Section 404 Sarbanes-Oxley Act 79 Remuneration report 81 Works councils 88
Dear reader, Our customers are at the heart of what we do. What they want and what they expect determine the changes and improvements we make. We want to demonstrate with our product and service offering that we can support and advise our customers when it comes to the financial choices they make and the issues they face. We want to make a difference and help our customers get ahead. In doing so, we can contribute to economic growth in the countries where we operate.
There are various ways of doing this. For example through our global range of responsible investment funds or responsible investment solutions, or offering products like the ING Savings Account for UNICEF which allows people to save and simultaneously support UNICEF. In our project finance portfolio we focus on renewable sources of energy. We finance companies that want to operate sustainably. An example is the financing of the Butendiek offshore wind farm in Germany, which supplies green energy and makes a major contribution to Germany’s conversion to renewable energy. So we are meeting the growing demand for products that generate good financial returns, while at the same time investing in society and the environment.
Winning The Banker magazine’s “Bank of the Year 2013” awards for the Netherlands, Belgium and Western Europe is a good signal that we are on the right path. Our commercial bank won several highprofile deals and closed major transactions. These are a demonstration of our customers’ trust in our capabilities. Commercial Banking maintained good positions in the league tables and won awards like the “Corporate Deal of the Year Award (Europe)” and “Best Structured Commodity Finance Bank (Global)”.
Internet and mobile banking are expanding rapidly. We are constantly innovating these delivery channels, and now have around 3 million mobile banking customers in 14 countries. We are seeing a transformation in customer interaction, sparked by the growth of online services, and this is just the beginning. This is paving the way for new forms of customer communication. For example, ING Bank Slaski is the first bank in Poland to introduce an online platform for businesses 4 ING Group Annual Report 2013
Simpler Stronger SustainableWe entered the final phase of our restructuring programme in 2013. We successfully listed ING U.S. on the New York Stock Exchange. We also largely completed our Asian insurance and investment management divestment programme. Furthermore, we have made significant progress in preparing our European and Japanese insurance and investment management business for an IPO (initial public offering) as a base case in 2014.
Another dilemma is striking a fair balance between the interests of our customers, employees, shareholders and society at large. The interests and requirements of our various stakeholders are not always compatible and sometimes even conflicting. This often makes it difficult and challenging to satisfy everybody, which is why we are in constant dialogue with all our stakeholders to listen and to give them an insight into how we operate and manage our company.
ING currently serves more than 48 million customers in over 40 countries. ING has more than 75,000 employees.
OUR FOCUS ING’s focus is on increasing customer satisfaction, simplifying its organisation and product offering, strengthening its financial position and solidifying the sustainability of its business model.
As required by Dutch law since 2013, ING’s Supervisory and Executive Boards, but also a broad group of directors committed to a set of behavioural principles, known as the “Banker’s Oath”.
ING Bank’s strategic aim is to be a strong, predominantly European bank for its customers. ING Bank wants to be a leading domestic full-service bank in attractive, stable home markets, as well as a leading commercial bank in the Benelux with a strong position in Central and Eastern Europe. A refined and sharpened Bank strategy for 2014 and onwards will be presented in the first half of 2014.
Principles prescribe the corporate values and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible. ING managed to further solidify the sustainability of its business model in 2013, by taking steps towards greater transparency and by growing our sustainable products offerings across all our business lines.
OUR REPAYMENT TO THE DUTCH STATE ING is grateful for the support the Dutch State extended during the financial crisis years 2008 and 2009. Milestones in 2013 were: • An agreement with the Dutch State on the unwinding of the
To set the standard in helping our customers manage their financial future. ING aims to deliver financial products and services in the way our customers want them: with exemplary service, convenience and at competitive prices.
Commercial Banking has a strong European presence and an extensive international network in more than 40 countries. It offers services to corporations, governments and other financial institutions.
Core Tier 1 securities (in EUR million) 1,500 2,250 3,000 5,000 5,000 (1) Comparative figures of this period have been restated to reflect the new pension accounting requirements under IFRS, which took effect on 1 January 2013. (2) The results of ING U.S., Insurance/IM Asia, excl ING Life Japan, and Insurance Latin America have been transferred to “net result from discontinued operations”. (3) See note 37 in the Annual Accounts.
NN Group IGD Solvency I ratio 257% 236% 224% Underlying return on equity based on IFRS-EU equity 6.4% 5.5% 8.3% Employees (FTEs, year-end, excluding FTEs in discontinued operations)) 76,050 77,835 79,480 Market capitalisation (year-end, in EUR billion) 39 27 21 (1) ING Group evaluates its debt/equity ratio on the basis of ‘core debt’ and ‘adjusted equity’. Further information is provided in the section “Capital management” in the consolidated annual accounts.
Sustainable Business Sustainable assets allocated (in EUR million) (1) 6,570 5,725
(2) Our absolute carbon emissions performance. (3) Annually, we survey the level of employee engagement. We define employee engagement as the extent to which our employees are committed to contributing to our business performance and are willing to walk the extra mile to achieve ING’s success. Given the operational split of ING Bank and NN Group, different employee engagement surveys have been held at both companies.
* You can find more information on the members of the Executive Board on page 69 and on the members of the Supervisory Board on pages 72-73.
Nomination Committee J. (Jeroen) van der Veer, chairman H.W. (Henk) Breukink P.A.F.W. (Peter) Elverding Y.C.M.T. (Yvonne) van Rooy Corporate Governance Committee H.W. (Henk) Breukink, chairman C.W. (Carin) Gorter J. (Jeroen) van der Veer 9ING Group Annual Report 2013
SHAREHOLDERS AND DEPOSITARY-RECEIPT HOLDERS WITH STAKES OF 3% OR MORE More than 99.9% of the ordinary shares issued by ING Groep N.V. is held by Stichting ING Aandelen (ING Trust Office). In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges. For the report of the board of Stichting ING Aandelen, please refer to pages 74-76.
On 15 November 2013, ING announced the successful completion of seven separate exchange offers of subordinated debt into CRD IV eligible Tier 2 securities by ING Bank. These transactions, as well as the calling of the USD 2 billion 8.5% Hybrid Tier 1 in December by ING Group, were announced on 6 November 2013. The total capital gain after tax of the exchange offers, together with the net present value of the financial benefit to be realised by the calling of the USD 2 billion 8.5% Hybrid Tier 1, totalling approximately 10 ING Group Annual Report 2013
Pursuant to the Dutch Financial Supervision Act, shareholders and holders of depositary receipts of ING Groep N.V. are required to provide updated information on their holdings once they cross threshold levels of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. ING Group is not aware of shareholders, potential shareholders or investors with an interest of 3% of more in ING Group other than the ING Trust Office, the ING Continuity Foundation and Blackrock Inc.
INVESTORS AND FINANCIAL ANALYSTS MAY CONTACT: ING Group Investor Relations (AMP C.03.049) P.O. Box 1800 1000 BV Amsterdam The Netherlands
(1) Still valid on 17 March 2014, the date of this Annual Report.
IMPORTANT DATES IN 2014* Publication results 1Q 2014 Wednesday, 7 May 2014, 7:00 am
ING GROUP FINANCIAL DEVELOPMENTS ING Group had a successful year in 2013, delivering an improved underlying result while making significant progress on its transformation. Our underlying result before tax was EUR 4,400 million in 2013, up 17.1% from 2012. The improvement was mainly driven by a strong performance at ING Bank, which recorded a 21.6% increase in underlying pre-tax results, as well as an improved operating result for the ongoing business at NN Group which increased 6.4% in 2013.
• For staff that work predominantly outside of the Netherlands, but within the EU, there is an individual cap of 100% of variable remuneration for all staff.
Banker’s oath In 2013, members of ING’s Supervisory and Executive Boards and a broad group of directors of various ING entities signed a financial institutions oath, commonly referred to as the “Banker’s Oath”. Since 1 January 2013 Dutch law requires that Supervisory and Executive Board members of financial institutions in the Netherlands take this oath and thus commit to a set of behavioural principles that reconfirms the industry’s commitment to ethical behaviour.
INSURANCE REGULATION Solvency II Throughout 2013, the European Commission, European Parliament and the Council (“the trilogue partners”) continued their efforts to develop the capital adequacy framework for the insurance sector, Solvency II. In November 2013, the trilogue partners reached a milestone with an agreement on key elements of the framework, but several other important elements are not expected to be finalised until the second half of 2014. Solvency II’s implementation is planned for 1 January 2016.
ComFrame ComFrame, short for Common Framework for the Supervision of Internationally Active Insurance Groups (“IAIGs”), is a global initiative started by the International Association of Insurance Supervisors (“IAIS”) in 2010. It aims to develop methods for the group-wide supervision of internationally active insurance companies, established to create a comprehensive framework for supervisors to address group-wide activities and risks, and to foster global convergence. The IAIS continued its public consultation of ComFrame in 2013 and it is on schedule for adoption in 2018. In October 2013, the IAIS said it would develop a risk-based global Insurance Capital Standard (“ICS”), using ComFrame as the vehicle for its implementation. ICS development will start in 2016, with implementation by 2019.
In 2013, the package was discussed in the European Parliament and the Council. The legislation may have a considerable impact on the distribution of insurance and retail investment products by setting higher standards for transparency and selling practices. ING will continue to monitor developments on the consumer package closely. Since we hold consumer protection in high regard, ING welcomes this initiative and will follow its further development closely.
ING has substantially completed the separation of its banking and insurance operations. This is required by the European Commission, but ING also thinks it is in the interests of all stakeholders, especially of our customers. The main reason is that it simplifies the organisation. We made significant progress with our restructuring programme in 2013. As a result, we have now reached the final stage of this process. A refined and sharpened Bank strategy for 2014 and onwards will be presented in the first half of 2014.
ING Group’s strategic priorities in 2013 were: strengthening our financial position, restructuring, repaying the remaining state aid and building both stronger and sustainable banking and insurance/ investment management businesses.
In the following, we will report on the progress that was made in 2013 on these strategic priorities.
The strength of the company is, among other things, based on its relatively high customer satisfaction levels, solid financial position, multi-channel distribution strategy and international network. ING is a sustainability leader in its sector. Bank-specific strengths are a strong brand awareness in countries where we are active, and the fact that we are a pioneer in digital banking.
Strong cost control continues to be a priority at the Bank in order to remain competitive and to be able to face external factors, such as high regulatory costs and bank taxes. The underlying cost/ income ratio improved from 60.3% in 2012 to 56.8% in 2013.
The preparations for the base case IPO of NN Group are progressing well, which is expected to allow us to go to the market in 2014.
Opportunities Threats • Regaining trust and demonstrating care, especially towards customers.
Bank-specific • Possibly from new entrants from outside of the industry.
In January 2012, the Bank unveiled Ambition 2015, a set of aspirations that included increasing our capital. Attaining a core Tier 1 capital ratio under Basel III of at least 10% by 2013 was a target we managed to sustain throughout 2013. At year-end, it stood at 11.7% under Basel II and 10.0% on a fully loaded pro-forma basis under Basel III. The leverage ratio under Basel III was 3.9%, which is also in line with Ambition 2015 (4.0%) and already complies with the CRD IV threshold of 3.0% by 2015.
ING also reduced the Dutch State guaranteed funding by EUR 3.6 billion to EUR 2.5 billion at year-end 2013. The remaining bonds matured in March 2014.
Other divestments announced and/or completed in 2013 were: • ING’s 26% interest in Vysya Life Insurance. Insurance units in
The reason for the amendments was that a standalone sale of ING Life Japan was not considered feasible in a manner that meets the demands of ING’s stakeholders. After carefully exploring and evaluating the options available for the divestment of ING Life Japan, the outcome was its inclusion in the entity for the base case IPO. As part of the revised agreement, ING will accelerate the timeline as described to year-end 2016. This provides further clarity on the base case IPO of NN Group. The preparations for this are progressing well, which is expected to allow us to go to the market in 2014.
REPAYING STATE AID ING is grateful for the support the Dutch State extended during the financial crisis years 2008 and 2009. In 2013 two major milestones were reached: • An agreement was reached with the Dutch State on the unwinding of the Illiquid Assets Back-Up Facility (“IABF”). The facility was established in 2009, at the depth of the financial crisis, in order to reduce the risk and uncertainty for ING from a portfolio of US Alt-A mortgage securities. Market developments allowed the unwinding of the facility, including the start of the sale of the securities, with an expected cash profit for the Dutch State of approximately EUR 0.4 billion. Unwinding the IABF also freed up EUR 2 billion of ING Bank’s risk-weighted assets and is 18 ING Group Annual Report 2013
• In keeping with our clients’ expectations, our sustainable products offerings grew across all our business lines in 2013. There was growth in renewable energy project finance, green lending, charity related savings accounts and sustainable mandates in our investment services.
ING Bank adapts to the changing needs of its customers, who increasingly want insight into their financial situation and future. Security of data is, of course, a prerequisite. Customers want to make more use of digital banking services and especially of mobile services. Therefore, ING has made mobile banking services available for retail customers in all countries where it is present. Now, millions of customers carry ING Bank in their pockets. This also contributes to a paperless delivery of our products and services, reducing our own and our customer’s environmental footprint. The rapid shift to mobile is starting to move from the retail world into Commercial Banking as well.
In 2013, ING Bank further optimised its balance sheet, for example through balance sheet integration. This is to address the mismatch in the funding gap and surplus across all key countries within the Bank. The focus is on generating local lending assets for local funds entrusted, while growing global Commercial Banking assets. For more details, please see the Banking overview chapter in this Annual Report.
It is important to have motivated and engaged employees who are able to adapt quickly enough to the new demands of our customers and who can build and foster long-term relationships with them. ING Bank made progress in 2013 in being a top employer. A few examples demonstrate this: • ING Bank’s annual engagement survey was conducted in
September and October 2013, and had a high response rate of 81%. Compared with 2012, the results show an increased confidence in the long-term future of the company and the
2. We offer fair value to customers. Depending upon the customer’s motivation, offering appropriate risk coverage or monetary value will be the only way to achieve sustained success.
on-going commitment to customer focus. There were also improvements in career development and retention.
INSURANCE/INVESTMENT MANAGEMENT In September 2013, NN Group presented an overview of its business, strategy, capital framework, executive team and how it is preparing for the base case IPO in 2014. NN Group is a leading insurance and investment management company with a strong, predominantly European presence in 18 countries. With more than 12,000 employees, it offers retirement services, insurance, investments and banking to retail, SME, corporate and institutional customers. In 2013, its future brand name was revealed: NN.
Once the restructuring of the Group is complete by the end of 2016 and the Bank is a stand-alone business, ING Bank aims to produce a competitive return on IFRS-EU equity of 10% to 13% through low costs and with a low-risk balance sheet. ING aims to build on its leading position as a predominantly European bank with a strong international network focused on providing customers with consistently high-quality services. ING’s main priority is to finance the economy, even in a volatile economic and regulatory environment.
Capital Management is integral to the way the Group manages its businesses and legal entities. ING’s Capital Management strategy is driven by the strategic aims of the Group and the risk appetite set by the Board. At all times, sufficient financial flexibility should be preserved to meet important financial objectives such as the repayment of the core Tier 1 securities. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting above the minimum regulatory requirements.
Premiums & coupons 375 375 Total repaid 8,500 7,750 Total premiums & coupons 2,781 2,406 Outstanding 1,500 2,250
Core Tier 1 repayment premiums & coupons 2,781 IABF net transaction result 1,378 Government guaranteed bonds guarantee premiums 375 Bank levies recurring tax 324 Total 4,858 21ING Group Annual Report 2013 1 W h o w e are 2 R
NN Group moved towards fair value accounting on the reserves for Guaranteed Minimum Death Benefits of the Japan Closed Block VA in the first quarter of 2014.
For more details, see the Strategy and Insurance overview chapters in this Annual Report.
ING needs to take into account other constraints, including: • Other regulatory capital requirements: such as the amount of additional capital, lower Tier 2 capital, the impact of the Basel I floor and the leverage ratio (as part of Basel III).
• Rating agency considerations: each rating agency provides a different analysis and specific topics may need to be addressed.
ING Bank’s capital position has been significantly strengthened over the last few years. During 2013, capital generation was again strong, enabling ING Bank to pay EUR 3.0 billion in dividends to the Group. Apart from the EUR 1.5 billion extraordinary dividend in the second quarter, these dividends pertained to a transfer of EUR 330 million into Nationale-Nederlanden Bank and the repayment of EUR 1,125 million of core Tier 1 securities in November.
In addition, ING Bank issued USD 2 billion CRD IV-compliant Tier 2 securities. Next to that, ING Bank called its USD 2 billion 8.5% Tier 1 hybrid on 15 December 2013 and executed a successful exchange offer on EUR 4.7 billion of existing Tier 2 securities for new CRD IV-compliant Tier 2 securities. The pick-up of this transaction came out at 55% and resulted in EUR 2.6 billion extra Tier 2 capital.
Like every financial services company, ING is exposed to a variety of risks which can have a negative impact. As a financial intermediary performing a “transformation” function, ING cannot operate without taking measured and managed risks. Therefore, strong and integrated risk management in the daily business activities and strategic planning is a must for sustainable value creation. An important element of strong and sustainable risk management is transparency which is reflected in the further enhancement of our risk disclosures.
The essence of our business is transformation, which takes many forms and serves various customer needs. In our retail banking operations, for example, we transform on-demand entrusted deposits into long-dated mortgage loans. Through our payments and cash management operations we make money available when and where customers need it. Geographic transformation takes place through our international commercial banking network when we help corporate customers fund their international business plans. Our insurance business provides products and services in retirement services, insurance, investments and banking to help customers secure their financial future.
With respect to developments in financial regulation and accounting standards, ING is following these closely and is taking action to ensure the Bank and Insurance units can cope with the changes. In 2013, ING Bank took further steps to prepare for the improved regulatory capital and liquidity framework for banks – Basel III, and within the EU, CRR/CRD IV – and is well positioned to operate under this new framework. Furthermore, the Bank supports the European Commission’s creation of a banking union for eurozone banks, where the Single Supervisory Mechanism and the Single Resolution Mechanism will strengthen banks. NN Group has strengthened the balance sheet by ensuring the business becomes less susceptible to the market environment. In addition, the Insurance company has continued preparations to ensure compliance with forthcoming Solvency II regulations.
The weak economic environment continued to contribute to elevated levels of risk costs in 2013, while the percentage of non-performing loans increased to 2.8% which represents EUR 15.9 billion lending credit outstanding. The additions to the provisions for loan losses rose by 8% year-on-year to EUR 2,289 million, resulting in ING Bank’s stock of provisions rising to EUR 6.2 billion at the end of 2013. ING Bank’s overall provision coverage ratio defined as the stock of provisions divided by the non-performing loans, improved from 36.9% at year-end 2012 to 38.6%. Next to additional provisioning, several other mitigating actions were taken. In 2013, the Bank further included the impact of the deteriorated market circumstances in the regulatory capital models by including recent observations in the various portfolios. Despite these measures the Bank maintains a strong capital position, with the Bank’s core Tier 1 ratio on a fully loaded Basel III basis remaining stable at 10.0% at year-end 2013, meeting ING’s Ambition 2015. Other contributing factors were strong capital generation, selective de-risking and divestments. The strong capital position enabled ING Bank not only to repay another tranche to the Dutch State, but also allowed ING Bank to use capital to further reduce the Group’s core debt. Further, in 2013 DNB performed an Asset Quality Review for commercial real estate primarily focusing on relevant income producing real estate portfolios. Provisions and Pillar I capital levels for ING Bank for the portfolios in scope were in line with the results of the Asset Quality Review.
Over the year, NN Group strengthened its balance sheet by refining asset/liability management to optimise risk-reward trade-offs. As a result, the Insurance business is less susceptible to market movements and is well positioned for selectively increasing investment returns. In addition, with the implementation of Solvency II expected in 2016 – following agreement on Omnibus II – NN Group has continued preparations to comply with Solvency II strengthening risk models, risk assessment and risk governance. Non-financial risk issues continuously demand our attention since they can seriously impact the functioning of our different businesses. These issues differ for each business activity and require tailored approaches to counter them. ING, for example, monitors possible new fraud methods and practices that can emerge following the introduction of new retail payment methods and products, and continues to expand anti-fraud programmes in our insurance and lending acceptance processes. A concrete action has been the implementation of geo-blocking in the Netherlands, whereby debit cards are blocked outside the EU unless the customer requests otherwise. In combination with a new type of chip integrated into cards this has significantly mitigated the risk of criminal skimming activities. Furthermore, as a result of lessons learned from other events, such as the manipulation of financial benchmarks, ING Bank is strengthening its own methodologies and procedures.
By virtue of 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, through, for example, sales suitability programmes. As part of its risk culture, ING continued refining the integrated sustainability objectives in its business strategies and activities and managing the related social and environmental risks. ING took another step towards greater transparency in 2013 by publishing its Environmental and Social Risk (ESR) Framework online, which includes ESR policies that ING has applied to its business activities since 2003 and further expanded in 2013. Furthermore, in line with European Union requirements, risk management plays an important role in evaluating the performance and determining the remuneration of senior management, ensuring that remuneration is properly correlated with our risk profile and the interests of all stakeholders.
ING Bank finalised the construction of a new data centre in Roosendaal, which will enable the consolidation of data centres in the Netherlands and in Commercial Banking.
Security and stability of IT systems remains paramount. Armed with new insights into bolstering websites following the DDoS attacks on ING Bank in the Netherlands, websites and portals were boosted against external threats. IT maintains a strong focus on enhancing IT security, resulting in effective and integrated risk mitigation, and to also stay ahead of security fraud developments. As multi-channel distribution and the importance of client-facing applications are increasing, an improvement programme was initiated to increase system availability. The programme will result in significantly greater availability for both internal and external users from the first quarter of 2014.
Improving the customer experience is a core priority at NN Group. In Europe outside the Netherlands, IT worked in conjunction with the business to introduce a direct servicing channel. It will enable customers to communicate directly with ING anytime and anywhere.
The net addition to the provision for loan losses increased to EUR 2,288 million, from EUR 2,121 million in 2012, reflecting the continued weak economic environment. Risk costs were 83 basis points of average risk-weighted assets compared with 74 basis points in 2012. The underlying return on IFRS-EU equity was 9.0% in 2013, up from 7.0% in 2012.
International investor sentiment towards Europe improved in 2013, illustrated by growing interest in bank shares and more capital flows back into the eurozone. The banking sector became less dependent on finance provided by funding from the European Central Bank (ECB).
REGULATION AND SUPERVISION New regulatory requirements imposed on Europe’s banks have resulted in higher expenses and higher costs for capital and liquidity. An important development in 2013 was the agreement on the Single Supervisory Mechanism (“SSM”) for banks in the eurozone, which will involve a transfer of prudential regulatory powers from national authorities to the ECB. About 130 of the eurozone’s largest banks, including ING Bank, will be directly supervised by the ECB by the end of 2014.
ING regards the SSM as an important first step in creating a European banking union. It will help eliminate uncoordinated national supervisory practices, which are restricting cross-border banking groups like ING from making internal funds transfers and financing the economy.
ING Bank is on track to reach the target of EUR 54 billion balance sheet integration (excluding off-balance positions) by 2015. Balance sheet integration refers to the continuous efforts we put into trying to minimise balance sheet inefficiencies that may arise because of the fact that our client asset base and our client liability base do not always grow at the same pace over time and across countries. This also includes looking for synergies between different ING units that have different balance sheet structures (some are client deposit driven, others are client asset driven). Since 2011, we have completed EUR 48 billion of balance sheet integration to optimise local balance sheets, of which EUR 14 billion was realised in 2013.
Microfinance can help under-banked communities gain access to financial services, contributing to poverty reduction. ING’s microfinance portfolio, financed by ING Groenbank, is active in India, Africa and, since 2013, in Turkey. ING Turkey’s microfinance activities are facilitated by an ING Groenbank loan of EUR 30 million which is part of the total microfinance portfolio of EUR 75 million.
Above all, ING Bank aims to build on its leading position as a predominantly European bank with a strong international network focused on providing customers with consistently high-quality services.
Underlying operating expenses increased 3.0% to EUR 6,138 million, mainly due to higher pension costs and additional restructuring charges recorded in the Netherlands as part of the existing efficiency programmes. This was largely offset by the benefits from the ongoing cost-savings initiatives and the partial transfer of WUB staff to Nationale-Nederlanden Bank. The underlying cost/income ratio improved to 60.4%, from 65.6% in 2012.
Total underlying income 10,162 9,090 Underlying operating expenses 6,138 5,961 Underlying additions to loan loss provisions 1,421 1,166 Underlying result before tax 2,603 1,963 Underlying cost/income ratio 60.4% 65.6% Customer balances: net production funds entrusted (EUR billion) 19 28 Customer balances: net production lending (EUR billion) 6 12 Underlying risk costs in bp of average risk-weighted assets 100 82 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 152 143 Underlying return on equity based on 10% core Tier 1** 13.2% 9.5%
Retail Netherlands 872 983 Retail Belgium 663 601 Retail Germany 598 441 Retail Rest of World 471 -62 Total Retail Banking 2,603 1,963 32 ING Group Annual Report 2013
The overall approach is driven by our Retail Standards Board, which is composed of the most senior leaders in the Retail Banking organisation. It sets standards in retail banking, creating and nurturing a sustainable knowledge-sharing culture throughout the Bank. Its priorities in 2013 were device-independent online banking, security and fighting cybercrime, social media and business/customer intelligence.
To achieve our vision of becoming the preferred bank for our customers, we must have employees who are committed and motivated. A Top Employer programme was launched in 2011 and since then Top Employer teams in every country where we operate have been steadily working to meet common standards. The programme will be continued in 2014.
RETAIL NETHERLANDS FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Netherlands decreased 11.3% to EUR 872 million in 2013 compared with EUR 983 million in 2012, due to additional restructuring charges and an increase in risk costs.
Underlying income rose 4.7% to EUR 4,079 million in 2013, reflecting higher interest results on lending and savings due to an improvement in margins, supported by a reduction in customer savings rates. These improvements were partly offset by lower volumes following the transfer and sale of EUR 8.3 billion of assets and EUR 3.7 billion of liabilities from WestlandUtrecht Bank (WUB) to NN Group, together with the sale of another EUR 2.2 billion of mortgages. Excluding these sales and transfers, net production of mortgages was EUR -0.4 billion in 2013, while other lending, mainly business lending, decreased by EUR 2.2 billion. Net production in funds entrusted was nil, mainly caused by new legislation for local governments to place surplus cash at the National Treasury and an acceleration of redemptions on mortgages.
Operating expenses increased 3.6% to EUR 2,330 million in 2013, including EUR 97 million of additional restructuring charges taken in the second half of the year, which were part of an extension of the efficiency programmes currently running. Excluding the restructuring charges, expenses decreased 0.7% from 2012, despite higher pension costs, reflecting the benefits of the efficiency programmes and the transfer of WUB staff to NationaleNederlanden Bank as from mid-2013. Net additions to loan loss provisions rose to EUR 877 million from EUR 665 million in 2012, mainly due to higher risk costs on mortgages and to a lesser extent business lending, reflecting the continued weakness in the Dutch economy.
BUSINESS DEVELOPMENTS As was the case in most European countries, the Netherlands had to cope with strong economic headwinds in 2013. There was a sharp increase in unemployment in the Netherlands, particularly in the first half of 2013, and a record high in corporate bankruptcies. The housing market remained weak but began to stabilise in the second half of the year, with house prices declining at a less rapid rate and demand picking up. In the course of 2013, the economy began to show signs of improvement as the country emerged from 33ING Group Annual Report 2013 1 W h o w e are 2 R
Based on the principle “Customer Interest First”, Retail NL maintains a customer-centric organisation. A programme has been in place for several years to ensure that the customer’s interest is always at the centre of our activities. This programme aims at simplifying customer processes, improving our products and services and motivating employees to put the customer’s interest first. These Customer Interest First-focused objectives are also included in the Key Performance Indicators for all our employees, including those of management.
We hosted a number of roundtable sessions with SME and Mid-Corporate customers in 2013 on relevant topics during which we shared our financial and sector knowledge. ING Mid-Corporate, together with ING Private Banking, launched a platform for family-owned businesses to share knowledge and provide benefits to the customer from the expertise of these two business lines.
ING Private Banking started a strategy to enhance customer centricity internally and the customer experience externally. This involved relocating staff to branches to increase our local presence and increasing the number of Client Service Teams. We opened our first Private Banking branch in Wassenaar and nine more will be added in 2014.
Another initiative to support Dutch businesses is the Orange Trade Mission Fund (Oranje Handelsmissiefonds), founded by ING, KLM and MKB-Nederland in collaboration with the Ministry of Foreign Affairs. Each year, the fund offers 10 businesses the opportunity to develop their international plans with an Orange Trade Mission package, which provides fully-supported participation in official trade delegations, a customised trade mission or participation in international fairs. The 10 winners in 2013 are being monitored and their know-how, experience and stories will eventually be shared as an example for other Dutch businesses.
WestlandUtrecht Bank Following a European Commission decision in November 2012 the banking activities of WestlandUtrecht Bank were partly combined with those of Nationale-Nederlanden, which is to be divested as part of NN Group. The resulting retail bank (NationaleNederlanden Bank) manages its funding and distribution strategy in the Dutch market independently from ING Bank.
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Private Banking, which has a top three position in Belgium, was awarded “Best Private Bank in Belgium” by the magazine World Finance. The total amount of Private Banking funds entrusted and assets under management in Retail Belgium was EUR 17.6 billion
ING BE’s open guided architecture fund range regrouping high quality funds from selected investment companies experienced a consistent above-the-market performance. The open-guided architecture fund offer was enlarged with the launch of the ING Core Fund. This Fund, which groups a limited selection of funds from several investment companies with a Morningstar rating of three stars or more, witnessed the strongest increase in funds entrusted of all funds over the past five years. Since 2013, all branches have also been equipped with Wifi and iPads, to help ING BE’s customers discover the multiple advantages of online and mobile banking.
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RETAIL GERMANY FINANCIAL DEVELOPMENTS Retail Germany’s underlying result before tax rose 35.6% to EUR 598 million in 2013, compared with EUR 441 million in 2012, due to continued volume growth in most products and improved margins on savings.
In the area of knowledge sharing, ING-DiBa profited from the experience in social media in the Netherlands and Spain by implementing their best practices on listening to and engaging with customers through social media.
ING-DiBa Germany and Austria, as well as Interhyp, were recognised as one of the best national employers in 2013 by the renowned Great Place to Work Institute. ING-DiBa Germany was also named a “Best Workplace in Europe 2013”. The results of the ING-DiBa annual employee survey are discussed at the Bank’s leadership summit and at other levels as a way of strengthening our corporate culture.
Awards ING-DiBa Germany received several awards in recognition of its high service and quality standards in 2013. It won the Deutschlands Beliebteste Bank (Germany’s Most Preferred Bank) award, from the readers of German Euro magazine for the seventh year in a row. It was also elected “Online broker of the Year” for the fourth time in a row by Börse Online. Mobile brokerage accounts for only a low percentage of trades executed by ING-DiBa, but it is increasing. ING-DiBa Austria received the “Recommender 2013 Awards” in May 2013 for its excellent customer focus.
Operating expenses increased slightly by 0.3% to EUR 1,623 million in 2013 from EUR 1,618 million in 2012, as higher expenses due to business growth were largely offset by favourable currency impacts. Risk costs rose to EUR 280 million, or 64 basis points of average risk-weighted assets, compared with EUR 250 million, or 50 basis points of average risk-weighted assets, in 2012. The increase in risk costs was mainly in India and Turkey reflecting the economic turmoil, partly offset by lower additions in Romania and the UK legacy portfolio.
BUSINESS DEVELOPMENTS Retail Rest of World comprises ING Australia, ING France, ING Italy, ING Romania, ING Bank Slaski (Poland), ING Spain, ING Turkey and ING Vysya Bank (India), as well as TMB Bank (Thailand) and Bank of Beijing (China) in which ING has equity positions. ING Direct UK was sold in March 2013 but Retail Rest of World still includes a UK legacy portfolio which is in run-off.
In India, Poland, Romania and Turkey, we offer products and services to all customer segments, whereas in Australia, Italy, France and Spain we focus on retail customers. However, in 2013, ING launched a pilot to serve small businesses in Spain.
Further progress was made with the One Bank strategy in Spain, Italy and France. According to plan, this brings together the retail and commercial banking lines of business within a country. As a result, these units now operate as One Bank, with the legal formalisation still to be finalised, except for ING France, which successfully merged ING Direct, ING Commercial Banking and ING Real Estate Finance in 2013.
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In line with our strategy to serve customers through their channel of choice, ING in Spain, Italy and France now have 28, 13 and 2 branches, respectively. At TMB Bank in Thailand, a simplified process allows customers to complete transactions quickly; account opening in a branch, for example, takes only 15 minutes.
ING Vysya Bank worked on providing banking services to the “unbanked” residents of villages with less than 2,000 inhabitants, most of whom are illiterate, as part of its financial inclusion initiatives.
Awards We won a number of awards during the year, most notably in the field of customer centricity and digital leadership. For instance, ING Australia was chosen Australia’s most beloved bank by customers at the Mozo People’s Choice Awards and ranked in the top 10 of national brands as the only bank. ING Spain won a “Digital Executive Award” for internet distribution, while ING Turkey led with direct banking innovation and an award-winning new branch concept – to name a few.
> We are a stronger commercial bank in 2013 > We focus on delivering a superior client experience > We make investments to become an even better network bank > And we focus on the One Bank structure and balance sheet optimisation
Industry Lending posted an underlying result before tax of EUR 934 million in 2013, up from EUR 848 million in 2012, primarily due to higher income in Structured Finance and Corporate Investments combined with lower risk costs, which more than offset lower results on Real Estate Finance due to a downsizing of the portfolio in line with ING Bank’s strategy. The underlying result before tax of General Lending & Transaction Services decreased to EUR 518 million from EUR 632 million in 2012. The decline was mainly attributable to lower interest results reflecting lower volumes in General Lending and margin pressure in Payments & Cash Management, while expenses were up due to investments in IT to enhance product capabilities. This was partly offset by lower risk costs. Financial Markets’ underlying result increased to EUR 618 million from EUR 20 million last year, reflecting the aforementioned positive swing in CVA/DVA impacts. Underlying result of Bank Treasury, Real Estate & Other dropped to EUR -253 million in 2013, from EUR 135 million in 2012, mainly due to lower income from Bank Treasury activities following the lengthening of the Bank’s funding profile and the further wind-down of the Lease run-off business. This was partly offset by lower impairments on real estate development projects.
* Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items ** Underlying after tax return divided by average equity based on 10% core Tier 1 ratio
It is our ambition to be the best bank for our clients and to provide the highest quality of service; to be a bank that delivers the products and services in the way clients want to receive them; with greater standardisation, uniformity in products and pricing across borders.
GENERAL LENDING AND TRANSACTION SERVICES GENERAL LENDING Within our General Lending business, the challenge is to maintain margins and volumes within our established risk appetite while competition intensifies, in particular in markets where large domestic banks protect their core franchises. General Lending has maintained its position as market leader in the Benelux and Central and Eastern Europe (CEE) as bookrunner in the syndicated loan market, and continued to support our corporate clients through our international network. We constantly strive to improve our corporate lending products to ensure these remain in alignment with changes in client needs, market developments and regulation. To deal with these changes in an effective way, further standardisation of our product offering and streamlining of lending processes and documentation across countries is in progress.
Over many years, ING has built a high quality Industry Lending business, operating within sectors in which we add value. We provide specialised commercial lending, originating well-structured loans that strike the right balance between what clients want and achieving good risk adjusted returns. We are leaders in many different industries and are acknowledged for our commitment to clients and excellent quality of service.
REAL ESTATE FINANCE Real Estate Finance’s (“REF”) primary activity is lending to investors in income-producing real estate backed by first mortgages. During 2013, REF sought to maintain the quality of its credit portfolio, while reducing its total exposure to this asset class, which was reduced significantly over the year. The volume of loan assets decreased to EUR 24 billion in 2013 reaching the target previously set for 2015. REF’s loan portfolio was the subject of two asset quality reviews by the DNB, the Dutch central bank, which validated our own assessment of its credit quality.
Clients appreciated ING’s hands-on, creative approach, ability to co-ordinate a complex blend of products in a time-critical manner, structuring expertise and our seamlessly delivered support.
• ING won several mandates for the refinancing of Clondalkin’s core debt financing of approximately EUR 585 million, primarily in fixed and floating rate notes. The transactions, which included a receivables securitisation programme alongside a USD Term Loan, have transformed the structure of the Clondalkin Group, an international producer of high value-added packaging products and services, and resulted in a positive outlook from rating agencies.
• ING also acted as Mandated Lead Arranger in the landmark EUR 1 billion project finance facility for the 288 megawatt Butendiek offshore wind park, contributing to the Commercial Banking portfolio of renewable power project financings. The Butendiek project will make an important contribution to Germany’s transition towards renewable energy.
CUSTOMER CENTRICITY, OPERATIONAL EXCELLENCE, TOP EMPLOYER CUSTOMER CENTRICITY Client service remains at the heart of Commercial Banking and market leadership positions were maintained within our core franchise areas.
Structured Finance maintained its strong positions in its markets and was successful in seven categories of the annual Project Finance International awards, including the “Corporate Deal of the Year (Europe)”, the “PPP Deal of the Year (Europe)” and “Rail Deal of the Year (Europe)”. Trade and Commodity Finance maintained a top three position in its markets and won awards from Trade Finance for example “Best Structured Commodity Finance Bank (Global)”.
Similarly in Central and Eastern Europe (CEE), ING maintained its strong market position, supporting its key client base. Many important transactions were closed and again Commercial Banking was ranked number one in CEE league tables as MLA and bookrunner by number of deals. For the second consecutive year, readers of Treasury Management International magazine (TMI) named ING Commercial Banking as “Best Cash Management Bank in Eastern Europe”.
MANAGEMENT BOARD NN GROUP N.V. on 1 March 2014 MANAGEMENT BOARD ING VERZEKERINGEN N.V. on 31 December 2013
Operating result ongoing business** 886 833 Non-operating items ongoing business: -229 -779 of which gains/losses and impairments 97 70 of which revaluations 3 -319 of which market and other impacts -329 -531 Japan Closed Block VA -669 105 Special items before tax -126 -451 Result on divestments and discontinued operations 221 770 Result before tax 83 478 Taxation/minority interest 35 10 Net result 48 468
Special items before tax improved to a loss of EUR 126 million in 2013 from a loss of EUR 451 million in 2012, as a result of the provisions set up for the restructuring programme in the Netherlands in 2012 and reduced costs for the operational separation from ING in 2013.
Results on divestments and discontinued operations was EUR 221 million in 2013, compared with EUR 770 million in 2012. The result in 2013 mainly reflected NN Group’s share in net result from discontinued operations. Furthermore, the gain on the sales of the insurance operations in Hong Kong, Macau and Thailand were offset by the loss on the sale of ING Life Korea. The result in 2012 reflected the gain on the sale of Insurance Malaysia and NN Group’s share in the net result from discontinued operations, partly offset by goodwill write-offs on the insurance and investment management operations in Korea.
The result before tax decreased to EUR 83 million in 2013, compared to EUR 478 million in 2012. This decrease was the result of lower results on divestments and a decrease in the result for Japan Closed Block VA as a result of the one off charge of EUR 575 million, partly offset by a lower loss of non-operating items and lower adverse impact from special items.
AGREEMENT WITH EUROPEAN COMMISSION In November, ING and the Dutch State reached an agreement with the European Commission (EC) on a revised timeline for the divestment of the European and Japanese businesses. Under this revised agreement, it was announced that Japan Life would be included in the base case IPO.
NN GROUP NN Group is a leading insurance and investment management company with a predominantly European presence in 18 countries. Its purpose is to help customers secure their financial futures: helping them manage and protect their assets and income through pensions, investments, insurance, savings and mortgages.
WHERE WE OPERATE* NN Group has a strong position as a provider of life insurance, retirement and investment management services and is well positioned to capitalise on socio-economic trends.
GOVERNANCE ING U.S. Prior to the completion of its initial public offering (“IPO”) in May 2013, ING U.S., Inc. (“ING U.S.”) was an indirect wholly owned subsidiary of ING Group. Following the ING U.S. IPO, and consistent with the terms of its shareholder agreement with ING U.S., ING Group retained control of a majority of the ING U.S. board of directors and ING U.S. continued to be part of ING Group’s consolidated business operations. ING U.S. has announced that it expects to rebrand over the course of 2014 to Voya Financial, Inc. and to change its legal name to Voya Financial, Inc. in April 2014. In May 2014 the ING U.S. Investment Management and Employee Benefits businesses also will begin using the Voya Financial brand.
CUSTOMER EXPERIENCE NN Group’s aim is to help customers secure their financial future. NN Group’s strategy focuses on offering appealing and easy-tounderstand products and services, multi-access distribution and efficient and effective operations. In line with its ambition to be a leading, responsible and customer-centric organisation.
In 2013, new corporate values were introduced which place the customer first and put emphasis on products being easy to understand, transparent and accessible. NN Group cares about its customers, aims to be clear, and commits to them.
ASIAN DIVESTMENT Good progress was made in 2013 in divesting the Asian Insurance and Investment Management businesses. By year-end, most of these businesses, including ING’s life insurance companies in South Korea, Hong Kong, Macau and Thailand, its 26% interest in ING Vysya Life Insurance Company Ltd and its 49% stake in South Korean insurer KB Life had been divested. An agreement had also been announced to sell a 50% stake in the Chinese insurance joint venture ING-BOB Life Insurance Company. It also completed the sale of its 33% stake in China Merchants Fund, which was announced in 2012. Investment Management businesses in Malaysia, Thailand and South Korea were also sold. The sale of the interest in the joint venture ING Financial Services Private Limited to Hathway Investments was completed. In early 2014, an agreement was reached to sell the investment management business in Taiwan. ING resolved the remaining divestment of its Asian insurance and investment management operations with the inclusion of ING Life Japan in the base case IPO of NN Group.
NN Group’s ambition is to play a leading role in improving industry standards. Its aim is to be a trusted partner in financial matters, providing guidance and financial education so consumers better understand and secure their financial future. Efforts to become an even stronger company for stakeholders, for example by continuing to make things easier and simpler for customers, are a significant aspect of its business strategy.
SOLVENCY II Throughout 2013, the insurance business worked towards meeting the European Union’s Solvency II Directive’s requirements, particularly with respect to adapting ING’s risk measurement, risk management and reporting to the levels required.
CONCLUSIONS AND AMBITIONS In 2013 strong progress was made in the European and Japanese insurance and investment management restructuring programme and on improving the customer experience and operational performance.
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> NN to be the future brand name > Strong presence across mature and growth markets > Focused on delivering a superior customer experience and operational excellence
NN Group is a leading insurance and investment management company with a strong, predominantly European presence in 18 countries. With more than 12,000 employees, it offers retirement services, insurance, investments and banking to retail, SME, corporate and institutional customers. NN Group’s aim is to help customers secure their financial future. In 2013, it leveraged its scale in mature markets and delivered profitable growth in emerging markets. In many countries NN Group won awards for its customer-focused approach, and for making things easier and simpler for customers.
> Responding to changes in the Dutch life insurance market > Delivering operational excellence in the group pensions and life businesses to create a customer-driven organisation > Lowered costs and improved capital position
The investment margin decreased to EUR 535 million in 2013 from EUR 542 million in 2012, after a slight decline in investment income mainly due to lower dividends on equity securities.
Compared with 2012, fees and premium-based revenues in 2013 decreased by EUR 47 million to EUR 461 million, mainly due to the run-off of the individual life closed book portfolio as well as lower cost charges to clients within individual unit-linked insurance policies from 2013 onwards.
Gains/losses and impairments decreased to a EUR 43 million loss in 2013 from a gain of EUR 138 million in 2012. The loss in 2013 was mainly due to impairments on real estate, while the gain in 2012 was mainly driven by realised gains on equities.
Special items were a loss of EUR 22 million in 2013, primarily due to preparation costs for the base case IPO. This compared to a loss of EUR 225 million in 2012 which primarily reflected reorganisation provisions related to the transformation programme announced in late 2012 as well as expenses related to the operational separation from ING Group.
BUSINESS DEVELOPMENTS Netherlands Life offers a range of group life and individual life insurance products. Its group life policies are primarily group pension products. Its individual life insurance business primarily consists of the closed-block operation of the individual life portfolios (comprising a range of discontinued products sold prior to 2012) of Nationale-Nederlanden, RVS and ING Verzekeringen Retail, formerly known as Postbank Insurance. Netherlands Life also provides pension administration and management services through its AZL brand. Netherlands Life was the largest life insurer in the Netherlands as measured by Gross Written Premiums (GWP) in 2012, the most recent year of official figures, collected by DNB.
In the pensions market, the persistently low-interest rate environment and longevity risk have increased employers’ funding costs for pension schemes. Through Netherlands Life’s Pensions division, Netherlands Life provides pension solutions to businesses of all sizes. It offers insured and non-insured pension solutions, bundled and unbundled options, and works in close collaboration with pension administrator AZL and ING Investment Management. Netherlands Life Pensions is able to help existing and new customers move from Defined Benefit to Defined Contribution pension schemes, giving employers greater certainty over the funding cost of their pension schemes and at the same time reducing risk and capital requirements for Netherlands Life.
FINANCIAL DEVELOPMENTS The operating result for Netherlands Non-life was EUR 79 million in 2013, a 23.3% decline compared with EUR 103 million in 2012, mainly due to a lower operating result in the Property & Casualty (P&C) segment partly offset by a higher operating result in the Disability & Accident (D&A) segment.
The result from non-operating items was a gain of EUR 4 million in 2013 compared with a loss of EUR 15 million in 2012. The positive result reflects improved revaluations of both real estate and private equity assets in 2013 and negative revaluations of the direct equity hedge in 2012.
BUSINESS DEVELOPMENTS Netherlands Non-life offers a broad range of non-life insurance products – motor, transport, fire, liability, travel and disability and accident insurance – to retail, self-employed, SME (small and medium-sized enterprise) and corporate customers. It does this through multi-channel distribution such as regular and mandated brokers, ING Bank and direct via the internet. Its Movir brand offers individual disability insurance to specific groups in the medical and business professions.
> Accelerated portfolio growth by improving the customer experience > Focus on protection and investment products and building a multi-channel distribution platform > Priority on cost containment
The investment margin for 2013 was EUR 105 million, compared with EUR 122 million for 2012. This decline reflects lower reinvestment yields and the impact of a regulatory change, both in the Czech Republic.
DAC amortisation and trail commissions decreased slightly to EUR 319 million in 2013 from EUR 321 million in 2012. DAC amortisation and trail commissions in Belgium decreased due to a new commission agreement with distributor ING Bank Belgium as well as lower sales, offset by the reclassification of the Belgian crisis tax.
The result before tax increased to EUR 243 million in 2013 from EUR 115 million in 2012. The decrease in operating result was more than offset by an improvement in non-operating items and special items.
In Europe, Insurance Europe was in 2012 the largest provider of life insurance in Romania and Hungary, and had top-four positions in the Czech Republic and Greece – in each case measured in GWP. It was the largest provider of mandatory pensions in Poland, Slovak Republic, Romania and Hungary, and voluntary pensions in Romania – in each case measured by assets under management.
Spain signed a collaboration agreement with Mutua Madrileña Group, and started selling its car insurance with special benefits for ING customers. Poland achieved success with its ”Insure yourself and trick the cancer“ campaign, which was voted the best campaign in the finance category of the Zloty Spinacz awards, a prestigious public relations award. The campaign was recognised for its corporate responsibility features, including cancer prevention and education about healthy living and the importance of regular medical examinations. Romania launched the country’s first online life insurance service. Turkey introduced a long-term life product, using online and offline distribution channels. Luxembourg launched a unit-linked life insurance solution for the French market.
In bancassurance, Insurance Europe is signing up more banking partners as well as working closer with existing partners. In November a partnership was announced with Anadolubank in Turkey, where bancassurance arrangements performed well in 2013. NN Group in Luxembourg is building partnerships in France and Italy.
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> Market leader in niche Corporate Owned Life Insurance (COLI) segment > Production innovation and distribution strength result in improved market adaptability > Strong profitability and cash generation
Gains/losses and impairments increased to EUR 42 million in 2013 from EUR 4 million in the prior year, mainly caused by asset rebalancing. Revaluations decreased to a loss of EUR 11 million in 2013 from a gain of EUR 10 million in the previous year.
BUSINESS DEVELOPMENTS In Japan, NN Group primarily offers a range of COLI (“CorporateOwned Life Insurance”) products to SMEs and owners and employees of SMEs through independent agents and bancassurance. COLI products are traditional life insurance policies that a company, typically an SME, takes out on the lives of executives or employees, whereby the company is both the policyholder and the beneficiary of the policy. COLI products are designed to address the protection, savings, and retirement preparation needs of SMEs and owners and employees of SMEs in a tax-efficient manner.
Fees were EUR 444 million in 2013, a 3.3% increase compared with EUR 430 million in 2012, as outflows in lower yielding proprietary assets were offset by inflows in higher margin products. As a result, the ratio of fees to average AuM improved slightly from 24.5 basis points in 2012 to 24.8 basis points in 2013.
Nationale-Nederlanden Bank accelerated efforts to become a one-stop shop for integrated financial solutions for retail customers, supported by the integration with a part of WestlandUtrecht Bank (“WUB”) as well as the launch of new savings products. As of 1 July 2013, the profitable operations of WUB, including assets and liabilities, were partially transferred to Nationale-Nederlanden Bank. Solvency II will provide ING Re with new business opportunities.
Operating result Nationale-Nederlanden Bank was a loss of EUR 11 million in 2013, compared with a loss of EUR 14 million in 2012, due to start-up and integration expenses.
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FINANCIAL DEVELOPMENTS The operating result of Japan Closed Block VA was EUR 80 million in 2013, a 5.9% decrease compared with EUR 85 million in 2012. Excluding currency effects, the operating result increased by 19.1%, mainly driven by higher operating income.
The increase in administrative expenses to EUR 18 million in 2013 from EUR 13 million in the prior year was due to preparation for business restructuring as a part of the ING Group divestment plan.
Result on divestments was a loss of EUR 50 million in 2013, primarily reflecting a EUR 62 million loss on the sale of the Mexican mortgage business.
The Corporate governance section starting on page 62 and the paragraphs of the Remuneration report “Remuneration policy for senior management” and “2013 remuneration structure senior management” on pages 81-87 are incorporated by reference in this Report of the Executive Board.
The fourth quarter and annual figures for 2012 were discussed in February, including the related reports from the external auditors and the assessment of the Executive Board of the adequacy and effectiveness of ING’s risk management and control systems. The Supervisory Board supported the proposal not to pay a dividend over 2012 given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repurchase the remaining outstanding core Tier 1 securities. The draft agenda of the annual General Meeting was discussed and approved, including the publication on the application of the Dutch Banking Code and the Dutch Insurers’ Code. The Supervisory Board also approved an adjusted internal ING Group decision structure for ING Group.
Furthermore, risk costs and cost trends in general, solvency volatility, deferred tax assets, the ING risk management programme, lapse assumption models, pension changes and the governance of the insurance activities in the Asian Pacific region were discussed several times. In addition, the Audit Committee discussed the IT incidents (DDoS attacks) at ING Bank, the Dutch mortgage portfolio and the DNB asset quality review of the ING Real Estate portfolio among other topics.
The possible unwinding by the Dutch State of the Illiquid Asset Back-up Facility was also discussed. The Supervisory Board was updated on the capital plans for ING Insurance EurAsia and ING Group in May and June whereby various possible divestments were presented. A report to align staff functions with the adjusted size of ING was presented.
In September, the Supervisory Board visited the ING banking and insurance businesses in the Netherlands. During this visit the Supervisory Board was informed about ING’s various operations in the Netherlands and on the IT strategy and IT infrastructure of ING Bank. Furthermore, an update on the developments regarding the Illiquid Asset Back-up Facility was given. A high level planning for the NN Group IPO was presented and the future brand name for the company was approved.
All decisions regarding the variable remuneration proposals over 2012 were discussed and decided in February and March. The ING U.S. remuneration policy was discussed and approved in April. Succession planning and talent management were tabled for 59ING Group Annual Report 2013 1 W h o w e are 2 R
APPRECIATION FOR THE EXECUTIVE BOARD AND ING EMPLOYEES The Supervisory Board would like to express its gratitude to the members of the Executive Board and the Management Boards for their work in 2013. During 2013, decisive steps were once more taken in executing the European Commission restructuring agreement. The Supervisory Board would also like to thank all employees of ING who continue to serve the interests of customers, shareholders and other stakeholders of ING and have shown continued commitment in the past year.
ADDITIONAL INFORMATION For more information, see the section on Corporate governance (pages 62-73) and the Remuneration report (pages 81-87), which are deemed to be incorporated by reference here.
Hermann-Josef Lamberti joined the Risk Committee. Henk Breukink and Yvonne van Rooy stepped down from the Audit Committee and joined the Remuneration and the Nomination committees. Please see page 9 for the composition of the Supervisory Board Committees at year-end 2013.
As a result of the unwinding of the IABF agreement, the governance restrictions as part of the IABF agreement will no longer be applicable, including the right of the Dutch State to nominate two members for appointment to the Supervisory Board and the special approval rights of the state-nominees regarding certain decisions of the Supervisory Board.
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On 17 December 2013, ING Group announced that it had completed the agreement with the Dutch State on the unwinding of the Illiquid Assets Back-up Facility (“IABF”) as announced on 1 November 2013. ING Group and the Dutch State formed the IABF on 26 January 2009 and ING Bank N.V. issued various series of debt instruments during 2009 under the 2008 Credit Guarantee Scheme of the Dutch State, for the first time on 30 January 2009. The terms of the agreement to unwind the IABF have been approved by the European Commission. The IABF is further described in note 33 to the consolidated annual accounts.
DIFFERENCES BETWEEN DUTCH AND US CORPORATE GOVERNANCE PRACTICES In accordance with the requirements of the US Securities and Exchange Commission, ING Group, as a foreign private issuer whose securities are listed on the New York Stock Exchange (“NYSE”), must disclose in its Annual Report on Form 20-F any significant differences between its corporate governance practices and those applicable to US domestic companies under the NYSE listing standards.
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: • ING Group has a two-tier board structure, in contrast to the one-tier board structure used by most US companies. In the Netherlands, a public limited liability company (naamloze vennootschap) with a two-tier board structure has an executive board as its management body and a supervisory board which advises and supervises the executive board. In general, members of the executive board are employees of the company while members of the supervisory board are not. The latter are often former state or business leaders and sometimes former members of the executive board. Members of the executive board and other officers or employees of the company cannot simultaneously be a member of the supervisory board. The supervisory board must approve specified decisions of the executive board. Under the Corporate Governance Code, all members of the supervisory board with the exception of not more than one person, should be independent. All members of ING Group’s Supervisory Board, with the exception of Luc Vandewalle, are independent within the meaning of the Corporate Governance Code. The definition of independence indicated to not use its right to recommend a second candidate for appointment as a member of the Supervisory Board. As a result of the agreement completed in December 2013 with the Dutch State on the unwinding of the IABF as described above these arrangements have expired. Furthermore, in line with these arrangements a sustainable remuneration policy for the Executive Board and Senior Management was introduced in 2010, which contains certain specific arrangements in relation to the remuneration of members of the Executive Board.
• Dutch law requires that ING Group’s external auditors be appointed at the General Meeting and not by the Audit Committee. In addition, new legislation on the accountancy profession (Wet op het accountantsberoep) will establish a system of mandatory audit firm rotation by 1 January 2016.
Pursuant to the Regulation (EU) no. 236/2012 of the European Parliament and the Council on short selling and certain aspects of credit default swaps, any person who acquires or disposes of a net short position relating to the issued share capital of ING Group, whether by a transaction in shares, depositary receipts or American depositary receipts, or by a transaction creating or relating to any financial instrument where the effect or one of the effects of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a change in the price of such shares, depositary receipts or American depositary receipts is required to notify, in accordance with the provisions of the above-mentioned Regulation: a. The Dutch Authority for the Financial Markets (Autoriteit
Financiële Markten) if, as a result of which acquisition or disposal his net short position reaches, exceeds or falls below 0.2% of the issued share capital of ING Group and each 0.1% above that.
• in terms of control: resolutions by the Executive Board to issue shares require the approval of the Supervisory Board.
TRANSFER OF SHARES AND DEPOSITARY RECEIPTS AND TRANSFER RESTRICTIONS Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. The Articles of Association do not restrict the transfer of ordinary shares, whereas the transfer of cumulative preference shares is subject to prior approval of the Executive Board. The Articles of Association and the trust conditions for registered shares in the share capital of ING Group (“Trust Conditions”) do not restrict the transfer of depositary receipts for shares. ING Group is not aware of the existence of any agreement pursuant to which the transfer of ordinary shares or depositary receipts for such shares is restricted.
REPURCHASE OF SHARES ING Group may repurchase outstanding shares and depositary receipts for such shares. Although the power to repurchase shares and depositary receipts for shares is vested in the Executive Board subject to the approval of the Supervisory Board, 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 must observe the price ranges prescribed in the authorisation. For the ordinary shares and depositary receipts for such shares, the authorisation currently in force stipulates a minimum price of one eurocent and a maximum price equal to the highest stock price on Euronext Amsterdam by NYSE Euronext on the date on which the purchase agreement is concluded or on the preceding day of stock market trading.
SPECIAL RIGHTS OF CONTROL No special rights of control referred to in Article 10 of the directive of the European Parliament and the Council on takeover bids (2004/25/EC) are attached to any share.
Such information includes the notice for the General Meeting, the agenda, the place and time of the meeting, the address of the website of ING Group, the verbatim text of the proposals with an explanation and instructions on how to participate in the meeting (either in person or by proxy), as well as the reports of the Executive Board and the Supervisory Board. More complex proposals such as proposals to amend the Articles of Association are normally not included in the notice but are made available separately on the website of ING Group and at the ING Group head office.
ING Group strives to maintain an open and constructive dialogue with current and potential investors, and with industry analysts. The scope of such bilateral communication may range from single investor queries via email, to more elaborate discussions with analysts or institutional investors that take place via telephone or face-to-face. These meetings are not announced in advance, nor can they be followed by webcast or any other means. ING Group’s Investor Relations department is the main point of contact for these communications. However, Executive Board members also participate in investor meetings. Information provided during such occasions is always limited to that which is already in the public domain, and no bilateral contacts take place shortly before the publication of regular quarterly results releases. If bilateral communication between ING Group and investors is organised and/or facilitated through a broker, an analyst or specialist salesperson representing the broker may be present in the meeting. ING Group does not provide brokers with any form of compensation pertaining to such meeting organisation and/or facilitation services.
REPORTING Resolutions adopted at a General Meeting are generally published on the website of ING Group (www.ing.com) within one week after the meeting. The draft minutes of the General Meeting are, in accordance with the Corporate Governance Code, made available to shareholders and holders of depositary receipts on the website of ING Group (www.ing.com) no later than three months after the meeting. Shareholders and holders of depositary receipts may react to the draft minutes in the following three months, after which the final minutes will be adopted by the chairman of the meeting in question and by a shareholder or holder of depositary receipts appointed by that meeting. The final minutes are made available on the website of ING Group (www.ing.com). In a deviation from the default provisions of the Corporate Governance Code shareholders and holders of depositary receipts will not have the opportunity to react to the minutes of a General Meeting if a notarial report of the meeting is made, as this would be in conflict with the laws applicable to such notarial report.
General Meeting to that effect is adopted by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the suitability and reliability requirements set out in the Dutch Financial Supervision Act and must continue to meet these while in office.
INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD This section provides an overview of the most relevant directorships, paid positions and ancillary positions, held by members of the Supervisory Board.
J.C.L. (JOOST) KUIPER (Born 1947, Dutch nationality, male; appointed in 2011, term expires in 2015) Former member of the Executive Board of ABN AMRO Bank N.V. Other business activities: chairman of the Supervisory Board of IMC B.V. Member of the Supervisory Board of Foundation Bewaarbedrijf Abete.
Other business activities: chairman of the Supervisory Board of Koninklijke Philips Electronics N.V. (listed company). Member of the Supervisory Board of Het Concertgebouw N.V. Chairman of the Supervisory Council of Nederlands Openluchtmuseum. Member of the Board of Nationale Toneel (theatre). Chairman of the Supervisory Council of Platform Betatechniek. Chairman of the Supervisory Council of the Technical University of Delft.
I. (ISABEL) MARTÍN CASTELLÁ (Born 1947, Spanish nationality, female; appointed in 2013, term expires in 2017) Former Vice-President and member of the Management Committee of the European Investment Bank. Other business activities: member of the Advisory Board of Madrid Network. Non-executive Board member of Foundation Konecta.
Furthermore, EY also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2013.
CHANGE OF CONTROL PROVISIONS LEGAL PROVISIONS Pursuant to the terms of the Dutch Financial Supervision Act a declaration of no objection from the Dutch central bank (“DNB”) must be obtained by anyone wishing to obtain or hold a participating interest of at least 10% in ING Group and to exercise control attached to such a participating interest. Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from or notification to local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
CHANGE OF CONTROL CLAUSES IN MATERIAL AGREEMENTS ING Group is not a party to any material agreement that becomes effective or is required to be amended or terminated, in case of a change of control of ING Group following a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. ING Group subsidiaries may have customary change of control arrangements included in agreements related to various business activities, such as joint venture agreements, letters of credit and other credit facilities, ISDA-agreements, hybrid capital and debt instruments, reinsurance agreements and futures and option trading agreements. Following a change of control of ING Group (as the result of a public bid or otherwise), such agreements may be amended or terminated, leading, for example, to an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover and liquidation of outstanding futures and option trading positions.
The following report is issued in compliance with the provisions of article 14 of the trust conditions for registered shares in the share capital of ING Groep N.V. and best-practice provision IV.2.6 of the Dutch Corporate Governance Code.
(“AGM”), the items on the agenda of the AGM, the proxy voting results and the voting by ING Trust Office.
Holders of depositary receipts who did not attend the AGM in person or who were not represented by a third party, were entitled to give binding voting instructions to ING Trust Office for a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date. Over 60% of the voting holders of depositary receipts gave binding voting instructions to ING Trust Office for a number of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date. During the AGM, ING Trust Office voted on these shares in accordance with the voting instructions given. A more detailed overview of these voting results can be found on de website of ING Group (www.ing.com).
ING Trust Office promotes the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation in the decision-making process in annual general meetings of shareholders and holders of depositary receipts and promotes the execution of voting rights in a transparent way. At the same time it prevents that a minority of shareholders and holders of depositary receipts could use a chance majority of votes to the disadvantage of the shareholders and holders of depositary receipts present nor represented at a general meeting of ING Group.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2013, the consolidated profit and loss account, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended. Our report dated 17 March 2014 expressed an unqualified opinion thereon.
Increased focus on risk and non-financial performance Variable remuneration is linked to risk and non-financial performance and takes both individual and company performance criteria into consideration. Performance measurement accounts for estimated risks and costs of capital. In addition to financial indicators, performance is assessed based on non-financial drivers, by means of a number of targets regarding economic, environmental, customer satisfaction and social criteria.
ING endeavours to match compensation of the Company’s leadership appropriately against a variety of factors, such as the complexity of functions, the scope of responsibilities, the alignment of risks and rewards, local and international legislation and the long-term objectives of the company and its stakeholders, which is all the more important given the changing international standards regarding responsible remuneration. These factors differ for each role, line of business and country. As much as possible for a global financial institution of this size, ING aims to take account of all these differences and also of the standards applied within similar financial institutions in the various countries in which it operates.
REMUNERATION POLICY FOR THE EXECUTIVE BOARD According to the remuneration policy of the Executive Board as adopted by the AGM on 27 April 2010 and amended by the AGM on 9 May 2011, remuneration of Executive Board members consists of a combination of fixed compensation (base salary) and variable remuneration (together “total direct compensation”), pension arrangements and benefits as described below.
Total direct compensation: reduced emphasis on variable remuneration Total direct compensation levels are based on market data that include peers both inside and outside the financial sector in the international context in which ING operates. Total direct compensation is benchmarked against a peer group of companies that, in the opinion of the Supervisory Board, are comparable with ING in terms of size and scope. In line with the foregoing, the Supervisory Board has determined that the peer group consists of the companies in the Dow Jones EURO STOXX 50 index. These are 50 companies, in a range of financial and non-financial industries, which are based in countries within the economic and monetary union of the European Union. ING’s remuneration policy for the Executive Board is in accordance with the Dutch Banking Code.
Pensions Executive Board members Members of the Executive Board who are employed on the basis of a Dutch employment contract, participate in the defined contribution pension plans introduced in 2010 as part of the remuneration policy. Individual board members participating in the pension plan that existed before the introduction of the 2010 plans were given the choice to keep their existing pension arrangement. This existing pension arrangement, approved by the 2006 AGM, is based on a defined contribution plan. Alternatively, they can switch to the 2010 arrangements.
Members of the Executive Board working on a non-Dutch employment contract are offered pensions in line with local practices.
OTHER ITEMS FOR SUPERVISORY BOARD DISCRETION CLAW BACK AND ADJUSTMENTS The Supervisory Board has the authority to reclaim variable remuneration allocated to a member of the Executive Board based on inaccurate data and/or behaviour that led to significant harm to the company. The Supervisory Board also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in undesired outcomes. Accordingly, the Supervisory Board has decision authority in situations not addressed in the policy.
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.
In 2013 there was no claw-back applied to paid or vested variable remuneration from any of the Executive Board members. The total direct compensation of former members of the Executive Board received in their capacity as Executive Board members amounted to nil for 2013, nil for 2012 and EUR 563,000 for 2011.
(3) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The 2012 pension costs for him reflect the partial year as an Executive Board member.
Pension costs of former members of the Executive Board in their capacity as Executive Board members amounted to nil for 2013, nil for 2012 and EUR 135,000 for 2011. In 2013 it was ruled by Court to apply a 100% pension indexation for all former Dutch employees associated in the ING Pension Fund, including former Executive Board members. This did not result in additional costs.
Long-term incentives awarded in previous years In 2013 no long-term incentives were awarded to the Executive Board members. Until 2010, the long-term incentive plan (LTIP) was in place at ING and includes stock options and performance shares. The ING stock options have a total term of ten years and a vesting period of three years after which they can be exercised during the remaining seven years.
For the Executive Board members the performance or deferred shares have vested during 2013 as indicated in the table below. The Executive Board members are not allowed to sell depositary receipts obtained as member of the Executive Board within a period of five years from the grant date. They are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested performance-share award. Depositary receipts obtained as a member of the Executive Board ING Group from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the exercised award.
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 December 2013
ING depositary receipts for shares held by members of the Executive Board number of depositary receipts 2013 2012 2011
(1) Ralph Hamers was appointed to the Executive Board on 13 May 2013. The figures reflect the loans and advances received well before his appointment to the Executive Board.
Compensation of former members of the Supervisory Board who are not included in the above table amounted to EUR nil in 2013, EUR 59,000 in 2012 and EUR 203,000 in 2011.
M.L.R. (Michel) Vonk, chairman L.G. (Bert) Woltheus, deputy-chairman J.R.H.M. (Job) van Luyken, secretary H.P. (Hennie) Post, deputy secretary J.H. (Hans) de Boer, G. (Goof) Bode, J. (Yoap) Brugmann, A. (Aad) Kant
J.P. (Jean Pierre) Lambert, chairman Bank, Belgium C.M. (Mihai) Ailincai, secretary Bank, Romania
O. (Otmar) Haneder, Austria F. (Franck) Goethals, D. (Dirk) Verstrepen, Belgium N. (Nikolay) Mladenski, B. (Biliana) Petrova, Bulgaria M. (Martina) Jezkova, P. (Petr) Ullmann, Czech Republic M. (Mourad) Benzaaza, France U. (Ulrich) Probst, Germany N. (Nikolaos) Ploumis, Greece G. (Géza) Bodor, C. (Csilla) Dobos, Hungary G. (Gianluigi) Spina, N. (Nicola) Cerruti, Italy C. (Christophe) Guissart, A. (Alain) Back, Luxembourg J.R. (Jeffrey) Dinsbach, G.J. (Gerard) Veldman, L.F.F. (Leo) Teunissen, L.S.A. (Lea) De Weerd, J. (Jennifer) Wirjosemito, the Netherlands A. (Anna) Potajallo, M. (Mieczyslaw) Bielawski, K. (Krzystov) Burnat, M. (Mariusz) Cieslik, Poland V. (Valerica) Chirila, C.M. (Mihai) Ailincai, D. (Daniela) Plopsoreanu, Romania M. (Marcel) Forisek, L. (Lukas) Motovsky, Slovakia D. (Deiane) Vicente Coira, M.A. (Miguel) Hernandez Fernandez, N. (Nadia) Belajard Moya, Spain S. (Sam) Chaudhuri, R. (Rina) Goldenberg, UK.
Notes to the consolidated annual accounts Notes to the accounting policies 1 Accounting policies 98
Notes to the consolidated balance sheet 2 Cash and balances with central banks 120 3 Amounts due from banks 120 4 Financial assets at fair value through profit and loss 120 6 Loans and advances to customers 129 7 Investments in associates 131 8 Real estate investments 132 9 Property and equipment 133 10 Intangible assets 135 11 Deferred acquisition costs 136 12 Assets and liabilities held for sale 137 13 Other assets 139 14 Shareholders’ equity (parent)/non-voting equity securities 140 15 Subordinated loans 146 16 Debt securities in issue 147 17 Other borrowed funds 148 18 Insurance and investment contracts,
Risk management 237 Capital management 335 89ING Group Annual Report 2013 1 W h o w e are 2 R
– non-trading derivatives 11,155 18,752 22,165 – designated as at fair value through profit and loss 13,855 13,399 13,021 Liabilities held for sale 12 146,142 69,899 64,265
Addition to loan loss provisions 6 2,289 2,125 1,670 Intangible amortisation and other impairments 32 146 272 362
Earnings per share 37 Basic earnings per ordinary share 0.71 0.93 1.12 Diluted earnings per ordinary share 0.71 0.93 1.12
Net result from discontinued operations attributable to: Equityholders of the parent 234 1,191 810 92 ING Group Annual Report 2013
Items that may be reclassified subsequently to the profit and loss account: Unrealised revaluations available-for-sale investments and other –4,824 6,941 831 Realised gains/losses transferred to the profit and loss account –79 –840 723 Changes in cash flow hedge reserve –827 737 1,124 Transfer to insurance liabilities/DAC 1,944 –2,181 –2,004 Share of other comprehensive income of associates 6 29 319 Exchange rate differences and other –2,094 –670 –158
– deferred acquisition costs and value of business acquired 1,282 –484 277 – change in provisions for insurance and investment contracts –8,503 –3,174 4,239 – addition to loan loss provisions 2,289 2,125 1,670
(1) Result before tax includes results from continuing operations of EUR 4,107 million (2012: EUR 4,074 million; 2011: EUR 6,459 million) as well as results from discontinued operations of EUR 318 million (after tax EUR 345 million), for 2012 EUR 1,289 million (after tax EUR 1,197 million) and for 2011 EUR 815 million (after tax EUR 815 million).
As at 31 December 2013 Cash and cash equivalents includes cash and balances with central banks of EUR 13,316 million (2012: EUR 17,657 million; 2011: EUR 31,194 million). Reference is made to Note 41 ‘Cash and Cash equivalents’.
Unrealised revaluations property in own use –12 –12 –12 Unrealised revaluations available-for-sale investments and other 830 830 1 831 Realised gains/losses transferred to the profit and loss account 723 723 723 Changes in cash flow hedge reserve 1,124 1,124 1,124 Transfer to insurance liabilities/DAC –2,004 –2,004 –2,004 Share of other comprehensive income of associates 319 319 319 Exchange rate differences and other –153 –153 –5 –158 Total amount recognised directly in equity (other comprehensive income) 1,927 1,927 –4 1,923
Net result from continuing and discontinued operations 4,161 4,161 109 4,270
NOTES TO THE ACCOUNTING POLICIES AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. for the year ended 31 December 2013 were authorised for issue in accordance with a resolution of the Executive Board on 17 March 2014. The Executive Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Group are described in the section ‘ING at a glance’ in section 1.
Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU; • Under IFRS 4, an insurer may continue its existing pre-IFRS accounting policies for insurance contracts, provided that certain minimum requirements are met. Upon adoption of IFRS in 2005, ING Group decided to continue the then existing accounting principles for insurance contracts under IFRS. ING Group operates in many different countries and the accounting principles for insurance contracts follow local practice in these countries. ING’s businesses in the Netherlands apply accounting standards generally accepted in the Netherlands (Dutch GAAP) for its provisions for liabilities under insurance contracts; similarly, ING’s businesses in the United States apply accounting standards generally accepted in the United States (US GAAP); • ING’s accounting policy for Real estate investments is fair value, with changes in fair value reflected immediately in the profit and loss account; • ING’s accounting policy for Property for own use is fair value, with changes in fair value reflected in the revaluation reserve in equity (‘Other comprehensive income’). A net negative revaluation on individual properties is reflected immediately in the profit and loss account; and
Basic earnings (before change in accounting policy) 3,252 4,246 3,802.4 3,789.1 0.86 1.12 Impact of change in accounting policy 267 15 0.07 Basic earnings (after change in accounting policy) 3,519 4,261 3,802.4 3,789.1 0.93 1.12
The impact of changes in IAS 19 on 2013 is mainly related to the recognition of the Net defined benefit asset/liability remeasurement in Equity. As disclosed in Note 14 ‘Equity’ the amount of the Net defined benefit asset/liability remeasurement reserve was EUR –3,766 million at 31 December 2013 (31 December 2012: EUR –2,861 million). Without the changes in IAS 19, this negative reserve would not have been deducted from Equity.
Amendments to IAS 1 ‘Presentation of Financial Statements’ The amendments to IAS 1 ‘Presentation of Financial Statements’ resulted in changes to the presentation in the Consolidated Statement of Other Comprehensive income, including a split of Other comprehensive income into items that may be recognised in the profit and loss account in future periods and items that will never be recognised in the profit and loss account. There is no impact on Total equity, Net result and/or Other comprehensive income.
Other The comparison of balance sheet items between 31 December 2013 and 31 December 2012 is impacted by the Initial Public Offering (‘IPO’) and second tranche sale of ING U.S, Inc, ING’s U.S.-based retirement, investment and insurance business (‘ING U.S.’), the classification of ING U.S. as held for sale and discontinued operations, the classification to continuing operations of ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’), the divestment of companies as disclosed in Note 55 ‘Companies and businesses acquired and divested’ and by the held for sale classification as disclosed in Note 12 ‘Assets and liabilities held for sale’ and Note 36 ‘Discontinued operations’.
IFRS 11 ‘Joint Arrangements’ and amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ IFRS 11 ‘Joint Arrangements’ and the related amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ eliminate the proportionate consolidation method for joint ventures that was applied by ING. Under the new requirements, all joint ventures will be reported using the equity method of accounting (similar to the accounting that is already applied for Investments in associates).
Summary of impact as at 1 January 2014 The above mentioned impact of changes of IFRS requirements that are implemented as of 1 January 2014 is summarised as follows: Upcoming changes in IFRS-EU in 2014
Liabilities held for sale 702 –442 260 Liabilities – other –95 –95 Impact on Total liabilities 702 –537 165
IFRS 9 ‘Financial Instruments’ was originally issued in November 2009, reissued in October 2010, and then amended in November 2013. Further amendments are expected to be finalised in 2014. The current version of IFRS 9 does not include a mandatory effective date. An effective date will be added when all phases of the project are complete and a final version of IFRS 9 is issued. The mandatory effective date of IFRS 9 is expected to be 2018. IFRS 9 is also not yet endorsed by the EU. Implementation of IFRS 9, if and when finalised and endorsed by the EU, may have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income.
UPCOMING OTHER CHANGES IN ACCOUNTING POLICIES IN 2014 Accounting for GMDB in Japan Closed Block VA NN Group has moved towards fair value accounting on the reserves for Guaranteed Minimum Death Benefits (GMDB) of the Japan Closed Block VA as of 1 January 2014. Reference is made to Note 60 ‘Subsequent events’.
Insurance provisions, Deferred Acquisition Costs (DAC) and Value of Business Acquired (VOBA) The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, assumptions related to these items that could have a significant impact on financial results include interest rates, mortality, morbidity, property and casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by NN Group risk management as described in the ‘Risk management’ section.
Fair values of real estate Real estate investments are reported at fair value. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values are established using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
The net defined benefit asset/liability recognised in the balance sheet in respect of the defined benefit pension plans is the fair value of the plan assets less the present value of the defined benefit obligation at the balance sheet date.
PRINCIPLES OF VALUATION AND DETERMINATION OF RESULTS Consolidation ING Group (‘the Group’) comprises ING Groep N.V. (‘the Company’), NN Group N.V., ING Bank N.V. and all other subsidiaries. The consolidated financial statements of ING Group comprise the accounts of ING Groep N.V. and all entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and financial policies through situations including, but not limited to: • Ability to appoint or remove the majority of the board of directors; • Power to govern such policies under statute or agreement; and • Power over more than half of the voting rights through an agreement with other investors.
Financial liabilities Debt securities in issue are recognised and derecognised at trade date.
A financial asset is classified as at fair value through profit and loss if acquired principally for the purpose of selling in the short term or if designated by management as such. Management will make this designation only if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis.
Investments in associates Associates are all entities over which the Group has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies through situations including, but not limited to one or more of the following: • Representation on the board of directors; • Participation in the policymaking process; and • Interchange of managerial personnel.
Property under development is stated at fair value (with changes in fair value recognised in the profit and loss account) if ING Group has the intention to recognise the property under development after completion as real estate investments.
In addition, for certain specific products or components thereof, ING applies the option in IFRS 4 to measure (components of) the provisions for liabilities under insurance contracts using market consistent interest rates and other current estimates and assumptions. This relates mainly to Guaranteed Minimum Withdrawal Benefits for Life on the Insurance US Closed Block VA book and certain guarantees embedded in insurance contracts in Japan.
Provisions for life insurance for risk of policyholders For insurance contracts for risk of policyholders the provisions are generally shown at the balance sheet value of the related investments.
Investment contracts Insurance policies without discretionary participation features which do not bear significant insurance risk are presented as Investment contracts. Provisions for liabilities under investment contracts are determined either at amortised cost, using the effective interest method (including certain initial acquisition expenses) or at fair value.
As at 31 December 2013, Amounts due from banks includes receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 5,137 million (2012: EUR 1,109 million) and receivables related to finance lease contracts amounting to EUR 73 million (2012: EUR 133 million).
Trading assets 114,247 114,895 Investments for risk of policyholders 39,589 98,765 Non-trading derivatives 8,546 13,951 Designated as at fair value through profit and loss 2,790 4,760
Trading assets and trading liabilities include assets and liabilities that are classified under IFRS-EU as ‘Trading’ but are closely related to servicing the needs of the clients of ING Group. ING Bank offers institutional and corporate clients and governments products that are traded on the financial markets. A significant part of the derivatives in the trading portfolio are related to servicing corporate clients in their risk management to hedge for example currency or interest rate exposures. In addition, ING Bank provides its customers access to equity and debt markets for issuing their own equity or debt securities (‘securities underwriting’). Although these are presented as ‘Trading’ under IFRS-EU, these are directly related to services to ING’s customers. Loans and receivables in the trading portfolio mainly relate to (reverse) repurchase agreements, which are comparable to collateralised borrowing (lending). These products are used by ING Bank as part of its own regular treasury activities, but also relate to the role that ING Bank plays as intermediary between different professional customers. Trading assets and liabilities held for ING’s own risk are very limited. From a risk perspective, the gross amount of trading assets must be considered together with the gross amount of trading liabilities, which are presented separately on the balance sheet. However, IFRS-EU does not allow netting of these positions in the balance sheet. Reference is made to Note 21 ‘Financial liabilities at fair value through profit and loss’ for information on trading liabilities.
Equity securities 437 13 Debt securities 1,289 2,682 Loans and receivables 1,052 1,169
The notional value of the related credit derivatives is EUR 111 million (2012: EUR 61 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated amounts was EUR –4 million (2012: EUR –6 million) and the change for the current year was EUR 2 million (2012: EUR –3 million).
Trading assets 18,890 17,472 Investments for risk of policyholders 1,821 6,940 Designated as at fair value through profit and loss 1,289 2,682 Financial assets at fair value through profit and loss 22,000 27,094
ING Group’s total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 158,703 million (2012: EUR 222,753 million) is specified as follows by type of exposure and by banking and insurance operations: Debt securities by type and balance sheet lines - Available-for-sale investments and Assets at amortised cost (banking operations)
Debt securities by type and balance sheet lines - Available-for-sale investments and Assets at amortised cost (insurance operations)
Debt securities - Exposure to Government bonds and Unsecured Financial institutions’ bonds on Greece, Italy, Ireland, Portugal, Spain and Cyprus
As at 31 December 2013, ING Group’s balance sheet value of ‘Government bonds’ and ‘Unsecured Financial institutions’ bonds to Greece, Italy, Ireland, Portugal, Spain and Cyprus and the related revaluation reserve (before tax) in equity is as follows: Greece, Italy, Ireland, Portugal, Spain and Cyprus - Government bonds and Unsecured Financial institutions’ bonds (1)
On 21 July 2011, a Private Sector Involvement (‘PSI’) to support Greece was announced. This initiative involved a voluntary exchange of existing Greek government bonds together with a Buyback Facility. In 2012, the agreement under the PSI to exchange Greek Government bonds into new instruments was executed. Under this exchange, ING received new listed Greek Government bonds (for a notional amount of 31.5% of the notional of the exchanged bonds, maturities between 2023 and 2042), listed European Financial Stability Facility (‘EFSF’) notes (for a notional amount of 15% of the notional of the exchanged bonds, maturities of one to two years) and listed short-term EFSF notes (maturity of 6 months, in discharge of all unpaid interest accrued on the exchanged bonds). These new securities were recognised as available-for-sale instruments. Furthermore, ING received listed GDP-linked securities issued by Greece (notional equal to notional of the new Greek Government bonds, maturity 2042). The exchange was executed on 12 March 2012. The exchanged bonds were derecognised and the new instruments were recognised at fair value on the exchange date. The exchange resulted in a gain of EUR 15 million (Bank: EUR 22 million; Insurance: EUR –7 million) in 2012, being the difference between amortised cost (net of cumulative impairments) of the exchanged bonds and fair value of the new instruments at the date of exchange. This result was included in ‘Investment income’.
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008) Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the second and first quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-for-sale to Loans and advances to customers and Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had the intention to hold for the foreseeable future. The table below provides information on the three reclassifications made in the fourth quarter of 2008 and the first and second quarter of 2009. Information is provided for each of the three reclassifications (see columns) as at the date of reclassification and as at the end of the subsequent reporting periods (see rows). This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet.
Carrying value as at 31 December 5,550 20,551 1,189 Fair value as at 31 December 5,871 20,175 1,184 Unrealised fair value losses in shareholders’ equity (before tax) as at 31 December –734 –902 –67 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made 321 –376 –5 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) 121 629 n.a Effect on result (before tax) for the year (mainly interest income) n.a n.a 47 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Loans to, or guaranteed by, public authorities 29,132 35,857 15,119 14,917 44,251 50,774
– more than 1 year but less than 5 years 6,283 7,673 – more than 5 years 4,041 4,413
The allowance for uncollectable finance lease receivables includes in the loan loss provisions amount to EUR 344 million as at 31 December 2013 (2012: EUR 322 million).
The closing balance is included in – Amounts due from banks 19 28 19 28 – Loans and advances to customers 2,970 2,445 3,165 3,032 6,135 5,477
In 2013, Changes in the composition of the group and other changes includes EUR –5 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’. Furthermore Changes in the composition of the group and other changes relates to the sale of ING’s mortgage business in Mexico. Reference is made to Note 55 ‘Companies and businesses acquired and divested’.
In 2013, the decrease in Loans and advances to customers includes the repayments of EUR 6.1 billion by the Dutch State on the IABF loan.
CBRE Lionbrook Property Partnership LP 29 146 567 55 79 27 CBRE Retail Property Fund Iberica LP 29 118 1,322 902 67 CBRE Property Fund Central Europe LP 25 100 850 450 45 39 CBRE Retail Property Fund France Belgium C.V. 15 77 1,336 822 71 78
CBRE Retail Property Fund Central and Eastern Europe 21 51 688 439 47 55 Other investments in associates 439
Accumulated impairments of EUR 25 million (2012: EUR 39 million) have been recognised.
Revaluations 56 –10 Share of results 114 55 Dividends received –51 –82 Disposals –350 –92 Impairments –1 Exchange rate differences –124 –22 Changes in the composition of the group and other changes –167 –41 Closing balance 1,749 2,203
In 2013, Share of results includes EUR 24 million (2012: EUR 16 million) relating to TMB, EUR 128 million (2012: EUR 80 million) relating to SulAmérica S.A. and the remainder to individually not significant associates.
Exchange rate differences In 2013, Exchange rate differences includes EUR –54 million (2012: EUR 7 million) relating to TMB, EUR –42 million (2012: EUR –42 million) relating to SulAmérica S.A. and the remainder to individually not significant associates.
Changes in the composition of the group and other changes In 2013, Changes in the composition of the group and other changes includes EUR –62 million as a result of the classification of ING U.S. as held for sale and EUR –17 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Gross carrying amount as at 31 December 2,128 2,276 Accumulated depreciation as at 31 December –696 –682 Accumulated impairments as at 31 December –189 –171 Net carrying value as at 31 December 1,243 1,423
In 2013, Changes in the composition of the group and other changes includes EUR –104 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
The changes in reportable segments as disclosed in Note 42 ‘Segments’ resulted in the above reporting units but did not impact the outcome of the impairment test.
Such additional analyses were performed for the goodwill that was concluded to be impaired as set out above. For other reporting units, the goodwill allocated to these reporting units was fully supported in the first step. For Retail Banking Central Europe, a second analysis was necessary in 2011. Although in 2012 the goodwill allocated to Retail Banking Central Europe was fully supported in the first step, the second test was performed in 2012 and confirmed the continued recognition of the related goodwill.
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2013 is 6.0% gross and 4.3% net of investment management fees (2012: 8.1% gross and 7.3% net of investment management fees). Percentages are based on the portfolios from continuing operations.
As at 31 December 2013 Assets and liabilities held for sale relates to ING U.S., the remaining ING’s Insurance and investment management businesses in Asia (‘Asia’) excluding ING Japan.
In light of ING’s intention to divest its remaining interest in ING U.S. over time ING U.S. is classified as held for sale and discontinued operations.
During 2013, the divestments of the insurance businesses in Hong Kong, Macau and Thailand, the investment management business in Malaysia and Thailand, the Insurance joint ventures in South Korea and India and ING Direct UK closed. During 2012, the divestment of ING’s insurance business in Malaysia was closed. As a result these businesses are no longer consolidated as at 31 December 2013. Furthermore, other divestments were agreed that are expected to close or closed in 2014, including ING Bob Life and the Taiwanese investment management businesses; these remain to be classified as held for sale as at 31 December 2013. ‘Reference is made to Note 55 ‘Companies and business acquired and divested’. In addition, some other businesses remain in held for sale, for which no divestments have yet been concluded; this includes mainly ING U.S.
Debt securities in issue 2,548 Other borrowed funds 138 Insurance and investments contracts 136,270 51,198 Customer deposits and other funds on deposit 14,207 Financial liabilities at fair value through profit and loss 2,554 2,081 Other liabilities 4,632 2,413
The fair values of the financial instruments carried at fair value were determined as follows: Methods applied in determining fair values of financial assets and liabilities - Held for sale 2013 Level 1 Level 2 Level 3 Total
Financial assets Investments for risk of policyholders 72,897 3,944 9 76,850
Net defined benefit assets 1,006 1,590 4,520 Deferred tax assets 1,380 2,244 2,702 Reinsurance and insurance receivables 635 1,763 1,971 Property development and obtained from foreclosures 945 1,220 1,584 Income tax receivable 597 558 542 Accrued interest and rents 9,988 12,356 14,387 Other accrued assets 961 1,542 2,200
The change in Other assets includes EUR –2,495 million as a result of the classification of ING U.S. as held for sale and EUR 1,251 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Depositary receipts for ordinary shares held by ING Group (Treasury shares) As at 31 December 2013, 4.0 million (2012: 30.1 million; 2011: 49.3 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 are held by ING Groep N.V. or its subsidiaries. The obligations with regard to the existing stock option plan and the share plans will be funded either by cash or by newly issued shares at the discretion of ING Group.
Transfer to insurance liabilities/DAC includes the change in the deferred profit sharing liability (net of deferred tax). Reference is made to Note 18 ‘Insurance and investment contracts, reinsurance contracts’.
In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted EUR 3 billion and included a 50% repurchase premium. On 26 November 2012, ING repaid EUR 1.125 billion also including a 50% repurchase premium. On 6 November 2013, ING repaid another EUR 1.125 billion also including a 50% repurchase premium. ING funded these repayments from retained earnings. ING intends to repay the remaining EUR 1.500 billion non-voting equity securities (core Tier 1 securities) in two tranches over the next 2 years. While ING has committed to redeem these securities per the defined schedule, ING has the ability to accelerate payments if it is prudent under prevailing financial circumstance or defer a repayment in full or in part. In the latter case, the subsequent tranche will be increased with a corresponding amount. In the event that ING does not repay in full 2 consecutive repayment tranches or does not pay in total EUR 4.5 billion by 15 May 2015 (including the EUR 2.250 billion paid respectively in 2013 and 2012), the Dutch State will re-notify to the Commission who may in principle require compensatory measures. All repayments are conditional upon the approval of the DNB. The terms for the remaining non-voting equity securities, remained unchanged. Reference is made to Note 58 ‘Related parties’.
As at 31 December 2013, an amount of EUR 987 million (2012: EUR 911 million; 2011: EUR 836 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN is included.
Minimum capital requirements for ING Group’s subsidiaries and associates are as follows: 2013 ING Bank NN Group Other Total
Regulatory capital invested 47,123 21,406 68,529 Required minimum regulatory capital 31,107 9,515 40,622
2013 – Repurchase of certain Dutch Government guaranteed notes In 2013, ING Bank repurchased certain EUR and USD denominated Dutch Government guaranteed notes. One offer was for the EURdenominated notes with a total principal amount of EUR 4.0 billion (3.375% fixed rate notes due on 3 March 2014). The aggregate principal amount of the notes repurchased was approximately EUR 1.28 billion or 32%, leaving a remaining amount outstanding of approximately EUR 2.72 billion. ING Bank paid a purchase price of EUR 1,022.19 per EUR 1,000 principal amount for the EUR denominated notes. In 2013, a charge of EUR 14 million (EUR 11 million after tax) is recognised in Other income - Other on the EUR-denominated notes.
Subordinated loans of group companies 678 88 872 2,055 2,062 3,249 9,004 Preference shares of group companies 396 396
Provision for unearned premiums and unexpired risks 266 265 3 2 269 267
Changes in the composition of the group and other changes –41,848 –31,577 –54,915 –23,852 –4,770 –244 –101,533 –55,673
Exchange rate differences –3,013 –1,869 –4,313 –2,916 –30 –93 –7,356 –4,878
Changes in the composition of the group and other changes 1 –36 –1 –2 –38
– for prior years –86 –39 2 –86 –37 – interest accrual of provision 40 45 40 45
Claim settlements and claim settlement costs – for the current year –452 –473 –1 –1 –453 –474 – for prior years –618 –643 –13 –13 –631 –656
ING Group has an outstanding balance of EUR 35 million as at 31 December 2013 (2012: EUR 36 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean-up, management of ING Group considers facts currently known including current legislation and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when sufficient information has been obtained to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
Where discounting is used in the calculation of the claims provisions, based on weighted averages, the rate is within the range of 3.0% to 4.0% (2012: 3.0% to 4.0%).
The Group applies the exemption in IFRS-EU not to present Gross claims development for annual periods beginning before 1 January 2004 (the date of transition to IFRS-EU) as it is impracticable to obtain such information.
Savings accounts 289,838 277,766 Credit balances on customer accounts 127,073 120,708 Corporate deposits 56,528 55,268
Equity securities 3,713 3,262 Debt securities 7,396 7,594 Funds on deposit 32,880 20,661
In 2013, the change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in credit risk is EUR –129 million (2012: EUR –633 million) and EUR –167 million (2012: EUR –38 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves).
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Releases –66 –23 Charges –580 –485 Exchange rate differences –4 2 Changes in the composition of the group and other changes –14 –12 Closing balance 575 919
In 2012, a reorganisation provision of EUR 233 million was recognised in the segment Retail Netherlands (Bank) mainly as a result of entering the second phase of the transformation program. The transformation program aims to streamline IT systems as well as the further development and integration of ING’s mobile banking services. These measures are expected to result in a further reduction of the workforce of around 1,400 FTE’s (of which 400 external FTE’s) over a period of three years.
Other Other mainly relates to year-end accruals in the normal course of business.
Gross premium income has been presented before deduction of reinsurance and retrocession premiums granted. Gross premium income excludes premium received for investment contracts, for which deposit accounting is applied.
Income from investments in debt securities and loans 2,644 2,755 2,945 2,644 2,755 2,945
Realised gains/losses on disposal of debt securities 129 209 91 185 -117 -35 314 92 56 Impairments of available-for-sale debt securities -1 -16 -734 -15 -584 -1 -31 -1,318 Reversal of impairments of available-for-sale debt securities 2 74 2 74 Realised gains/losses and impairments of debt securities 130 193 -569 185 -132 -619 315 61 -1,188
Realised gains/losses on disposal of equity securities 61 367 39 127 444 368 188 811 407 Impairments of available-for-sale equity securities -3 -22 -65 -172 -144 -173 -175 -166 -238 Realised gains/losses and impairments of equity securities 58 345 -26 -45 300 195 13 645 169
In 2012, ING sold all of its shares in Capital One Financial Corporation. The transaction resulted in a gain of EUR 323 million (before and after tax) and was recognised in Realised gains/losses on disposal of equity securities. Reference is made to Note 55 ‘Companies and businesses acquired and divested’.
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Foreign exchange transactions results –138 –142 –374 108 482 –178 –30 340 –552
Securities trading results includes the results of market making in instruments such as government securities, equity securities, corporate debt securities, money-market instruments, and interest rate derivatives such as swaps, options, futures and forward contracts. Foreign exchange transactions results include gains and losses from spot and forward contracts, options, futures, and translated foreign currency assets and liabilities.
The portion of trading gains and losses relating to trading securities still held as at 31 December 2013 amounts to EUR –105 million (2012: EUR 118 million; 2011: EUR –66 million).
Gross underwriting expenditure – before effect of investment result for risk of policyholders 8,655 10,350 13,238 – effect of investment result risk of policyholders 4,930 5,517 206
Investment result for risk of policyholders –4,930 –5,517 –206 Reinsurance recoveries –70 –72 –79
The total amount of commission paid and commission payable with regard to the insurance operations amounted to EUR 841 million (2012: EUR 897 million; 2011: EUR 903 million). This includes the commissions recognised in Costs of acquiring insurance business of EUR
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In 2013 and 2012, the Dutch Government imposed an additional tax charge of 16% on the income in excess of EUR 150,000 of each employee who is subject to Dutch income tax. The tax is charged to the company and does not affect the remuneration of involved staff. The tax imposed on ING for relevant employees amounts to EUR 21.7 million (2012: EUR 21.9 million), which is included in the table above.
In 2013, no share awards (2012: nil; 2011: nil) were granted to the members of the Executive Board of ING Groep N.V., 553,600 share awards (2012: 643,644; 2011: 154,440) were granted to the Management Boards of ING Bank and NN Group. To senior management and other employees 10,403,613 share awards (2012: 19,802,692; 2011: 20,135,968) were granted. In 2013, members of the Management Board, senior management and other employees of ING U.S. received Voya shares instead of the share awards of ING Groep N.V. they received previously.
Summary of stock options outstanding and exercisable 2013 Range of exercise price in euros
Weighted average exercise price 165ING Group Annual Report 2013 1 W h o w e are 2 R
Interest result banking operations 23 11,701 11,884 13,449 Investment income – insurance operations 25 3,189 3,283 3,279 Other interest expenses –461 –464 –380 35 OTHER OPERATING EXPENSES
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 219 million (2012: EUR 245 million; 2011: EUR 150 million) in which ING Group is the lessee. No individual operating lease has terms and conditions that significantly affect the amount, timing and certainty of the consolidated cash flows of the Group.
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36 DISCONTINUED OPERATIONS As at 31 December 2013, ING U.S. and ING’s remaining insurance and investment management businesses in Asia (‘Asia’), excluding ING Japan are classified as discontinued operations.
As at 31 December 2012, ING’s Insurance and investment management businesses in Asia (‘Asia’) were classified as discontinued operations.
Latin America 114 Net result from discontinued operations 370 839 –180
Taxation –27 92 Net result from discontinued operations 370 839 –180
Underlying income – Gross premium income 9,530 9,530 – Net interest result - banking operations 11,804 –101 11,703
Divestments –42 15 –76 Special items 235 –182 IFRS-EU (continuing operations) 26,301 22,194 2,998 Total net result from discontinued operations 16,867 16,524 234 IFRS-EU (continuing and discontinued operations) 43,168 38,718 3,232
Divestments in 2013 include the sale of part of ING’s direct stake in SulAmérica S.A. and the sale of ING Hipotecaria, ING’s mortgage business in Mexico as well as the operating result of divested units.
Special items in 2013 is primarily related to the previously announced restructuring programmes in both Bank and Insurance and additional IT expenses for Insurance which is partly offset by pension curtailments in the Netherlands.
Underlying income – Gross premium income 10,706 10,706 – Net interest result - banking operations 11,664 –85 11,578
– Revaluations: revaluations on assets marked-to-market through the consolidated profit and loss account. These investments include private equity (associates), real estate (property and associates), derivatives unrelated to product hedging programs (i.e. interest rate swaps, foreign exchange hedges) and direct equity hedges.
– Market & other impacts: these impacts mainly comprise the change in the provision for guarantees on separate account pension contracts (net of hedging) in the Netherlands, the equity related and other deferred acquisition costs unlocking for Japan ClosedBlock VA as well as the accounting volatility related to the reinsurance of minimum guaranteed benefits of Japan Closed-Block VA.
Total net result from discontinued operations ING U.S. 39 Total net result from discontinued operations Asia 195 Net result 202
Fees and premium based revenues 508 514 490 430 148 2,090
Net result from continuing operations –178 –35 81 140 76 –367 72 54 –161
Fees and premium based revenues 499 548 437 434 149 2,066
Non-operating items – Gains/losses and impairments 193 –45 –599 7 5 6 –433
Interest income and interest expenses 2013 Total Banking Total Insurance Eliminations Total external
Total interest income and interest expenses 2011 Total Banking Total Insurance Eliminations Total external
43 INFORMATION ON GEOGRAPHICAL AREAS ING Group’s business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. The Netherlands is ING Group’s country of domicile. Geographical distribution of income is based on the origin of revenue. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
Latin America Asia Australia Other Eliminations Total 182 ING Group Annual Report 2013
The most recent (actuarial) valuations of the plan assets and the present value of the defined benefit obligation were carried out at 31 December 2013. The present value of the defined benefit obligation, and the related current service cost and past service cost, were determined using the projected unit credit method.
In 2013, Changes in the composition of the group and other changes includes EUR –1,123 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
No plan assets are expected to be returned to ING Group during 2014.
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Changes in defined benefit obligation and other post-employment benefits Defined benefit obligation Other post-employment benefits
Remeasurements: Actuarial gains and losses arising from changes in demographic assumptions –10 2 Remeasurements: Actuarial gains and losses arising from changes in financial assumptions 243 5,919 Participants' contributions 2 Benefits paid –591 –617 –4 Past service cost 3 –2 Effect of curtailment or settlement –138 –468 –1 –1 Exchange rate differences –56 –19 –2 –1 Changes in the composition of the group and other changes –1,420 –80 –27
2013 – Effect of curtailment In 2013, the Effect of curtailment or settlement includes the curtailments of two pension plans in the Netherlands. These plans are or will be closed for new pension rights and are replaced by defined contribution schemes.
Amounts recognised directly in Other comprehensive income (equity) were as follows: Remeasurement of the net defined benefit asset/liability
The discount rate is approximately 3.7% on 31 December 2013 (2012: 3.7%). As disclosed in the 2012 Annual Accounts, discussions were ongoing, both in the industry and at the IASB, on the definition of the discount rate for defined benefit pension liabilities and ING would reconsider the methodology for setting the discount rate if and when appropriate. The discount rate used by ING remains based on AA-rated corporate bonds. During 2013, ING further refined its methodology to extrapolate the observable AA-rated corporate bond rates to the full duration of the defined benefit pension liability. The refined methodology and the resulting discount rate are more in line with observed market practices. The impact of the refinement of the extrapolation was an increase in the defined benefit obligation as at 31 December 2013 of approximately EUR 3.2 billion (EUR 2.4 billion after tax); this impact was recognised in Other comprehensive income (equity) in 2013.
On 31 December 2013, the actuarial assumption for Indexation for inflation is 2.0% in 2013 (1.8% in 2012). This percentage is mainly based on the expected inflation and the best estimate assumption for future indexation in the pension plan in the Netherlands. The best estimate assumption for future indexation was amended in 2013 to reflect the outcome of the arbitration in respect of the 2013 indexation as disclosed in Note 54 ‘Legal proceedings’.
The average duration of the benefit obligation at the end of the reporting period is 20 years (2012: 21 years). This number can be subdivided into the duration related to: • active members: 26 years (2012: 26 years); • inactive members: 23 years (2012: 23 years); and • retired members: 11 years (2012: 11 years).
Profit and loss account - Pension and other staff-related benefit costs
Defined contribution plans Certain group companies sponsor defined contribution pension plans. The assets of all ING Group’s defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in other assets/liabilities.
Since the plan will be closed for new pension accruals as of 1 January 2014, no premiums will be paid into the Plan. However, ING decides annually whether or not to grant a lump sum payment for indexation of the accrued pensions.
Closed defined benefit plan in the Netherlands - Major categories of plan assets Fair value of plan assets
Other assets and liabilities (including accrued interest) 257 85 257 85
Real estate investments 349 –22 –42 285 Financial assets and liabilities at fair value through profit and loss –1,089 274 –3 4 –814 Deferred acquisition costs and VOBA 1,351 339 –332 –153 –893 312
Presented in the balance sheet as: – deferred tax liabilities 2,813 1,056 – deferred tax assets –2,244 –1,380 569 –324
Presented in the balance sheet as: – deferred tax liabilities 2,342 3,611 – deferred tax assets –3,148 –2,702
For the year 2012 the tax charge in the Netherlands decreased with EUR 776 million to negative EUR 321 million caused by lower results in combination with a significant part of the result being tax exempt compared to 2011 due to the divestments of ING Direct Canada and ING Direct US.
The weighted average statutory tax rate in 2013 is lower compared to 2012. This is mainly caused by changes in the composition of the profit before tax from continuing operations in 2013 compared to 2012. In 2013 more profits were taxable in countries with lower tax rates compared to 2012.
The weighted average statutory tax rate in 2012 was higher than in 2011. This was mainly a result of differences in the composition of results before tax from continuing operations in 2012 and 2011. In 2012 relative more profits were taxable in countries with high tax rates, while relative more losses were incurred in countries with lower tax rates (as compared to 2011).
The effective tax rate in 2013 was lower than the weighted average statutory tax rate. This is mainly caused by non-taxable income and prior year adjustments which are only partly offset by non-deductible expenses and write-off of deferred tax assets.
The effective tax rate in 2011 was lower than the weighted average statutory tax rate. This was mainly caused by exempt income, which was only partly offset by non-deductible expenses and write-offs of deferred tax assets.
Adjustment to prior periods in 2013 relates to a true-up of tax positions. Adjustment to prior periods in 2012 related mainly to a tax settlement.
46 FAIR VALUE OF ASSETS AND LIABILITIES Financial assets and liabilities The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Financial assets Cash and balances with central banks 13,316 17,657 13,316 17,657 Amounts due from banks 43,173 39,126 43,012 39,053 Financial assets at fair value through profit and loss
Debt securities in issue and other borrowed funds The fair value of debt securities in issue and other borrowed funds is generally based on quoted market prices or, if not available, on estimated prices by discounting expected future cash flows using a current market interest rate and credit spreads applicable to the yield, credit quality and maturity.
Observable inputs reflect market data obtained from independent sources. Unobservable inputs are inputs which are based on the Group’s own assumptions about the factors that market participants would use in pricing an asset or liability, developed based on the best information available in the circumstances. Unobservable inputs may include volatility, correlation, spreads to discount rates, default rates and recovery rates, prepayment rates and certain credit spreads. Transfers into and transfers out of fair value hierarchy levels are recognised as of the date of the event or change in circumstances that caused the transfer.
Financial instruments at fair value The fair values of the financial instruments carried at fair value were determined as follows: Methods applied in determining fair values of financial assets and liabilities 2013 Level 1 Level 2 Level 3 Total
Methods applied in determining fair values of financial assets and liabilities 2012 Level 1 Level 2 Level 3 Total
Level 1 – (Unadjusted) quoted prices in active markets This category includes financial instruments whose fair value is determined directly by reference to published quotes in an active market that ING Group can access. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Trading assets, Non-trading derivatives and Assets designated at fair value through profit and loss and Level 3 Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as Level 3 if a 196 ING Group Annual Report 2013
In 2013, Changes in the composition of the group and other changes includes EUR –1,654 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
– Other 1 3 Option pricing model Commodity volatility 6% 28% Com/Com correlation –0.1 0.9 Com/FX correlation –0.8 –0.2
Available for sale – Debt 506 n/a – Equity 509 n/a – Asset backed securities 149 n/a
If ING had used input values from the extremes of the ranges of reasonably possible alternatives when valuing these instruments as of 31 December 2013 then the impact on the profit and loss account would have been higher or lower as indicated below. The purpose of this disclosure is to present the possible impact of a change in unobservable inputs in the fair value of financial instruments where unobservable inputs are significant to the valuation. In practice it would be unlikely that all unobservable inputs would ever be simultaneously at the limits of their respective ranges of reasonably possible alternatives and so the estimates in the table below show a greater fair value uncertainty than the realistic position at year end. Also, this disclosure does not attempt to indicate or predict future fair value movements. The numbers in isolation give limited information as in most cased these level 3 assets and liabilities should be seen in combination with other instruments (for example as a hedge) that are classified as level 1 or level 2. The table below does not include available for sale investments as changes in the fair value values of such investments would not directly impact profit and loss. Further disclosure on valuations, inputs and sensitivities is provided in the Risk management section.
Unrealised gains and losses recognised in Other comprehensive income that relate to Available-for-sale assets are included in the Revaluation reserve – Available-for-sale reserve and other and Property in own use are included in the Revaluation reserve – Property in own use reserve.
Investment contracts (for contracts at amortised cost) 20 775 795 Amounts due to banks 5,126 20,769 1,837 27,732 Customer deposits and other funds on deposit 223,021 84,633 157,357 474,011
Non-financial assets Real estate investments –25 20 –5 Property in own use –60 –7 –67
Greece, Italy, Ireland, Portugal, Spain and Cyprus Of the Government and Unsecured Financial institutions’ bonds exposure in Greece, Italy, Ireland, Portugal, Spain and Cyprus as disclosed in Note 5 ‘Investments’, EUR 5 billion (2012: EUR 5.0 billion) is classified as available-for-sale and is measured at fair value (with the revaluation recognised in equity, taking into account impairments that are recognised in the profit and loss account). The table below provides the fair value hierarchy per year-end 2013 for the Greek, Italian, Irish, Portuguese, Spanish and Cyprian Government and Unsecured Financial institutions’ bond exposure measured at fair value.
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47 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.
For the year ended 31 December 2013, ING Group recognised EUR –812 million (2012: EUR 716 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2013 was EUR 2,448 million (2012: EUR 3,558 million) gross and EUR 1,879 million (2012: EUR 2,689 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 44 years for insurance operations and 40 years for banking operations, with the largest concentrations in the range of 1 to 8 years for insurance operations and 5 to 20 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a gain of EUR 54 million (2012: EUR 4 million gain) which was recognised in the profit and loss account.
As at 31 December 2013, the fair value of outstanding derivatives designated under cash flow hedge accounting was EUR 245 million (2012: EUR 1,032 million), presented in the balance sheet as EUR 4,630 million (2012: EUR 7,471 million) positive fair values under assets and EUR 4,385 million (2012: EUR 6,439 million) negative fair values under liabilities.
As at 31 December 2013, the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting purposes was EUR –299 million (2012: EUR 267 million).
Included in Interest income and interest expense on non-trading derivatives is EUR 3,456 million (2012: EUR 2,598 million) and EUR 3,220 million (2012: EUR 2,620 million), respectively, relating to derivatives used in cash flow hedges.
As at 31 December 2013, the fair value of outstanding derivatives designated under net investment hedge accounting was EUR 86 million (2012: EUR –22 million), presented in the balance sheet as EUR 138 million (2012: EUR 49 million) positive fair values under assets and EUR 52 million (2012: EUR 71 million) negative fair values under liabilities.
– designated as at fair value through profit and loss 714 213 836 528 473 26 2,790 Investments
Transfer of financial assets not qualifying for derecognition Securities lending Sale and repurchase 2013 Equity Debt Equity Debt
Transfer of financial assets not qualifying for derecognition Securities lending Sale and repurchase 2012 Equity Debt Equity Debt
Associated liabilities at carrying amount Amounts due to banks n.a n.a 5,723 Customer deposits and other funds on deposit n.a n.a 797 Financial liabilities at fair value through profit and loss n.a n.a 1,861 18,193
The table above does not include assets transferred to consolidated securitisation entities as the related asset remain recognised in the consolidated balance sheet. Assets transferred to unconsolidated securitisation entities are disclosed below. Reference is made to Note 57 ‘Structured entities’.
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Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements Related amounts not offset in the balance sheet
Net amounts of financial assets presented in the balance sheettechnique (s)
Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Related amounts not offset in the balance sheet
Impact of enforceable master netting arrangements or similar arrangements Derivatives –9,553 10,060 –507
Proceedings in which ING is involved, include complaints and lawsuits concerning the performance of certain interest sensitive products that were sold by a former subsidiary of ING in Mexico. Litigation was filed by the purchaser of certain ING Mexican subsidiaries who claims that the financial condition of the subsidiaries was not accurately depicted. Parties have agreed to a settlement. The outcome of the settlement is reflected in the 2013 Annual Accounts. Further, purported class litigation has been filed in the United States District Court for the Southern District of New York alleging violations of the federal securities laws with respect to disclosures made in connection with the 2007 and 2008 offerings of ING’s Perpetual Hybrid Capital Securities. The District Court has dismissed all claims related to the 2007 and 2008 offerings. The plaintiffs appealed that decision relating to the 2008 offering. The appellate court affirmed the lower Court’s decision dismissing all claims. The plaintiffs have petitioned the Court for an en banc review of that decision by the entire Court. An administrator of an ERISA plan has filed a lawsuit seeking to represent a class of ERISA plan administrators claiming that an ING subsidiary has breached certain of its ERISA duties. The District Court has granted the Administrator’s motion for class certification. The Court has conducted a bench trial of the liability issues, which concluded on 3 October 2013 and the Court has taken the matter under advisement. These matters are being defended vigorously; however, at this time, ING is unable to assess their final outcome. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect.
ING’s Dutch insurance subsidiaries have issued, sold or advised on approximately one million individual unit-linked policies. There has been for some time and there continues to be political, regulatory and public attention focused on the unit-linked issue in general. Elements of unit-linked policies are being challenged or may be challenged on multiple legal grounds in current and future legal proceedings. There is a risk that one or more of those legal challenges will succeed. The financial consequences of any of the aforementioned factors or a combination thereof can be substantial for the Dutch insurance business of ING and may affect ING, both financially and reputationally. However, these consequences cannot be reliably estimated or quantified at this point.
In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan. In its appeal, ING contested the way the Commission has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disproportionality of restructuring requirements in general. On 2 March 2012, the General Court handed down its judgment in relation to ING Group’s appeal and annulled part of the EC’s state aid decision. Subsequently, the EC filed an appeal against the General Court’s judgment before the Court of Justice of the European Union. In parallel, the EC adopted a decision on 11 May 2012 that re-approved the state aid granted to ING Group as compatible with the internal market on the basis of ING Group’s 2009 Restructuring Plan. On the same date, the EC adopted an interim decision which opened an investigation concerning certain amendments and elements of the 2009 Restructuring Plan.
On 12 June 2012, ING Bank entered into a Settlement Agreement with U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Deferred Prosecution Agreements with the Department of Justice, the United States Attorney’s Office for the District of Columbia and the District Attorney of the County of New York (together the ‘U.S. Authorities’) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until 2007. The Agreements have expired as of 12 December 2013 and the motion against ING Bank N.V. has been dismissed by the US District Court of Columbia.
Following a recent broad industry review by the Dutch regulator DNB, Nationale-Nederlanden Schadeverzekering Maatschappij N.V. was instructed to strengthen its policies and procedures in respect of sanctions-related customer screening and related compliance matters. Nationale-Nederlanden Schadeverzekering Maatschappij N.V. is currently in the process of implementing DNB’s recommendations.
55 COMPANIES AND BUSINESSES ACQUIRED AND DIVESTED Acquisitions effective in 2013 There were no significant acquisitions in 2013.
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Divestments effective in 2013 – ING’s mortgage business in Mexico In June 2013, ING reached an agreement to sell ING Hipotecaria, its mortgage business in Mexico, to Banco Santander (México) S.A. This announcement does not affect ING’s Commercial Banking activities in Mexico. This transaction resulted in a net loss of EUR 64 million which is recognised in 2013. The transaction closed on 29 November 2013.
Liabilities Insurance and investment contracts 4,329 15,034 19,363 Financial liabilities at fair value through profit and loss 1 7 8 Customer deposits and other funds on deposit 13,701 13,701
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(1) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually insignificant disposals in addition to the cash flows presented.
56 PRINCIPAL SUBSIDIARIES For the majority of ING’s principal subsidiaries, ING Groep N.V. has control because it either directly or indirectly owns more than half of the voting power. For subsidiaries in which the interest held is below 50%, control exists based on the combination of ING Group’s financial interest and its rights from other contractual arrangements which result in control over the operating and financial policies of the entity.
Subsidiary ING Bank N.V. The Netherlands 100% 100% Bank Mendes Gans N.V. The Netherlands 100% 100% ING Lease (Nederland) B.V. The Netherlands 100% 100% ING Corporate Investments B.V. The Netherlands 100% 100% ING Vastgoed Management Holding B.V. The Netherlands 100% 100% WestlandUtrecht Bank N.V. The Netherlands 100% 100% ING België N.V. Belgium 100% 100% ING Luxembourg S.A. Luxembourg 100% 100% ING DiBa A.G. Germany 100% 100% ING Bank Slaski S.A. Poland 75% 75% ING Financial Holdings Corporation United States of America 100% 100% ING Vysya Bank Limited. India 43% 44% ING Direct N.V. Spain, Italy 100% 100% ING Bank A.S. Turkey 100% 100% ING Bank (Australia) Ltd Australia 100% 100% ING Bank (Eurasia) Z.A.O. Russia 100% 100%
For each of the subsidiaries listed above, except for ING Vysya Bank Limited, the voting rights held equal the proportion of ownership interest and consolidation by ING is based on the majority of ownership. For ING Vysya Bank Limited, consolidation is based on the combination of ownership interest and additional agreements that, amongst others, provide ability to nominate the majority of the board of directors.
Loans to small and medium-sized enterprises 426 656 Residential mortgages 3,878
The structured entity issues securitisation notes in two tranches, one subordinated tranche and one senior tranche, rated AAA by a rating agency. The AAA tranche can subsequently be used by ING Group as collateral in the money market for secured borrowings.
In 2013, NN Bank (part of NN Group) originated a securitisation program of approximately EUR 2.1 billion mortgage loans (‘Hypenn’). The related structured entity is consolidated by NN Bank and, therefore, the related mortgage loans continue to be recognised in the balance sheet. The structured entity is partly funded through the issue of Residential Mortgage backed Securities to ING Bank (as at 31 December 2013: EUR 400 million).
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In general, the third-party investors in securities issued by the structured entity have recourse only to the assets of the entity and not to the assets of ING Group.
Reference is made to Note 5 ‘Investments’ in which Available for sale investments – Equity securities are specified by NN Group managed investment funds and Third party managed investment funds. The maximum exposure to loss for ING is equal to the reported carrying value of the investment recognised in the consolidated balance sheet of ING Group.
The majority of the equity investments relate to investments in investment funds that are not originated or managed by ING. Reference is made to Note 5 ‘Investments’ in which Available for sale investments – Equity securities are specified by NN Group managed investment funds and Third party managed investment funds.
ING has significant influence for some of its real estate investment funds as disclosed in Note 7 ‘Investments in associates’.
58 RELATED PARTIES In the normal course of business, ING Group enters into transactions with related parties. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Related parties of ING Group include, amongst others, its Joint ventures, Associates, Key management personnel, the Dutch State and various defined benefit and contribution plans. Transactions between related parties have taken place on an arm’s length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral. There are no significant provisions for doubtful debts or individually significant bad debt expenses recognised on outstanding balances with related parties.
For the decrease in ‘Associates’ reference is made to Note 7 ‘Investments in associates’.
In 2013, ‘Management Boards’ includes the Management Boards of ING Bank N.V. (‘ING Bank’), NN Group N.V. (‘NN Group’) and the Named Executive Officers of ING U.S., Inc. (‘ING U.S.’). The Named Executive Officers of ING U.S. are in accordance with the requirements of the Securities Exchange Commission (SEC) the CEO, CFO and the three highest compensated Executive Officers. The members of the Management Boards are considered to be key management personnel and their compensation is therefore included in the tables below.
Three members of the Executive Board of ING Groep N.V. are also members of the Management Boards of ING Bank and NN Group. Two members of the Executive Board of ING Groep N.V. are also members of the Board of ING U.S.
(1) Includes their compensation earned in the capacity as Executive Board members. Mr. Hamers was appointed to the Executive Board on 13 May 2013 and Mr. Hommen stepped down from the Executive Board as per 1 October 2013.
The total number of stock options on ING Groep N.V. shares held by the Executive Board members of ING Groep N.V. amounted to 178,203 as at 31 December 2013 (2012: 77,447) and total number of stock options on ING Groep N.V. shares held by Management Board members of ING Bank, NN Group and the Named Executive Officers of ING U.S., Inc. amounted to 1,187,306 as at 31 December 2013 (2012: 1,967,465). As at 31 December 2013, members of the Supervisory Board held 92,959 stock options on ING Groep N.V. shares (2012: 113,796). As at 31 December 2013, members of the Executive Board held 193,608 ING Groep N.V. shares (2012: 189,128, including 12,372 shares which are subject to retention in a blocked account as required under the CRD III regulations) and members of the Management Boards of ING Bank, NN Group and the Named Executive Officers of ING U.S., Inc. held 395,798 ING Groep N.V. shares (2012: 302,131, including 54,866 shares which are subject to retention in a blocked account as required under the CRD III regulations). As at 31 December 2013, members of the Supervisory Board held 285,157 ING Groep N.V. shares (2012: 324,956).
In November 2012, ING Insurance restructured the IABF to effectively delink ING Insurance US from the IABF. ING Insurance US transferred its Dutch State receivable of approximately EUR 1.1 billion (USD 1.4 billion) to ING Bank, and at the same time transferred legal title to 80% of the Alt-A portfolio to ING Bank. The securities were held in an ING Bank custody account for the benefit of the Dutch State (the portion for which the investment risk has been transferred to the Dutch State). Following the restructuring, ING Insurance US continues to own 20% of the Alt-A portfolio (the portion for which the economic ownership and investment risk remains for the risk of ING), but will going forward have the right to sell these securities, subject to a right of first refusal granted to ING Bank. ING has committed to the Dutch State that it will not sell these securities to non-ING parties without the prior written consent of the Dutch state.
As of 12 November 2011, ING Groep N.V. has the right to repay all or some of the non-voting equity securities at EUR 15 per security at any time, together with the pro-rata coupon accrued to such date. ING Groep N.V. and the Dutch State have agreed in October 2009 that up to EUR 5 billion of the EUR 10 billion core Tier 1 securities could be repaid at any time until 31 January 2010 at the original issue price of EUR 10 per non-voting equity security, plus a repurchase premium and accrued interest.
European Commission Restructuring Plan In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. By decision of 18 November 2009, the European Commission, formally approved the Restructuring Plan. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows: • elimination of double leverage and significant reduction of ING’s balance sheet; • divestment of all Insurance and Investment Management activities; • divestment of ING Direct USA; • creation of a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, needs to be divested; • restriction to be a price leader in any EU country for certain retail and SME banking products and restriction to acquire financial institutions or other businesses that would delay the repayment of the non-voting equity securities.
These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State; • an agreement with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities; • repayment of EUR 5 billion of the non-voting equity securities issued in November 2008 to the Dutch State; • additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission will have to be made to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING of EUR 1.3 billion in the fourth quarter of 2009; • launch of a EUR 7.5 billion rights issue, in order to finance the repayment of 50% of the non-voting equity securities and a mitigation of the capital impact of the additional Illiquid Assets Back-up Facility payment as part of the overall agreement with the European Commission to the Dutch State of EUR 1.3 billion; • execution of the Restructuring Plan before the end of 2013; • if the overall return on the (remaining) non-voting equity securities (core Tier 1 securities) issued to the Dutch State is expected to be lower than 10% p.a., the European Commission may consider the imposition of additional behavioural constraints; and • The calling of Tier 2 capital and Tier 1 hybrids will in the future be proposed case by case to the Commission for authorisation, for the shorter period of three years starting from the date of the Commission decision or up to the date on which ING has fully repaid the non-voting equity securities (core Tier 1 securities) to the Dutch State (including the relevant accrued interest of core Tier 1 coupons and exit premium fees).
Amendments to the Restructuring Plan in 2012 The amendments to the 2009 Restructuring Plan as announced in November 2012 extended the time horizon and increase the flexibility for the completion of divestments and have adjusted other commitments in light of the market circumstances, economic climate and more stringent regulatory requirements.
Under the amendments announced in 2012, the ultimate dates for divesting the insurance and investment management businesses changed as follows: • The divestment of more than 50% of ING’s interest in its Asian insurance and investment management operations has to be completed by year-end 2013, with the remaining interest divested by year-end 2016; • The divestment of at least 25% of ING’s interest in ING U.S. has to be completed by year-end 2013, more than 50% has to be divested by year-end 2014, with the remaining interest divested by year-end 2016; • The divestment of more than 50% of ING’s interest in its European insurance and investment management activities has to be completed by year-end 2015, with the remaining interest divested by year-end 2018; and • As ING has committed to eliminate double leverage, proceeds from the divestments will be used to that end while ensuring adequate leverage ratios of the insurance holding companies.
ING has committed, amongst others, that Nationale-Nederlanden Bank will reach certain targets for mortgage production and consumer credit until the date on which more than 50% of the Insurance/IM Europe operations has been divested, or until 31 December 2015 if the European Commission requires so. Furthermore, ING has agreed to a maximum ratio for mortgage production at ING Retail Banking Netherlands in relation to mortgage production of Nationale-Nederlanden Bank until year-end 2015.
As part of the previously announced amended restructuring agreement with the EC in 2012, ING planned to divest more than 50% of ING’s Asian insurance and investment management businesses by the end of 2013. ING successfully divested most of these businesses over the course of the past year. Under the revised timelines announced, ING will divest ING Life Japan in line with the divestment timeline for ING’s European insurance and investment management activities. This means that the timeline to divest more than 50% of ING Life Japan has effectively been extended by two years to year-end 2015, which is also the unchanged timeline to divest more than 50% of ING’s European insurance and investment management businesses. As part of the revised 2013 agreement, ING will accelerate the timeline to complete the divestment of 100% of ING’s European insurance and investment management activities by two years to year-end 2016. Preparations for the base case IPO of NN Group in 2014 are on track.
Other Following the transactions as disclosed in this note, the Dutch State is a related party of ING Group. All other transactions between ING Group and the Dutch State are of a normal business nature and at arm’s length.
Indemnification and allocation agreement with ING Insurance Eurasia N.V. ING Groep N.V. and NN Group N.V. have entered into an indemnification and allocation agreement, in which ING Group has agreed to indemnify NN Group for certain liabilities that relate to the business of or control over certain (former) U.S. and Latin American subsidiaries of the Company in the period until 30 September 2013 or, if the relevant subsidiary was divested by NN Group after 30 September 2013, such later date of divestment. These liabilities mainly include contingent liabilities that may arise as a result of the initial public offering of ING U.S. (such as prospectus liability) and the sales of the Latin American businesses (such as claims under warranties and other buyer protection clauses), and the liabilities for the claims concerning the performance of certain interest-sensitive products that were sold by a former subsidiary of NN Group in Mexico and the claims filed by the purchaser of certain Mexican subsidiaries of NN Group claiming that the financial condition of the subsidiaries was not accurately depicted.
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ING Group is divesting its insurance and investment management businesses as part of the amended Restructuring Plan agreed with the European Commission. ING intends to divest its remaining stake in ING U.S. over time, in line with the timeline set out in the amended Restructuring Plan as disclosed in Note 58 ‘Related parties’.
Upon a future transaction that results in the deconsolidation of ING U.S. by ING Group, a divestment loss will be recognised in the profit and loss account. This loss will reflect ING Group’s remaining share (at the transaction date) in the difference between the carrying value of ING U.S. and the fair value, plus ING Group’s share in unrealised revaluations in equity plus the currency translation reserve related to ING U.S. Reference is made to Note 60 ‘Subsequent events’.
ING has adjusted its reporting structure to better align its segmentation according to the businesses that it comprises, their governance and internal management, and to reflect the decision to divest ING Life Japan with the IPO of NN Group. The new reporting segments for NN Group are as follows: • Netherlands Life; • Netherlands Non-life; • Insurance Europe; • Japan Life; • Japan Closed Block VA; • Investment Management; and • Other.
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As part of the agreement, ING Bank and NN Group are released from all financial obligations arising out of the Dutch defined benefit plan. Accordingly, this plan will no longer be accounted for as a defined benefit plan and, consequently, it will be removed from ING’s balance sheet. The removal of the net pension asset related to the Dutch defined benefit pension fund from ING’s balance sheet of approximately EUR 0.6 billion after tax and the payment to the Dutch ING Pension Fund of EUR 549 million (EUR 412 million after tax) will result in a charge of approximately EUR 1.1 billion after tax to be recognised in 2014. Of this impact, EUR 0.7 billion is attributed to ING Bank and EUR 0.4 billion to NN Group.
Mission 246 Risk governance 247 Business model and risk profile 250 Economic capital 256 Ongoing changes in the regulatory environment 258 Risk developments in 2013 259 Credit risk 260 Market risk 293 Funding and liquidity risk 305 Non-financial risk 308 Business risk 311
Introduction 312 Organisational risk management structure 312 Risk management framework 313 Risk management policies, standards and processes 314 Risk profile 316 Insurance risk 318 Business risk 319 Market and credit risk: general account 321 Market and credit risk: separate account 328 Liquidity risk 330 Operational risk 331 Compliance risk 331 Economic capital for entities outside NN’s internal model 332 Regulatory capital and IFRS Result before tax sensitivities 333 237ING Group Annual Report 2013 1 W h o w e are 2 R
Risk management formulates with the various management boards the risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout ING Group on risk-related issues. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate and foreign exchange risks), insurance risk, liquidity & funding risk and business risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this Risk Management section.
GROUP RISK MANAGEMENT FUNCTION The ING Group CRO is supported by the Risk functions of ING Group and by the Group functions Corporate Legal and the Functional Controller Insurance. As a result of the decision to manage ING Bank and NN Group separately, ING Group Chief Risk Officer has delegated day-to-day Risk Management within ING Bank, NN Group and ING US to the respective CROs. The remaining Risk functions that are specific for the Group function have been delegated to ING Bank.
ING U.S. RISK MANAGEMENT GOVERNANCE As of 31 December 2013 ING Group has a 57% stake in ING U.S., Inc. ING manages risk within ING U.S. through its majority membership in the ING U.S., Inc. Board and through participation in Board committees. Furthermore, ING has the right to appoint observers to some important Management risk committees. The activities of ING U.S. are classified as held for sale and as discontinued operations. They are not further discussed in the remainder of this section.
Risk management ING Group amounts in millions of euros, unless stated otherwise 238 ING Group Annual Report 2013
Throughout 2013, ING has continued to selectively optimise its balance sheet, including reducing its positions in especially covered bonds, asset backed securities (ABS) securities and committed facilities for some of the weaker countries as a result of these risk analyses. Several European countries have been downgraded in 2013 due to a weak and uncertain economic environment. As the Eurozone countries are going through a recession period. The Southern European countries seem to slowly emerge from the recession, while the strong countries were showing some signs of recovery although growth is fragile. Furthermore, the chairman of the European Central Bank (ECB) announced twice the reduction of the main refinancing rate by 25 basis points respectively in May and November 2013 to a final rate of 0.25% down from 0.75% at the end of 2012. In September, the ECB by his chairman announced that it was ready to use any instrument, including long-term refinancing operations (LTROs), to push down the money market interest rates.
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Residential mortgages and other consumer lending 11 7,831 6 4 9,922 2 17,776
Residential mortgages and other consumer lending 14 7,531 6 4 9,680 1 17,236
Greece Total exposure to Greece declined by EUR 66 million in 2013 mainly due to a reduction of undrawn committed facilities with EUR 119 million resulting from reduction in the limits, partially offset by an increase of corporate lending with EUR 110 million, primarily structured finance deals
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Ireland Total exposure to Ireland increased by EUR 458 million in 2013 mainly due to an increase of the lending book of EUR 273 million and undrawn committed facilities of EUR 367 million. The increase was partially offset by a reduction in debt securities of EUR 226 million.
The lending book declined by EUR 463 million to EUR 15,611 million. This decrease was driven by a EUR 648 million reduction in corporate lending, partly offset by a EUR 242 million increase in residential mortgages and other consumer lending.
However, the current situation of low interest rates levels is caused by 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.
ING Bank uses risk assessment and measurement models to guide decision making. To guard the quality of these risk models there is a governance process for approval of risk models, methods and parameters. This ensures compliance with business and regulatory requirements, via a clear assignment of responsibility and accountability. Nevertheless, users of the disclosed information in the risk management section should bear in mind that the analyses provided are based on forward looking models that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Bank continues to develop, recalibrate and refine the various models, which may result in changes to the risk analyses as disclosed.
These sections show ING’s approach to risk management. Introduction to risk section and mission 244 Introduction to Pillar 3 380 Risk governance 247 Business model and risk culture 250 Risk appetite framework and stress testing 253 Economic and Regulatory capital 256 381 Regulatory monitoring 258 Risk developments in 2013 259
Credit risk is the risk of potential loss due to default by ING Bank’s debtors (including bonds) or trading counterparties.
With respect to comparability of risk disclosures, it is important to note that since the start of the financial crisis there has been much debate on the risk-weighted capitalisation of banks, and in specific whether internal models are appropriate for such purposes. ING Bank is of the opinion that internal models are very valuable since they better represent the bank’s business model, its customers and its credit quality than a standardised approach. However, we also acknowledge that interpretations between banks and also between regulators may differ. This stresses the importance of having a level playing field via a uniform banking supervision within the EU, but also improves and aligns risk disclosures as proposed by the EDTF as much as possible.
MISSION The mission of ING Bank’s risk management function is to support the Banks ambition to be the preferred bank for our customers, by safeguarding ING’s current and future financial strengths. The following principles support this mission: • The risk management function is embedded in all levels of ING Bank’s organisation and is part of the daily business activities and strategic planning to have a sustainable competitive advantage; • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; • Delegated authorities are consistent with the overall Bank strategy and risk appetite; and • Transparent communication to internal and external stakeholders on risk management and value creation.
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board level risk oversight ING Bank has a two-tier board structure consisting of the Management Board Bank and the Supervisory Board; both tiers play an important role in managing and monitoring the risk management framework.
G ro u p L ev el 1st line of defence 2nd line of defence 3rd line of defence
• Non-Financial Risk Committee Bank (NFRC Bank): Accountable for the design and maintenance of the Risk Management Framework including the ORM, Compliance and Legal policies, minimum standards, procedures and guidelines; the NFRC structure; development of tools, methods and key parameters (incl. major changes) for risk identification, measurement and monitoring/ reporting.
The MV department undertakes back testing of all existing risk models. In addition to evaluating the underlying model parameters, ensuring continued applicability of the models for the relevant portfolios, and discussing the model performance with front office and risk users of the models, MV also tests the observed performance of a model (and its components) with the predicted level. A model where the observed results deviate from the predicted results is a candidate for either re-calibration or re-development.
This business model is translated into the following specific ambitions: • Retail Banking will pursue the One Bank approach by combining retail and commercial banking and converge to one retail model: Easy, fair, and at low costs. • Optimise the balance sheet by better match assets and liabilities across the Bank and limit growth and risk of the balance sheet, • Remain financially healthy by improving cost efficiency and strengthen risk management. Additionally, Basel III requirements have to be met and there should be a focus on improving capital, funding and liquidity.
Non-financial risks: • Operational risk: the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; and • Compliance risk: the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards as in ING Bank Business Principles.
The risk management framework based on the three lines of defence governance model is effective when a strong risk culture is present on all levels. ING promotes awareness of collectively shared values, ideas and goals but also of potential threats and it ensures alignment of individual performance objectives with the short- and long-term strategy. By making ING’s risk responsibilities more transparent within the different levels of the organisation and holding every employee accountable for his acts, the risk culture and awareness are embedded in the organisation which leads to effective risk management.
Risk identification Risk identification is a joint effort of the commercial business and the risk management functions. Its goal is to detect potential new risks and determine changes in known risks. Regular risk identification is essential for both the effectiveness and efficiency of risk management. Potential risks that are not identified, will not be controlled and monitored and may lead to surprises later. Known risks may have changed over time and as a consequence the existing mitigating measures and monitoring may be inadequate or obsolete. Risk identification is performed periodically and, in addition, in case of material internal or external change.
In order to achieve this risk ambition, ING Bank believes it should have the following targets: • Rating: have a rating ambition which is in line with the strongest among its peer group; • State Support: be able to restore capital and liquidity position following a stress situation on its own strength; • Regulatory based: be in a position to meet current and forthcoming regulatory constraints and targets; and • Peer comparison based: have a risk profile that compares favourably to its main banking peers.
The solvency risk appetite is closely aligned to capital management activities and policies. ING Bank has expressed tolerances for its risk weighted solvency position (core tier 1 ratio), for non-risk weighted solvency (leverage ratio) and for more value based solvency (economic capital). The solvency risk appetite statement is not only compared to the actual reported level, but also include the potential impact of a standardised and pre-determined 1-in-10 years stress event (i.e. at a 90% confidence level with a 1 year horizon). Based on this mild stress scenario the impact on ING Bank’s earnings, revaluation reserve and risk-weighted assets (RWA) is calculated (which are labelled as earnings-at-risk, revaluation reserve-at-risk and RWA-at-risk). These stressed figures are used as input for a two year simulation which depicts the developments of ING Bank’s solvency level versus its risk appetite.
For financial risks a sequence of different risk appetite frameworks are implemented to address the most significant risks. This implies that a whole framework of credit risk limits is in place that monitors the overall quality of the ING Bank credit portfolio and that of all the underlying portfolios as well. In addition, specific concentration risk appetites are defined on product level, geographic level and (single name) counterparty level which are cascaded down into the organisation. For market risk, the risk appetite for the trading book activities within Financial Markets is accompanied by a risk appetite framework for market risks in the banking books. For both types of market risk, limits at Bank level are translated into the organisation. The liquidity & funding risk appetite statements that are defined on ING Bank level are translated down into the organisation, taking the liquidity & funding specific situation of each (solo) unit into account.
GPD Growth Unemployment Real estate prices Interest rates Credit spreads Equity prices Savings outflow Prof. Funding availability Downgrades Haircuts Etc.
ECONOMIC CAPITAL Model Disclosure This model disclosure section explains the methodologies and models used to determine economic capital (EC). The risk models for the EC calculations are reviewed on a periodic basis and validated by the internal Model Validation department. The Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the Dutch Central Bank.
EC is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general EC is measured as the unexpected loss above the expected loss at a given confidence level. This economic capital definition is in line with the net market value (or surplus) definition. The process of EC modelling enables ING Bank to allocate economic capital to the business units and support risk-adjusted performance measurement via the Risk Adjusted Return on Capital (RAROC). The use of RAROC increases focus on risks versus rewards in the decision making process, and consequently stimulates the use of scarce capital in the most efficient way.
The following fundamental principles and definitions have been established for the model: • ING Bank uses a one-sided confidence level of 99.95% and a one-year time horizon to calculate EC; • It is assumed that all currently known measurable sources of risk are included; • The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set of best-estimate assumptions for each risk type to be used at ING Bank; • The EC calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value; • The EC calculations reflect known embedded options and the influence of customer behaviour in banking products; • The EC calculations are on a before tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; and • The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
Aggregation model The main processes executed in ING Bank’s economic capital aggregation model are depicted in the flowchart below. The white boxes show the processes performed by the model while the shaded box indicates input from other risk departments.
The tables below provide ING Bank’s EC and RC by risk type and business line. Despite the tables display a slight increase compared to 2012, both are well below the total amounts of available capital of EUR 46,496 million. Details on the available capital can be found in the Capital Management paragraph, section ‘Capital Adequacy Assessment’.
Economic and Regulatory Capital (bank diversified only) by business line combination Economic Capital Regulatory Capital
• A reduction of ‘pro-cyclicality’ to avoid that banks would be required to increase their capital in difficult financial times when it is most scarce. • Additional capital requirements for counterparty credit risk.
The Basel III accord was originally intended to enter its first phase of implementation on 1 January 2013. In 2013, CRR/CRD IV was officially agreed upon, allowing for the application of the Regulation on 1 January 2014. The Directive will have to be transposed into national law and because of this a few months delay is envisaged. Like other banks, ING Bank participated in semi-annual Basel III monitoring exercises in order to prepare for the functioning of all Basel III elements. Significant management actions have been undertaken to adjust the business model and exposure to certain asset classes to better meet the new Basel III requirements for both the liquidity and capital. Examples include reducing short-term funding and shifting significant derivative settlement to central clearing parties. Although not all definitions and parameters of the CRR/CRD IV have been finalised, ING Bank has been making impact analyses of the proposed changes continuously. The overall impact of Basel III on ING Bank’s capital and liquidity ratios, even before management actions, is considered to be lower than for most peers. The key principles of Basel III have been included in both the solvency and liquidity risk appetite framework that are continuously monitored by senior management.
The strategy of the Bank focuses on effective balance sheet management in order to meet all the new requirements. The stricter capital requirements will be met by combining strong continued capital generation with RWA containment. To underpin this, ING Bank maintains a Basel III fully loaded Core Tier 1 ratio ambition of at least 10% and a Basel III Leverage Ratio ambition of at least 4%. To adhere to the new liquidity and funding requirements strong funds entrusted generation and increased long-term funding will be combined with reduced reliance on short-term professional funding and the transformation of the investment book into a liquidity portfolio.
Before assuming its new responsibilities, the ECB conducts a comprehensive assessment of 130 Eurozone banks in collaboration with the European Banking Authority (EBA). The exercise comprises three complementary pillars: • Supervisory risk assessment, addressing key risks in the banks’ balance sheets, including liquidity, leverage and funding via quantitative and qualitative analysis based on backward and forward-looking information, including position in relation to peers.
In response to the crisis ING Bank has set up an all-encompassing Recovery Plan to enhance the bank’s readiness and decisiveness to tackle financial crises on its own strength. Furthermore, ING Bank is diligently working towards providing information on the basis of which the Dutch Resolution Authorities will be able to develop a Resolution Plan.
Liquidity risk Funding and liquidity risk management remained in 2013 an important topic for senior management and the Asset and Liability Committee Bank. During the year further implementation steps were undertaken in implementing and finalising the funding and liquidity risk management framework, whilst working in parallel on new regulatory requirements which were published in 2013 by the BCBS, EC and EBA. External market developments improved in comparison with the previous year, but both in the Eurozone and globally economic developments are sluggish and at times still volatile. Therefore, market developments, regulatory developments and internal financial developments are closely monitored. Stress testing and measurement of early warning indicators are, among others, used to provide additional management information. In 2013 the funding and liquidity risk appetite statements were reviewed and updated. The appetite statement is set and allocated throughout ING Bank. In addition, funding and liquidity usage is steered by means of funds transfer pricing thus embedding funding and liquidity risk management in the total organisation.
Dutch mortgages In 2013 the Dutch housing market remained fragile due to the economic downturn, however a cautious recovery was observed towards the end of the year. The stricter tax and acceptation rules seem to be accepted. The biggest change to the tax rules is that interest on new mortgages is only tax deductible if there is at least an annuity repayment schedule. The Dutch housing market is historically characterised by a housing shortage, high income tax with deductibility of interest on mortgages, and tax driven mortgage products.
Although the house prices decreased, the Dutch payment behaviour is good, reflected in a slightly elevated but still low percentage of non-performing loans (NPL) by the end of 2013. Given the significant amount of mortgages in our credit portfolio, ING Bank closely follows all developments related to the Dutch housing market and its mortgage portfolio.
In 2013, the continued weak and challenging European commercial real estate markets were reflected in the risk costs and nonperforming loans. Further, in 2013 DNB performed an Asset Quality Review for Commercial Real Estate (CRE) primarily focusing on relevant Income Producing Real Estate portfolios (IPRE) at ING Bank globally, including Private Banking. This project consisted of two phases with the first phase dedicated to processes and methodologies and the second phase concentrating on the appropriate level of both capital and provisioning. The second phase assessment was executed by DNB with assistance of BlackRock included data delivery of IPRE exposure of in total EUR 40 billion, of which The Netherlands, Spain and Italy were selected for detailed analysis. This selection totals EUR 24 billion of which the majority is managed by ING REF (approximately 77%).
CREDIT RISK Introduction The credit risk section provides information on how ING Bank manages, measures and monitors credit risk and will give an insight into the ING Bank portfolio from a credit risk perspective. Prior to providing insight into the portfolio, we will explain how ING Bank ensures that credit risk is properly addressed and managed within ING Bank.
The ING Bank business model is to be a strong predominantly European bank, with leading positions in attractive, stable home markets, with options for future growth beyond Europe. ING Bank primarily extends credit to two types of customers; Retail customers made up largely of individuals and small businesses and Commercial Banking made up of larger corporate, financial, and sovereign counterparties. In general, Retail customers tend to be served by country specific organisations while Commercial Banking counterparties are often multi-jurisdictional and even global. Therefore, it is important that the credit risk management department has both local product knowledge as well as understanding of global industries.
In order to properly assess, monitor, and manage the credit risks over such a broad spectrum of products, industries, and geographies, Credit Risk Management (CRM) is organised both locally and centrally. The local risk management teams have knowledge of specific geographic markets and the products and their risk characteristics. The central risk team focuses on more global industries and customers. The central risk team is also responsible for setting the ING Bank credit risk policies and standards. The local and central credit risk teams strive to have a consistent risk appetite which is facilitated by a robust credit risk infrastructure that supports the entire credit lifecycle.
• Investment risk: is the credit default and risk rating migration risk that is associated with ING Bank’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. This can be viewed as the worst-case loss that ING Bank may incur as a result of holding a position in underlying securities whose Issuer’s credit quality deteriorates or defaults. All investments in the banking book are classified in the investment risk category. The primary purpose of ING Bank’s investments in the banking books is for liquidity management.