Regulation is becoming increasingly more extensive and complex. A recent example is the implementation of the Common Reporting Standard (CRS), which like FATCA requires financial institutions to report detailed client-related information to the competent authorities. Customer due diligence (CDD) and transaction monitoring impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering (AML), terrorist financing, and fraud.
Financial Economic Crime The 4th AML Directive as issued by the European Union has been incorporated into the update of the FEC Policy and Minimum Standards. The main changes in this Directive (compared to the 3rd AML Directive) are related to: the establishment of an UBO register (at national level with the potential to share the information within the European Economic Area (EEA)) and a stronger approach towards the application of Due Diligence on ING’s customers. The final translation of the 4th AML Directive into the laws and regulations of the EU member states is foreseen in Q2/2017. Various global programs have started in 2016 to enhance the Know Your Client process and the risk assessment of the clients’ files, as well as strengthening the requirements and activities relating to Client Activity Monitoring.
Regulator relationships The Bank Compliance Risk Management function continued its policy of investing in pro-active relationship building with regulators in the jurisdictions where ING Bank operates, by striving for cooperation in identifying and mitigating compliance risks for ING Bank as well as seeking to contribute to the regulatory debate going forward.
Learning An e-learning module for all ING Bank employees was launched to raise awareness of Market Abuse and its consequences, addressing new and stricter legislation that took effect in July 2016. It aimed at increasing knowledge of ING standards, regulatory obligations and market practice to prevent it, looking at aspects, such as insider dealing, unlawful disclosure of inside information, market manipulation and how to guard against them. Also understanding the human element involved to remain alert and maintain high standards of integrity and adhering to the Orange Code values.
Global education and awareness in the form of e-learning modules, awareness sessions and material was provided on topics such as Fraud and Security, Conflicts of Interest, Financial Economic Crime (FEC) and an ORM Onboarding e-learning for staff new to Operational Risk Management worldwide. Similar to what was developed earlier for Compliance Risk Management, an ORM curriculum and learning path was launched in the ING Learning Centre that gives staff in Operational Risk Management worldwide an overview of available ORM and other relevant training, including recommended external trainings. For staff in the Netherlands an Insiders elearning was developed. Furthermore, there were end of year campaigns for anti-bribery and anti-corruption to strengthen awareness.
In March 2016 a GBP 66 million grandfathered additional Tier 1 security, which was fully on-lent to ING Bank, was redeemed by ING Group on its first call date. In April 2016, ING Bank NV issued EUR 1 billion CRD IV-eligible Tier 2 instruments. The transaction had an issuer substitution option which gives ING the right to exchange these for subordinated Tier 2 notes issued by ING Groep NV.
With a 14.2% fully-loaded Group common equity Tier 1 ratio as at 31 December 2016, ING is in compliance with the current fullyloaded requirement of 11.75%. ING Group’s fully-loaded Tier 1 ratio (including grandfathered securities) was 16.6% at the end of 2016, while the total capital ratio (including grandfathered securities) increased to 19.7%.
Since 2012, ING has worked with the different resolution authorities to determine a resolution strategy and to identify potential impediments to resolution. Following an discussion throughout 2016, with the Single Resolution Board (SRB) and the national resolution authority, De Nederlandsche Bank (DNB), we concluded that ING Group should be our designated resolution entity. At the end of January 2017, the Single Resolution Board (SRB) has informed us that it supports the designation of ING Group as the point of entry. Henceforth, ING Group will be the issuing entity for all TLAC/ MREL eligible debt consisting of Additional Tier 1, Tier 2 and senior unsecured debt.
ING Bank continues to maintain a strong and high quality capital level, with a fully-loaded common equity Tier 1 ratio and a phased-in common equity Tier 1 ratio of 12.6%, thereby complying with CRR/CRD IV solvency requirements. Dividend from ING Bank to ING Group of EUR 1.3 billion was paid in November 2016. The fourth quarter 2016 profit of EUR 0.6 billion is not included in the regulatory capital per December 2016 as this was upstreamed as dividend to ING Group in February 2017. The sale of 2.5% of Kotak Mahindra Bank shares, which was settled in October 2016, had no material impact on ING’s capital ratios. The fully loaded and phased in Tier 1 ratios respectively increased from 13.9% to 14.7% and 13.4% to 14.4%, primarily reflecting developments in ING Bank’s common equity Tier 1 ratio. This was partly offset by the redemption of the USD 800 million 7.05% grandfathered Perpetual Debt Securities in September. In April 2016, ING Bank had issued EUR 1 billion of Tier 2 bonds with an issuer substitution option through exchange. Now that clarity has been provided on the preferred resolution strategy, ING intends to use the option to replace these ING Bank Tier 2 notes with ING Group Tier 2 notes at similar terms through exchange. The noteholders have agreed upfront to the terms and conditions to exchange their ING Bank Tier 2 notes for ING Group Tier 2. ING Bank’s fully-loaded Tier 1 ratio (including grandfathered securities) was 14.7% at the end of 2016, while the total capital ratio (including grandfathered securities) increased to 17.8%.
Dividend ING Group’s dividend policy aims to pay a progressive dividend over time which will reflect considerations including expected future capital requirements, growth opportunities available to the Group, net earnings, and regulatory developments. The Executive Board proposes to pay a total cash dividend of EUR 2,560 million, or EUR 0.66 per ordinary share, over the financial year 2016. This is subject to the approval of shareholders at the Annual General Meeting in May 2017. Taking into account the interim dividend of EUR 0.24 per ordinary share paid in August 2016, the final dividend will amount to EUR 0.42 per ordinary share and will be paid fully in cash. The total amount of EUR 1,629 million is fully covered by the remaining balance of 'interim profits not included in CET1 capital' at year-end 2016.
Capital adequacy assessment As at 1 January 2014, the CRR/CRD IV capital rules entered into force. The capital position table reflects own funds according to the Basel III rules as specified in the CRR/CRD IV. As CRD IV will be phased-in gradually until 2019, the table shows the CRD IV positions according to the 2019 end-state rules and the 2016 rules. ING reports these metrics for ING Group and ING Bank. During 2016, ING Group and ING Bank were adequately capitalised.
− Deductions of significant investments in financial institutions 0 –1,389 0 –558
Regulatory adjustments additional Tier 1 0 0 –809 –1,716 1 The interim profit not included in CET1 is the proposed final dividend of EUR 1,629 million, subject to approval of the shareholders at the Annual General Meeting in
Regulatory requirements Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (Dutch Central Bank until 3 November 2014, the ECB thereafter) for supervisory purposes. In 2010 the Basel Committee on Banking Supervision issued new solvency and liquidity requirements, which superseded Basel II. The minimum requirements, excluding buffers, for the common equity Tier 1 ratio is 4.5%, the minimum Tier 1 requirement is 6% and the total capital ratio is 8% of all risk-weighted assets. Basel III requires Banks to hold a capital of at least 80% of the old Basel I requirements, which was 8% of the RWAs as calculated with the Basel I methodology. This Basel I floor has been extended until the end of 2017.
ING Group Annual Report 2016 322 in EUR million 2016 2015
Result after tax –35 –120 Result from (disposal of) group companies, associates and joint ventures after taxation 12 4,686 4,130
Parent company equity and related reserves The total amount of equity in the parent company annual accounts equals Shareholders’ equity (parent) in the consolidated annual accounts. Certain components within equity are different as a result of the following presentation differences between the parent company accounts and consolidated accounts: • Unrealised revaluations within consolidated group companies, presented in Other reserves - Revaluation reserve in the consolidated accounts, are presented in the Share of associates and joint ventures reserve in the parent company accounts; • The reserve for cash flow hedges within consolidated group companies, presented in Other reserves – Revaluation reserve in the consolidated accounts is included in the Share of associates and joint ventures reserve, in the parent company accounts on a net basis.
Notes to the parent company statement of financial position 1 Investments in group companies
In the course of 2016 the NN Group shares were included in available-for-sale investments and were sold in April 2016. The EUR 128 million reflects unrealised and subsequently realised loss on the sale.
The number of debentures held by group companies as at 31 December 2016 is 0 with a statement of financial position value of nil (2015: nil with a statement of financial position value of nil).
Remuneration of Senior Management, Executive Board and Supervisory Board The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the Consolidated annual accounts. Reference is made to Note 49 ‘Related parties’ (page 237 up to and including page 241).
10 Valuation results Included in Valuations results, are valuation results on non-trading derivatives related to warrants on the shares of Voya and NN Group amounting to EUR 33 million (2015: EUR –19 million).
Included in Interest and other financial expenses is EUR –80 million (2015: EUR –117 million) related to group companies.
Additional information 13 Other Fees for audit and non-audit services Reference is made to the ING Group Consolidated annual accounts, Note 27 ‘Other operating expenses’ for disclosures related to fees for audit and non-audit services.
Addition to reserves pursuant to Article 37 (4) of the Articles of Association 2,091
The Supervisory Board J. (Jeroen) van der Veer, chairman H.J.M. (Hermann-Josef) Lamberti, vice-chairman E.F.C.B. (Eric) Boyer de la Giroday H.W. (Henk) Breukink I. (Isabel) Martín Castellá M. (Mariana) Gheorghe R.W.P. (Robert) Reibestein A.C. (Ann) Sherry
Initial audit engagement This year was the first year we audited the annual accounts of ING Group. Therefore, we provide more information on how we prepared for this initial audit engagement.
From October 2015 and throughout the 31 December 2015 year-end process, we worked alongside the former auditors, attending their key meetings with ING Group and understanding the complex or significant audit judgements which they made. Members of the audit team took the opportunity to meet with ING Group’s Executive Board and Management Board and key senior executives to understand the issues faced by the business, and to gather information which we required to plan our audit. We also observed the Audit Committee meetings and Risk Committee meetings of the Group.
All components in scope for group reporting are audited by KPMG member firms. We sent detailed instructions to all component auditors, covering significant areas including the relevant risks of material misstatement and set out the information required to be reported to the group audit team. We visited component locations in the Netherlands, Belgium, Germany, Poland and the United States of America, where we performed reviews of the audit files from local auditors. For all components in scope of the group audit, we held conference calls and/or physical meetings with the auditors of the components. During these visits, meetings and calls, the planning, risk assessment, procedures performed, findings and observations reported to the group auditor were discussed in more detail and any further work deemed necessary by the group audit team was then performed.
Description ING Group is vitally dependent on its IT infrastructure for the reliability and continuity of its operations and financial reporting. In 2016, ING Group made significant efforts to improve IT systems and processes to increase the efficiency and effectiveness of the IT infrastructure and the reliability and continuity of the IT processing.
Description The recognition and measurement of both provisions and the disclosure of contingent liabilities in respect of litigation, regulatory measures and client care remediation (hereafter: ‘legal matters’) require significant judgement by management. In 2016, notable developments in this area included amongst others the SME derivatives remediation programme in the Netherlands and related client care remediation and litigation.
In order to assess the facts and circumstances, we obtained and assessed underlying underwriters documentation and the relevant regulatory and litigation documents, including (external) lawyer’s letters, we read minutes from relevant committees, we inquired with senior management and we interviewed ING Group’s legal counsel and, where necessary, external lawyers of ING Group. We also assessed the assumptions made and key judgements applied by management based on our own assessment and knowledge of market information.
As part of the preparation of the annual accounts, the Executive Board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting framework mentioned, the Executive Board should prepare the annual accounts using the going concern basis of accounting unless the Executive Board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Executive Board should disclose events and circumstances that may cast significant doubt on the company’s ability to continue as a going concern in the annual accounts.
Shareholders’ equity and our net result may be significantly impacted by turmoil and volatility in the worldwide financial markets. Negative developments in financial markets and/or economies and changes in the regulatory environment in which we operate have in the past had and may in the future have a material adverse impact on shareholders’ equity and net result, including as a result of the potential consequences listed above. See ‘— Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations’ and ‘— We operate in highly regulated industries. Changes in laws and/ or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability’ below.
In addition, the International Accounting Standards Board (‘IASB’) issued in July 2014 a new accounting standard for financial instruments also known as IFRS 9 ‘Financial Instruments’. IFRS 9, which was endorsed by the EU in November 2016, will replace IAS 39, the accounting standard heavily criticised in the wake of the financial crisis, for annual periods beginning on or after 1 January 2018, with early adoption permitted. Such changes could also have a material impact on our reported results and financial condition, as well as on how ING manages its business, internal controls and disclosure.
Single Supervisory Mechanism In November 2014, the European Central Bank (‘ECB’) assumed responsibility for a significant part of the prudential supervision of banks in the Eurozone, including ING Bank, following a year-long preparatory phase which included an in-depth comprehensive assessment of the resilience and balance sheets of the biggest banks in the Eurozone. ING Bank was among the seven Dutch institutions covered by the assessment (out of 130 institutions overall). While the ECB has assumed the supervisory tasks conferred on it by the Single Supervisory Mechanism (‘SSM’) Regulation, the DNB will still continue to play a big role in the supervision of ING Group and ING Bank.
Dodd-Frank Act On 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’ or ‘Dodd-Frank Act’) was signed into law in the U.S. The Dodd-Frank Act effects comprehensive changes to the regulation of financial services in the U.S. and has implications for non-U.S. financial institutions with a U.S. presence or that transact with U.S. counterparties, such as ING. Dodd-Frank directs existing and newly created government agencies and bodies to perform studies and promulgate a multitude of regulations implementing the law, most of which are in place. Because some of the regulations have only recently taken effect or are yet to be finalized, we cannot predict with certainty how such regulations will affect the financial markets generally and impact the Group’s business, credit rating, results of operations, cash flows or financial condition or liquidity. Key aspects of Dodd- Frank that we have identified to date as possibly having an impact on the Group include the aspects set out below: Title VII of Dodd-Frank creates a new framework for regulation of the over-the-counter derivatives markets and certain market participants which could affect various activities of the Group and its subsidiaries. ING Capital Markets LLC, a wholly-owned indirect subsidiary of ING Bank N.V., has registered with the U.S. Commodity Futures Trading Commission (‘CFTC’) as a swap dealer. The CFTC and other U.S. prudential regulators have adopted margin requirements on uncleared swaps, which will begin to come into effect for ING Capital Markets LLC in 2017. The SEC is expected to adopt regulations establishing margin and capital requirements for securitybased swaps. Along with the still indeterminate effective date for SEC regulations on, among others, reporting, registration, and internal and external business conduct with respect to security-based swaps, these are likely to materially impact ING. Additionally, the CFTC is expected to adopt capital requirements for swap dealers, although the specific requirements, and any available exemptions, have not been finalized. If these requirements are applicable to ING, and no exemptions are available, it is possible that these requirements will be difficult for ING to comply with and may, as a result, materially and adversely impact ING's ability to operate as a swap dealer in the U.S. Other CFTC regulatory requirements, already implemented, include registration of swap dealers, business conduct rules imposed on swap dealers and requirements that some categories of swaps be centrally executed on regulated trading facilities and cleared through regulated clearing houses. In addition, new position limits requirements for market participants that may be contained in final regulations to be adopted by the CFTC could limit ING’s position sizes in swaps referencing specified commodities and similarly limit the ability of counterparties to utilize certain of our products by narrowing the scope of hedging activity that is permitted for commercial end users and the trading activity of speculators. All of the foregoing areas of regulation of the derivative markets and market participants will likely result in increased cost of hedging and other trading activities, both for ING and its customers, which could expose our business to greater risk and could reduce the size and profitability of our customer business. In addition, the imposition of these regulatory restrictions and requirements, could result in reduced market liquidity, which could in turn increase market volatility and the risks and costs of hedging and other trading activities.
Increasing competition in the markets in which we operate may significantly impact our results if we are unable to match the products and services offered by our competitors. Future economic turmoil may accelerate additional consolidation activity. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. These developments could result in our competitors gaining greater access to capital and liquidity, expanding their ranges of products and services, or gaining geographic diversity. We may experience pricing pressures as a result of these factors in the event that some of our competitors seek to increase market share by reducing prices.
The first ex-ante DGS contribution has been charged in respect of the first quarter of 2016. The build-up of the ex-ante fund will take place in 34 quarters. See also ‘—We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability — Bank Recovery and Resolution Regimes’.
Currently, the EU is discussing the introduction of a pan-European deposit guarantee scheme, (partly) replacing or complementing national compensation schemes in two or three phases. Proposals contain elements of (re)insurance, mutual lending and mutualisation of funds. The new model is intended to be ‘overall cost-neutral’. A more definitive proposal is expected in 2017 or 2018.
The requirements for ING Groep N.V. to develop and submit recovery and resolution plans to regulators, and the incorporation of feedback received from regulators, may require us to increase capital or liquidity levels or issue additional long-term debt at ING Groep N.V. or particular subsidiaries or otherwise incur additional or duplicative operational or other costs at multiple entities, and may reduce our ability to provide ING Groep N.V. guarantees of the obligations of our subsidiaries or raise debt at ING Groep N.V. Resolution planning may also impair our ability to structure our intercompany and external activities in a manner that we may otherwise deem most operationally efficient. Furthermore, arrangements to facilitate our resolution planning may cause us to be subject to additional costs such as resolution planning related taxes and funds. Any such limitations or requirements would be in addition to the legal and regulatory restrictions described above on our ability to engage in capital actions or make intercompany dividends or payments.
Our risk management policies and guidelines may prove inadequate for the risks we face. We have developed risk management policies and procedures and will continue to review and develop these in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective, particularly during extremely turbulent times. The methods we use to manage, estimate and measure risk are partly based on historic market behaviour. The methods may, therefore, prove to be inadequate for predicting future risk exposure, which may be significantly greater than suggested by historical experience. For instance, these methods may not predict the losses seen in the stressed conditions in recent periods, and may also not adequately allow prediction of circumstances arising due to government interventions and stimulus packages, which increase the difficulty of evaluating risks. Other methods for risk management are based on evaluation of information regarding markets, customers, catastrophic occurrence or other information that is publicly known or otherwise available to us. Such information may not always be accurate, complete, updated or properly evaluated. Management of operational, compliance, legal and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events. These policies and procedures may not be fully effective.
In addition, as a result of our operations in certain countries, we are subject to risks of possible nationalisation, expropriation, price controls, exchange controls and other restrictive government actions, as well as the outbreak of hostilities and or war, in these markets. Furthermore, the current economic environment in certain countries in which we operate may increase the likelihood for regulatory initiatives to enhance consumer protection or to protect homeowners from foreclosures. Any such regulatory initiative could have an adverse impact on our ability to protect our economic interest, for instance in the event of defaults on residential mortgages.
ING Group may be unable to retain key personnel. As a financial services enterprise with a decentralised management structure, ING Group relies to a considerable extent on the quality of local management in the various countries in which it operates. The success of ING Group’s operations is dependent, among other things, on its ability to attract and retain highly qualified personnel. Competition for key personnel in most countries in which ING Group operates is intense. ING Group’s ability to attract and retain key personnel, in particular in areas such as technology and operational management, client relationship management, finance, risk and product development, is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent.
The share price of ING shares has been, and may continue to be, volatile. Our share price has experienced periods of volatility in the past, and the price and trading volume of our shares may be subject to significant fluctuations in the future, due, in part, to changes in our actual or forecast operating results and the inability to fulfil the profit expectations of securities analysts, as well as to the high volatility in the securities markets generally and more particularly in shares of financial institutions.
Because we are incorporated under the laws of the Netherlands and many of the members of our Supervisory and Executive Board and our officers reside outside of the United States, it may be difficult to enforce judgments against ING or the members of our Supervisory and Executive Boards or our officers. Most of our Supervisory Board members, our Executive Board members and some of the experts named in this Annual Report, as well as many of our officers are persons who are not residents of the United States, and most of our and their assets, are located outside the United States. As a result, it may not be able to serve process on those persons within the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws.
Assurance/validity The Pillar III disclosures have been subject to the ING Group’s internal control assessments and validation mechanisms, to ensure compliance with laws and regulations. They have not been audited by ING Group’s external auditors.
For the requirements related to CRR/CRD IV disclosures, a reference guide will be published on the corporate website ing.com.
European Regulation In order to be legally binding, the RPF templates needed to be transposed for European institutions into EU requirements by EBA. Therefore, in June 2016, EBA issued a consultation paper on the guidelines on the CRR disclosure requirements covering Phase I of the BCBS Revised Pillar III Framework.
Further, the EBA is mandated to develop uniform disclosure formats to enhance comparability, and the management is required to verify and sign off on compliance with disclosure requirements and adherence to internal policies on disclosure.
Implementation With the EBA guidelines being positioned as specifications of the existing CRR disclosure requirements, ING Group has opted for an early implementation of the EBA templates related to regulatory capital requirements, credit risk, counterparty credit risk and market risk. This early implementation provides us an opportunity to improve the transparency of the information published in the annual Pillar III report.
Credit risk and CRM in the standardised approach EU CR4 Standardised approach – Credit risk exposure and CRM effects 400
EU CR9 IRB approach – Backtesting of PD per exposure class 398 – 399 CCR EU CCR1 Analysis of CCR exposure by approach 407
The table below presents an overview of the Minimum capital requirements and the RWA at year end 2016 per type of risk and method of calculation. The largest part of the capital requirement relates to credit risk (82%), followed by operational risk with 13%, amounts below the threshold for deduction (which relates to equity in the banking book) 3% and market risk for 2% of the capital requirements.
Tier 2 capital Opening amount 7,912 8,672 3,291 9,474 Change in T 2 instruments 918 918 -801 -801 CRR/CRD IV phased-in adjustments (excl. significant investments in FIs) 145 184 Change in deductions significant investments in Financial Institutions 419 5,239 Change minority interest 7 7 -1 -1 Closing amount 9,402 9,597 7,912 8,672
Netherlands 3,671 191,088 0 117 0 967 4,211 8 7 4,227 22.110% - Belgium 855 81,241 0 0 0 0 2,573 0 0 2,573 13.460% - Germany 254 90,653 0 38 0 784 1,994 3 41 2,037 10.656% - United States of America
Turkey 10,899 4,636 0 79 0 0 1,018 6 0 1,024 5.356% - Poland 8,106 11,097 0 5 0 0 980 0 0 980 5.128% - United Kingdom 40 13,223 0 29 0 463 661 2 5 668 3.496% - Spain 2,169 17,189 0 49 0 730 635 3 19 658 3.442% - France 726 12,692 0 82 0 106 566 6 2 573 2.997% - Italy 1,170 16,931 0 7 0 0 483 1 2 485 2.539% - Australia 1,373 36,861 0 4 0 19 368 0 0 368 1.927% - Luxembourg 144 11,853 0 28 0 773 342 2 6 350 1.831% - Russian Federation 4 4,633 0 286 0 0 284 20 0 304 1.592% - Romania 2,274 2,124 0 0 0 0 245 0 0 245 1.282% - Brazil 0 2,236 0 0 0 0 227 0 0 227 1.186% - Switzerland 0 8,619 0 0 0 0 198 0 0 198 1.037% - Hong Kong 45 4,699 0 25 0 0 94 2 0 96 0.502% 0.625% Sweden 0 1,816 0 30 0 0 68 2 0 70 0.364% 1.500% Norway 0 2,796 0 11 0 0 37 1 0 37 0.195% 1.500% Total of other 346 62,584 0 533 0 79 2,275 37 18 2,330 12.190% - Total 32,365 628,989 0 1,367 0 6,858 18,873 95 148 19,117 100.000% 0.012%
Derivative exposures 4 Replacement cost associated with all derivatives transactions (i.e. net of 5 Add-on amounts for PFE associated with all derivatives transactions (mark-tomarket method)
Leverage ratio 22 Leverage ratio 4.7% 4.8% 4.3% 4.4% Choice on transitional arrangements and amount of derecognised fiduciary items
EU-24 Amount of derecognised fiduciary items in accordance with Article 429(11) of Regulation (EU) NO 575/2013 1 Please note that Tier 1 Capital per December 2016 includes grandfathered hybrids to an amount of EUR 4,654 million (2015: EUR 5,187 million)
Total banking operations 34,410 35,957 24,967 25,456 1 Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line.
• The market risk EC is higher than the RC primarily due to the inclusion of the interest rate risk in the banking books and the equity stakes in EC. In RC, only market risk in trading books and FX risk of the banking book are in scope. Furthermore, for Equity Investments the EC figures are reported under market risk, while the RC figures are reported under credit risk. During 2016, market risk economic capital decreased mainly caused by the sale of shares in Kotak Mahindra Bank and lower volatility in the time period used in the Historical Value-at-risk calculation for foreign exchange positions.
• For operational risk, the EC calculations are done using the same methodology as for RC apart from the application of a 99.95% confidence level.
EC and RC do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management framework in place to manage this risk, which is described in the ‘funding and liquidity risk’ section of the Risk Management section part of the Annual Accounts.
Credit RWA Migration Analysis The table below explains the changes in Credit RWA during the reporting period and provides additional information by linking the impact of changes in portfolio composition, model changes and shifts in the risk environment on Credit RWA. The table reconciles movements in Credit RWA for the period for each Credit RWA risk type of ING Bank for the SA and AIRB portfolio including securitisations excluding equity and ONCOA. It does not include counterparty credit risk exposures under the Internal Model Method, because ING Bank does not have these exposures.
Closing amount 240.3 231.6 Excluding equities and ONCOA. 1 Book size: organic changes in book size and composition (including new business and maturing loans). 2 Book quality: quality of book changes caused by experience such as underlying customer behaviour or demographics including changes to credit quality of portfolios. 3 Model updates: model implementation, change in model scope or any change to address model malfunctions including changes through model calibrations /
Key changes Over the year 2016, credit RWA increased by EUR 8.7 billion to EUR 240.3.
• Book size: The increasing book size, excluding divestments, de-consolidations and FX fluctuations, led to EUR 9.2 billion higher
• Foreign exchange movements: FX rates fluctuated over quarters, but over the year FX movements had a small impact increasing RWA by EUR 0.1 billion. The appreciation of the US Dollar (3.0%) against the Euro increased RWA by EUR 1.6 billion, this was offset by the depreciation of the Turkish Lira (-14,5%) and the British Pound (-13.6%) decreasing RWA by EUR 1.0 billion and EUR 0.7 billion respectively.
ING Bank applies the Advanced Internal Ratings Based (AIRB) approach on the majority of its significant portfolios that contain credit risk in accordance with the approvals granted by ECB and various local regulators, as required. The AIRB approach is permitted by the Regulator if there are regulatory approved rating models (PD, EAD and LGD) in place and if the (local) management understands and uses these rating models (Basel Use Test) in their credit decision making processes. However, a small portion of the portfolio remains that is subject to the Standardised Approach (SA). The majority of SA portfolios at ING Bank relate to subsidiaries where the home regulator does not have a robust AIRB framework or requirement. Depending on the regulatory landscape, ING will continue to explore opportunities to transition additional portfolios from SA to AIRB.
Exposure classes The Basel Accord has developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a common obligor type or product type. For the AIRB and SA, most of the exposure classes have subcategories.
• Retail – Secured by immovable property SME (included in most tables with Other Retail) includes all retail loans which are covered by commercial properties.
Credit risk exposure (based on internal exposure classes) The table below shows the total READ and RWA for ING Bank by internal defined exposure types for both the SA and AIRB portfolio per exposure class for Lending, Investment and Money Market. Counterparty Credit Risk is included in the table.
SEC AIRB On-balance 6,097 755 6,854 1,780 Off balance 827 87 1,276 124 Total Sec IRB 6,924 842 8,130 1,904
Institutions Geography/business units 88,853 107,372 -17% 13,491 20,683 -35% Africa 126 435 -71% 79 515 -85% America 14,334 17,701 -19% 2,202 3,249 -32% Asia 9,045 12,274 -26% 1,640 2,878 -43% Australia 1,730 1,495 16% 236 216 9% Europe 63,618 75,466 -16% 9,334 13,827 -32%
Institutions Product Type 88,853 107,372 -17% 13,491 20,683 -35% Derivatives 29,579 32,056 -8% 3,531 5,371 -34% Bond Investments 15,027 18,645 -19% 1,273 1,623 -22% Revolving 11,678 18,144 -36% 2,877 4,575 -37% Securities Financing 11,017 13,113 -16% 779 1,387 -44% Term Loans 12,952 13,794 -6% 3,276 4,200 -22% Other 8,601 11,620 -26% 1,755 3,526 -50%
Institutions PD Bands 88,853 107,372 -17% 13,491 20,683 -35% <0.05% 19,296 17,386 11% 2,396 2,346 2% 0.05% to 0.5% 64,487 84,313 -24% 8,884 15,367 -42% 0.5% to 5% 4,647 4,987 -7% 2,097 2,393 -12% 5% to 10% 11 91 -88% 12 67 -83% 10% to 20% 82 137 -40% 92 262 -65% 20% to 50% 7 104 -93% 3 43 -92% more than 50% 323 354 -9% 8 206 -96%
The decrease in READ was mainly driven by the implementation of the EU equivalence regulation, which shifted EUR 15.0 billion READ and EUR 5.9 billion RWA from exposure class Institutions to Corporates. Under this change, the resulting exposure class and correlation will be determined by the country and customer type, meaning that some banks will be treated as Corporates rather than Institutions. The shift was witnessed across the geographies within this portfolio. The biggest impact of this change in absolute numbers was witnessed in America, Asia and Other Europe and in the 50%-60% LGD band.
The READ and RWA decrease in the more than 60% bucket is mainly driven by reduced nostro exposure in Switzerland.
Corporate Geography/business units 308,068 269,558 14% 145,581 125,091 16% Africa 2,553 1,654 54% 1,735 1,007 72% America 48,956 39,936 23% 24,362 19,191 27% Asia 35,151 25,601 37% 11,392 8,044 42% Australia 5,520 4,083 35% 2,171 1,556 39% Europe 215,890 198,284 9% 105,922 95,292 11%
Corporate Europe 215,890 198,284 9% 105,922 95,292 11% Netherlands 57,366 54,324 6% 28,669 26,228 9% Belgium 38,697 39,083 -1% 20,051 15,476 30% Germany 9,432 8,284 14% 3,552 3,100 15% Rest of Europe 110,395 96,593 14% 53,650 50,488 6%
Corporate PD Bands 308,068 269,558 14% 145,581 125,091 16% <0.05% 10,997 9,058 21% 1,499 1,239 21% 0.05% to 0.5% 183,109 158,886 15% 58,113 49,792 17% 0.5% to 5% 94,849 83,802 13% 62,505 50,991 23% 5% to 10% 4,075 3,049 34% 3,757 2,877 31% 10% to 20% 2,736 3,176 -14% 3,285 4,335 -24% 20% to 50% 4,256 3,690 15% 5,271 5,222 1% more than 50% 8,046 7,897 2% 11,152 10,634 5%
Corporate LGD Bands 308,068 269,558 14% 145,581 125,091 16% <10% 79,490 66,795 19% 6,732 4,889 38% 10% to 20% 32,219 38,908 -17% 11,264 12,812 -12% 20% to 30% 54,954 43,457 27% 23,332 16,322 43% 30% to 40% 74,699 59,761 25% 40,188 31,314 28% 40% to 50% 41,385 38,953 6% 33,683 33,286 1% 50% to 60% 12,980 9,642 35% 13,141 10,039 31% more than 60% 12,340 12,042 3% 17,240 16,429 5%
A driver for both the READ and RWA increase is the implementation of the EU Equivalence regulation. Under this regulation, EUR 15.0 billion READ and EUR 5.9 billion RWA shifted from exposure class Institutions to exposure class Corporates. The methodology update on SME clients also contributed to an increase in READ and RWA. Due to this change, EUR 3.7 billion in READ and EUR 1.6 billion in RWA shifted from Retail exposure class to Corporate exposure class. Besides this, an additional stand-alone increase of EUR 0.9 billion in RWA has been observed within the Corporate exposure class, which is not related to the methodology update on SME clients or the implementation of the EU Equivalence regulation.
Retail Geography/business units 337,217 333,876 1% 68,964 70,647 -2% Africa 55 88 -38% 14 16 -12% America 166 249 -33% 45 85 -47% Asia 118 171 -31% 20 26 -22% Australia 32,948 29,834 10% 2,116 2,011 5% Europe 303,929 303,534 0% 66,769 68,509 -3%
PD 3 The main PD model applied is Bank Commercial based upon financial, qualitative and country information. Other PD models for different types of financial institutions are built using a similar framework, but are more specialised for the specific characteristics of the financial institution.
Other1 21.27 2.6% 2.93 1.4% Other (Covered Bonds, Structured assets) Total 808.03 100% 211.46 100%
SA approach Central governments or central banks 3,801 3,807 3,812 Regional governments or local authorities 274 245 227 Institutions 2,281 2,438 4,917 Corporates 12,468 14,002 13,456 of which: SMEs 2,865 3,408 3,746 Retail 14,831 14,783 14,533 of which: SMEs 4,492 4,815 5,236 Secured by mortgages on immovable property 15,991 14,278 11,665 of which: SMEs 2,960 2,910 2,702 Exposures in default 481 479 424 Total SA approach 50,127 50,032 49,033
Exposures in default 474 41 129 0 305 0 0 0 7 481 Total SA approach 48,145 6,486 1,101 354 40,204 48 4 442 1,489 50,127
Net Carrying Value Activities of households as employers and own use
Central governments or central banks 2,699 1,100 2 3,801 Regional governments or local authorities 271 3 274 Institutions 2,281 2,281 Corporates 283 3,449 406 4,968 3,361 12,468 Retail 5,727 2,241 305 915 1,878 3,765 14,831 Secured by mortgages on immovable property
Central governments or central banks 110,087 62,072 53,668 225,826 Institutions 66,600 19,726 14,628 100,954 Corporates 163,364 168,364 77,781 409,510 Retail 14,552 38,019 273,165 325,737 Total AIRB approach 354,603 288,181 419,243 1,062,027
Central governments or central banks 3,136 628 37 3,801 Regional governments or local authorities 2 245 27 274 Institutions 2,170 108 3 2,281 Corporates 4,859 6,356 1,252 12,468 Retail 5,422 6,772 2,637 14,831 Secured by mortgages on immovable property 2,330 3,677 9,985 15,991 Exposures in default 266 29 187 481 Total SA approach 18,186 17,814 14,127 50,127
The majority of the exposures within the AIRB portfolio are observed in the lower than 1 year and higher than 5 years maturity buckets. The Retail portfolio consists mostly of residential mortgages, which typically have longer maturities. The exposures within the Corporates and Central Governments or Central Banks exposure classes are shorter compared to the Retail portfolio, which results in more exposure within the lower maturity buckets. For Central Governments or Central Banks this is mostly in the less than 1 year buckets in Money Market Lending and to a lesser extent to Revolving Loans. Exposures in the other two buckets are predominantly seen in the Bond Investment products. Revolving Loans and Guarantees make up the majority of the exposure seen in the first maturity bucket of the Corporate exposure class, whereas Term Loans and Revolvers are the dominant product types in the longer maturity buckets.
Central Governments and Central Banks 0.75 to < 2.50 107 26 52% 121 1.9% 40 3% 4.37 11 9%
Central Governments and Central Banks default 50% 100.0% 3 31% 1.00 6%
EU CR6: IRB- Credit risk exposures by exposure class and PD range
Corporates 0.00 - 0.01 AAA 0.010% 0.010% 13 13 Corporates 0.01 - 0.03 AA 0.021% 0.021% 26 315 Corporates 0.03 - 0.04 AA 0.031% 0.031% 89 96 Corporates 0.04 - 0.05 AA 0.041% 0.041% 121 158 0.075% Corporates 0.05 - 0.06 A 0.051% 0.047% 2,667 2,960 1 0.095% Corporates 0.06 - 0.08 A 0.062% 0.066% 1,242 1,320 0.159% Corporates 0.08 - 0.11 A 0.092% 0.102% 1,423 1,577 1 0.133% Corporates 0.11 - 0.17 BBB 0.139% 0.136% 9,453 10,030 25 0.300% Corporates 0.17 - 0.26 BBB 0.213% 0.214% 6,447 6,782 10 0.340% Corporates 0.26 - 0.37 BBB 0.306% 0.297% 10,451 11,279 30 0.448% Corporates 0.37 - 0.58 BB 0.443% 0.444% 13,245 14,191 52 0.725% Corporates 0.58 - 1.00 BB 0.755% 0.761% 13,051 13,807 90 1.214% Corporates 1.00 - 1.77 BB 1.318% 1.343% 13,057 13,583 210 1.680% Corporates 1.77 - 3.23 B 2.360% 2.393% 9,367 9,837 196 2.936% Corporates 3.23 - 6.05 B 4.384% 4.350% 6,935 7,432 230 4.659% Corporates 6.05 - 11.67 B 8.317% 8.347% 3,083 3,221 225 10.425% Corporates 11.67 - 20.20 CCC 15.846% 15.769% 3,172 3,271 320 9.335% Corporates 20.20 - 29.58 CC- 24.881% 24.639% 1,512 1,414 266 16.522% Corporates 29.58 - 100.00 C- 36.148% 39.969% 1,242 1,104 288 27.205%
Institutions 0.00 - 0.01 AAA 0.010% 0.010% 59 52 Institutions 0.01 - 0.03 AA 0.021% 0.021% 309 33 Institutions 0.03 - 0.04 AA 0.031% 0.031% 69 80 0.154% Institutions 0.04 - 0.05 AA 0.041% 0.041% 992 1,006 Institutions 0.05 - 0.06 A 0.052% 0.051% 505 526 0.064% Institutions 0.06 - 0.08 A 0.062% 0.062% 828 646 Institutions 0.08 - 0.11 A 0.092% 0.092% 790 451 0.072% Institutions 0.11 - 0.17 BBB 0.139% 0.139% 672 775 1 0.135% Institutions 0.17 - 0.26 BBB 0.212% 0.213% 488 528 0.023% Institutions 0.26 - 0.37 BBB 0.307% 0.305% 503 377 0.036% Institutions 0.37 - 0.58 BB 0.444% 0.444% 812 643 1 0.021% Institutions 0.58 - 1.00 BB 0.756% 0.761% 520 471 0.042% Institutions 1.00 - 1.77 BB 1.318% 1.331% 392 321 4 0.293% Institutions 1.77 - 3.23 B 2.389% 2.406% 285 275 1.055% Institutions 3.23 - 6.05 B 4.524% 4.371% 223 150 4 0.539% Institutions 6.05 - 11.67 B 8.183% 8.277% 91 62 2 1.091% Institutions 11.67 - 20.20 CCC 16.322% 16.293% 62 126 4 3.476% Institutions 20.20 - 29.58 CC- 24.855% 24.658% 32 10 4 4.819% Institutions 29.58 - 100.00 C- 36.813% 39.576% 31 10 1 4.611%
Retail 0.00 - 0.01 AAA 0.005% 0.009% 1,865,865 1,984,312 538 0.031% Retail 0.01 - 0.03 AA 0.019% 0.021% 79,657 86,022 71 0.073% Retail 0.03 - 0.04 AA 0.031% 0.031% 77,248 97,544 42 0.090% Retail 0.04 - 0.05 AA 0.044% 0.041% 645,294 677,469 296 0.050% Retail 0.05 - 0.06 A 0.051% 0.053% 79,571 46,746 21 0.031% Retail 0.06 - 0.08 A 0.067% 0.067% 143,336 51,231 89 0.061% Retail 0.08 - 0.11 A 0.089% 0.102% 864,211 948,013 1,059 0.104% Retail 0.11 - 0.17 BBB 0.146% 0.136% 556,848 556,142 559 0.142% Retail 0.17 - 0.26 BBB 0.209% 0.217% 647,080 681,394 978 0.222% Retail 0.26 - 0.37 BBB 0.324% 0.312% 541,514 570,611 1,384 0.392% Retail 0.37 - 0.58 BB 0.457% 0.476% 615,005 615,365 3,035 0.600% Retail 0.58 - 1.00 BB 0.727% 0.773% 663,427 653,326 3,540 1.605% Retail 1.00 - 1.77 BB 1.314% 1.485% 373,902 455,802 3,762 1.663% Retail 1.77 - 3.23 B 2.645% 2.498% 421,224 470,410 5,298 2.348% Retail 3.23 - 6.05 B 4.152% 3.907% 191,386 190,078 6,905 6.357% Retail 6.05 - 11.67 B 8.340% 7.927% 171,878 182,624 11,027 7.675% Retail 11.67 - 20.20 CCC 16.227% 16.815% 82,577 75,683 7,580 12.792% Retail 20.20 - 29.58 CC- 24.960% 25.843% 11,192 10,885 2,131 20.164% Retail 29.58 - 100.00 C- 44.409% 37.048% 43,591 34,283 11,592 27.216%
Res. Mortgage Other retail Total Expected loss rate 2015* 0.02% 0.05% 0.34% 0.18% 0.82% 0.22% Observed Loss Rate 2016 0.00% 0.05% 0.25% 0.12% 0.80% 0.17%
The table below illustrates the effect of all CRM techniques applied in accordance with the Part Three, Title II, Chapter 4 of Regulation (EU) 575/2013 on the standardised approach capital requirements’ calculations. Risk weighted exposure amount (RWA) density provides a synthetic metric on riskiness of each portfolio.
EU CR4: Standardised approach - credit risk exposure and Credit Risk Mitigation (CRM) effects
The SA portfolio comprises mainly of the exposures in Turkey, Poland and Romania. In terms of business, the portfolio is spread over residential mortgages and consumer lending, with a relatively small portion arising from corporate exposures. The biggest movement in 2016 within the SA portfolio was the move of the Dutch Healthcare portfolio from IRB approach to SA approach. Excluding this change, there was growth in residential mortgages in these SA three countries. The sovereign portion of SA exposure is arising mainly due to deposits with the Turkish Sovereign.
The credit quality of risk exposures is presented in three tables providing insight in the credit quality per exposure class, industry or counterparty type and geography. These tables present the gross carrying values, consisting of on- and off balance sheet exposures, split over non-performing / performing, specific risk adjustments and impairments/allowances. The net carrying values are the result and are presented at the end of the tables. These three tables should be read in conjunction with detailed sections per (ING Internal) exposures class: Sovereign, Institutions, Corporate and Retail. Albeit that the measures used in those sections are READ and RWA, the main movements are explained.
Nondefaulted exposures specific credit risk adjustments general credit risk adjustments credit risk adjustment charges of the period Net values
Total 14,077 1,103,441 -5,363 1,112,154 Excludes Counterparty Credit Risk, Securitisations, CVA RWA, Equities and ONCOA.
Credit quality of exposures by industry or counterparty types The following breakdown shows the defaulted and non-defaulted exposures per NACE industry or counterparty sector type.
ING Group Annual Report 2016 403 gross carrying values of defaulted exposures nondefaulted exposures specific credit risk adjustments general credit risk adjustments credit risk adjustment charges of the period Net values
Construction 1,237 18,167 -547 18,858 Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles
Credit quality of exposures by geography The table below provides a comprehensive picture of the credit quality of the on- and off-balance sheet exposures by geography gross carrying values of defaulted exposures nondefaulted exposures specific credit risk adjustments1 general credit risk adjustments credit risk adjustment charges of the period Net values
EU CR1-B: Credit quality of exposures by industry or counterparty types
On nonperforming exposures of which: forborne exposures of which: forborne of which: forborne of which: forborne
The total ING Bank forborne assets increased by EUR 4.7 billion to EUR 15.4 billion per December 2016. The main driver for this increase relate to the further policy revision of the forbearance definition which was implemented in 2016. Key policy revisions were the inclusion of concessions where ING Bank is substantially compensated by concessions by the client, as well as measures that address key financial covenants as part of the loan agreement. Almost 70% of this increase is visible in the top three industries: a EUR 1.0 billion increase in Natural Resources which was mostly attributable to the Oil & Gas portfolio, another EUR 0.9 billion increase in Transportation & Logistics which is mainly related to shipping activities and another EUR 0.4 billion in the Real Estate portfolio.
Past due but performing consumer loans by geographic area (based on outstandings)
On a total level the ageing of the portfolio improved with EUR 2.5 billion, counting from 30 days and more past due. All buckets show a decrease, except the bucket > 1 year, which increased with EUR 1.1 billion. This means that a part of the customers that were already past due, continue having interest payment arrears.
Corporates sub-total 14,026 0.67% 9,121 34% 2.2 5,796 41% Institutions 0.00 to < 0.15 37,510 0.06% 1,294 34% 3.0 3,366 9% Institutions 0.15 to < 0.25 3,155 0.21% 129 19% 0.5 455 14% Institutions 0.25 to < 0.50 558 0.36% 365 27% 2.3 193 35% Institutions 0.50 to < 0.75 Institutions 0.75 to < 2.50 391 0.99% 612 22% 1.1 223 57% Institutions 2.50 to < 10.00 31 4.76% 96 10% 4.1 13 44% Institutions 10.00 to < 100.00 4 16.32% 105 38% 1.0 4 121% Institutions default
Institutions sub-total 41,649 0.09% 2,601 33% 2.8 4,255 10% Retail 0.00 to < 0.15 8 0.07% 216 53% 1 9% Retail 0.15 to < 0.25 5 0.17% 84 58% 1 22% Retail 0.25 to < 0.50 2 0.36% 196 57% 1 34% Retail 0.50 to < 0.75 2 0.68% 79 67% 1 54% Retail 0.75 to < 2.50 4 1.11% 160 41% 1 40% Retail 2.50 to < 10.00 1 3.74% 44 54% 1 79% Retail 10.00 to < 100.00 2 17.52% 140 60% 2 129% Retail default 100.00% 16 61% 2 757%
Bond Financing Given 113 5,876 500 6,489 6,983 Equity Financing Given 3,487 1,522 5,009 5,140 Bond Financing Taken 78 1,200 704 1,982 2,363 Equity Financing Taken 702 92 794 1,301 Total (ALL) 191 11,265 2,818 14,275 15,786 Includes both AIRB and SA portfolios; excludes Securitisations, equities and ONCOA.
Fair value of collateral received Fair value of posted collateral Fair value of collateral received
Central Counterparties The use of Central Clearing (CCPs) is becoming more important for the derivatives business and as a consequence part of the credit risk is shifting from counterparties to CCPs.
EU CCR5-B: Composition of collateral for exposures to counterparty credit risk
Note: The status “qualified” is based on the European Securities and Markets Authority (ESMA) qualification. ING clears with the following QCCPs: Banque Centrale de Compensation SA, EUREX Clearing Aktiengesellschaft, KDPW CCP SA, LCH Clearnet Repoclear service and LCH Clearnet Swapclear service.
Voluntary and mandatory clearing has a large impact on the development of EAD and RWA. From an EAD perspective, it should be noted that many trades are concentrated in one netting set (per CCP service), compared to bilateral trading, where trades are ending up in various netting sets. Novating a bilateral traded contract to a CCP therefore typically reduces the amount of EAD. From an RWA perspective, the novation reduces the amount of RWA even more, due to the fact that the risk weight is only 2% (for QCCP exposure).
The average credit quality of ING counterparties did not change in 2016 thus the average risk weight remained constant during the period. CVA Capital Maturity dropped in all the major product lines showing that some long term contracts were closed out and replaced by shorter maturity trades. Additionally the CVA capital was impacted by the regulatory exposure calculation methodology change for derivatives in Q4. Exposure decreased by 13.6% on average compare to 2015. This reflects ING efforts to move trades to qualifying CCPs, where no CVA Capital charge is required. FX derivative portfolio is an exception where CVA exposure increased by 45% in 2016. This is explained by new client volume as well as expansion in one product (FX Swap) with key counterparties.
As of 30 December 2016, ING’s credit derivative positions are mostly used in intermediation activities. The largest notional is under single-name credit default swap (CDS), and a small notional is under Index CDS. The largest contributor to the fair values comes from sovereign position, followed by corporates and financial institutions. The remaining small portion of credit derivative positions are used for own credit portfolio. Only single-name CDS is used. The largest contributor to the fair values is from sovereign position, followed by corporates and financial institutions. Compared to 2015, the absolute total notional for intermediation activities have increased in both protection bought and protection sold. For protection bought, the total fair value changed from positive in 2015 to negative in 2016, mainly due to the decrease in the fair value of the sovereign position. On the other hand, the fair value of protection sold changed from negative in 2015 to positive in 2016, mainly caused by the increase in the fair value of the sovereign and corporate positions. For the own credit portfolio, the absolute notional amounts of both long and short CDS positions have increased compared to 2015. Especially, the notional for protection bought has increased significantly. The total fair value changed from positive in 2015 to negative in 2016, driven by the decrease in the fair value of the sovereign position and the negative fair value of the corporates exposure.
Third party obligation Third Party Obligation, indemnification or undertaking (either by contract and/or by law) is a legally binding declaration by a third party that gives ING Bank the right to expect and claim from that third party to pay an amount, if the customer fails on its obligations to ING Bank. The most common examples are guarantees (such as parent guarantees and export credit insurances) and letters of comfort.
Cover valuation methodology General guidelines for cover valuation are established to ensure consistency of the application within ING Bank. These general guidelines also require that the value of the cover needs to be monitored on a regular basis, in principle at least annually. Covers shall be revalued accordingly and whenever there is reason to believe that the market is subject to significant changes in conditions. The frequency of monitoring and revaluation depends on the type of covers.
The table below presents the ING bank portfolio excluding equities per loan type. Exposures represent the outstandings and a loan is presented as secured by collateral or a guarantee if such a cover exists on a facility type. The secured amounts represent the part of the loan that is covered by the collateral. If a loan would have both collateral and a guarantee than these are both shown in the designated column.
The table below presents the ING bank portfolio excluding pre-settlement, securitisations and equities. Exposures represent the outstandings and a loan is presented as secured by collateral or a guarantee if such a cover exists on a facility type. If a loan would have both collateral and a guarantee than these are both shown in the table below in the designated column.
Basel II eligible AIRB Sovereigns 6,621 2,502 2,188 2,754 93,898 299 349 1,419 122 Institutions 147,239 41,669 30,302 30,598 73,390 483 14,922 3,929 2,666 Corporates 18,682 14,257 12,270 15,821 260,979 84,908 14,504 58,091 83,036 Res Mortgage secured
Current Outstandings 96,365 75,396 265,637 278,576 34,965 750,939 733,880 1 month 82,440 54,913 255,661 278,183 34,734 705,931 683,140 3 month 80,296 47,282 240,627 277,271 34,461 679,937 660,550 6 month 79,703 43,501 225,337 275,752 33,977 658,270 641,577 1 year 72,314 37,135 188,744 272,152 30,175 600,520 572,739 2 years 69,309 31,565 151,999 267,435 25,652 545,960 516,076 3 years 67,818 26,484 120,881 262,002 22,773 499,958 472,762 5 years 65,606 19,109 65,863 247,067 15,479 413,124 378,167 7 years 61,933 16,732 36,836 232,252 10,144 357,898 314,117 10 years 59,237 14,304 18,355 202,798 6,503 301,196 240,312 Includes AIRB portfolio only; excludes securitisations, equities and ONCOA. Non-performing loans (rating 20-22) are excluded in the figures above.
Securitisations The following information is prepared taking into account the ‘Industry Good Practice Guidelines on Pillar III disclosure requirements for securitisations’ (the Guidelines) issued by the European Banking Federation and other industry associations on 31 January 2010 and the CRR/CRD IV disclosure requirements. It includes qualitative and quantitative disclosures addressing both the exposure securitised as well as securitisations positions held. While quantitative disclosures are limited to those securitisations that are used for the purpose of calculating the regulatory capital requirements under the CRR/CRD IV, qualitative information have a broader scope and give a view on ING Bank’s entire securitisation activity.
2016 2015 S&P Fitch Moody’s IAA approach Other Total Total Asset Backed Securities 1,716 2,000 160 0 0 3,875 3,056 Residential Mortgage Backed Securities 393 990 166 0 0 1,549 3,331 Securitisation Liquidity 0 0 0 720 0 720 846 Interest Rate Derivatives 0 0 0 330 0 330 423 Other 32 7 10 401 0 450 474 Total 2,141 2,996 336 1,451 0 6,924 8,130
Europe 3,962 4,692 -18.4% Germany 1,556 888 43.0% Netherlands 943 768 18.5% Spain 730 1,452 -98.9% United Kingdom 463 919 -98.6% Rest of Europe 269 664 -146.6%
During 2016 the exposure to securitisations decreased from EUR 8.1 billion to EUR 6.9 billion mainly caused by repayments in the RMBS portfolio. The biggest increase was observed in the exposure in German assets. During 2016 the liquidity portfolio in ABS grew moderately mainly in Auto-ABS from Western Europe, the majority of Auto-ABS is based on German Assets. All assets in the securitisation portfolio are performing.
In the table below, the investor securitisations are given, broken down by underlying exposure.
In 2016 the securitisation activities with underlying retail exposure decreased by EUR 1.5 billion to EUR 4.6 billion, while the securitisations with underlying Wholesale Banking exposure increased by EUR 0.5 billion to EUR 0.9 billion.
The following table provides the breakdown of current exposures by risk weight bands. The amount of securitisation positions is based on the regulatory exposure values calculated according to the CRR/CRD IV after consideration of credit conversion factors (CCFs) where applicable as used for the purpose of Pillar I, but prior to the application of credit risk mitigates on securitisation positions. Given the focus on high quality securitisations the portfolio composition is shifting to the lower risk band.
ING Bank supports the commercial paper programmes by providing Mont Blanc Capital Corp. with short-term liquidity facilities. Once drawn these facilities bear normal credit risk.
In line with the Internal Assessment Approach, which has been approved for use by ECB for ING in relation to the ING sponsored ABCP conduit, Mont Blanc Capital Corp, the credit quality of the positions are internally assessed by following publicly available assessment methodology of external rating agencies. This includes differing stress factors for different asset classes as outlined by rating agencies as well as assessing the entire structure of the transaction including additional quantitative and qualitative features. This will result in the calculation of a certain credit enhancement. Other protections in a transaction (eligibility criteria, early amortization triggers, commingling protections etc.) are factored in that results in an internal rating. This rating is then directly mapped to an external rating for the liquidity facilities provided by ING to support the transactions and is outlined in a defined approach. Any changes to rating agency methodology is tracked annually with a procedure in place with the credit risk measurement department verifying that any changes are captured in an update to the approach.
On balance sheet amount Off balance sheet amount RW Exposure amount RWA Capital requirements 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Exchange traded equity exposures 770 1,224 - - 290% 770 1,224 2,233 3,548 179 284 Private equity exposures 490 556 - - 190% 490 556 930 1,057 74 85 Other equity exposures - - - - 370% - - - - - - Total 1,260 1,780 - - 1,260 1,780 3,163 4,605 253 368
In September 2016 ING announced the sale of 46.7 million ordinary shares of Kotak Mahindra Bank (Kotak). The sale reduced ING's stake in Kotak from 6.4% to 3.9%. ING obtained its stake in Kotak through the merger of ING Vysya Bank with Kotak Mahindra Bank, which was effective from 1 April 2015. This transaction significantly reduced ING equity exposure amount and as a result the RWA.
In 2016, the median asset encumbrance ratio for ING Group was 19% compared to 18% in 2015.
ING Group Annual Report 2016 424 2015 median in EUR million
Collateral received by ING Group 69,988 40,384 Equity instruments 16,076 5,891 Debt securities 53,911 34,033 Other collateral received 460 Own debt securities issued other than own covered bonds or ABSs 2016 median in EUR million
Non-Financial Risk The table below shows the distribution of the gross loss amount for non-financial risk events by the Basel risk categories. The Basel risk categories (i.e. Basel event type classifications) include the risk areas set out in the Non-Financial Risk chapter. The event loss is presented in the year of discovery of the individual events.
Concerns are recorded in accordance with specific categories, as represented in the table. The Concerns are reported periodically (in numbers and on content, if necessary) via the Head of Compliance up to the level of the Supervisory Board.
We achieved number one Net Promoter Scores (NPS) in 7 of our 13 major retail markets
We set an abmition to increase our sustainable transitions financed (STF) to EUR 35 billion by 2020
We aim to further invest in the personal and professional development of our employees
The total extrapolated amount of carbon emissions decreased by 27% from 101 to 74 kilotonne CO2e
The topics were based on an extensive analysis of issues that either ING can impact through our business and strategy, or that can impact ING’s own business. These topics were checked against ING’s own risk assessment as well as guidelines from international bodies such as GRI G4 and the Sustainability Accounting Standards Board (SASB).
The materiality matrix below shows senior management’s views on the horizontal axis and our stakeholders’ views on the vertical axis.
The position of the material topics is based on 2015 materiality assessment. The arrows indicate 2016 outcomes, demonstrating whether a topic is increasing or decreasing in importance.
ni m al te st in g fo r c os m et ic p ur po se s
(C on tr ov er sia l W ea po ns
or b ur ni ng d ow n tr op ic al ra in fo re st
* O nl in e po rn og ra ph y*
– Natural resources 6,8% ● ● ● ● ● ● ●
Credit risk portfolio per economic sector and application of ESR framework and SF strategies
External Independent Review A B C Total A B C Total 1 Category A – Projects with potential significant adverse environmental and social risks and/or impacts that are diverse, irreversible or unprecedented; Category B –
The tables below provide an overview of Human Resources related topics like training and development and diversity.
1 Total leavers headcount in 2016 divided by headcount on 1 January 2016. 2 Correction on 2015 numbers. This correction is predominantly due to an update for Turkey with minor adjustments for Australia, Belgium, Germany and Poland.
UNICEF programme, Power for Youth, that aims to empower 335,000 adolescents by 2018. The Power for Youth programme is active in six countries: Indonesia, Kosovo, Montenegro, Nepal, The Philippines and Zambia.
Environmental footprint Our activities impact the environment we operate in - both directly, through the operations of our buildings, IT systems and business travel, but also indirectly, through our lending portfolio and through our procurement supply chains. We are committed to reducing this impact and work closely with customers and suppliers to take advantage of opportunities within the low-carbon, resourceefficient economy of the future. Our Environmental Approach (www.ing.com/16ar11) describes how we are managing our direct and indirect environmental impacts as well as how we mitigate risks and create and seize opportunities.
Our objectives and targets concerning our operational environmental impact are managed through the ING Environmental Programme, which has established a robust Environmental Management System (EMS) that ensures effective processes and continual improvement of our performance. In 2016, ING achieved the ISO14001 EMS certification for head office operations in the Netherlands. Our EMS, which applies globally, has helped us to make progress against our 2020 targets. Relative to our base year, our carbon footprint was reduced by 27% in 2016 as a result of increasing our renewable electricity consumption to 91% of total electricity consumption, which is a 14% increase since 2014. In addition, we reduced global energy consumption by 10% compared to 2014. This means that we have met our 2020 target for emissions reduction and have made solid progress on our target to achieve 100% renewable electricity consumption by 2020.
GHG emissions. As a result we have updated our emissions disclosure accordingly. For more information about emissions factors and restatement policy, please see our Non-financial Reporting Protocol on ING.com 2 The total carbon amount is the sum of scope 1, 2 and 3 emissions. The total can vary slightly from sum of the figures displayed due to the fact that we only display figures rounded to the nearest kilotonne.
Circular Purchasing Projects # of Projects realised 18 211 2 1 This is the number of projects initiated in 2015 while 18 were realised in 2016.
On a day to day basis we actively engage with our customers and other stakeholders such as investors, government officials and NGOs on relevant topics, issues and challenges, both on expert level and on (senior) management and Board level. With regard of new or revised ESR policies, we follow a structured process for consultation and proactively seek input from relevant stakeholders.
Throughout the year challenges and issues are discussed with and brought to our attention by different stakeholders. In the table below, we provide a snapshot of the key issues from 2016.
Stakeholder Topic of Discussion ING's point of view Society at large Australia
Stakeholder Topic of Discussion ING's point of view Society at large Netherlands
Stakeholder Topic of Discussion ING's point of view Fair Finance Guide (FFG) report: Living wages Netherlands
ING shares many of the environmental and social concerns expressed by the FFG. However, we differ in our approach towards these issues and feel the methodology and research do not do our results justice. Different from the FFG, we don’t seek to totally exclude sectors like coal, oil, gas and uranium mining, hampering steel production (coal), the transport industry including freight transport, shipping and aviation (oil), electricity production and heating (gas), or cancer treatment with medical isotopes (uranium). We rather seek to support higher standards applied within sectors than exclusion.
Information and statistics provided from the government show that persons, who have not individually saved funds for retirement, but have relied only the national pension scheme, will receive a max. of 30% of their last salary upon retiring. The Polish society has somewhat changed its attitude towards saving for this cause.
ING Group evaluates its results using a financial performance measure called underlying result. Underlying result is used to monitor the performance of ING Group at a consolidated level and by segment. The Executive Board and Management Board of ING Bank consider this measure to be relevant to an understanding of the Group's financial performance because it gives better insight into the commercial developments of the company. Underlying result is derived by excluding from IFRS the following: special items; the impact of divestments and Legacy Insurance.
Bank for International Settlements (BIS) The Bank for International Settlements is an international organisation fostering the cooperation of central banks and international monetary policy makers.
Basis Point Value (BPV) The change in the net present value of a cash flow or a pool of cash flows due to a one basis-point change of the yield curve.
Commercial paper Promissory note (issued by financial institutions or large firms) with a very-short to short maturity period (usually 2 to 30 days, and not more than 270 days), and unsecured.
Defined benefit plan Post-employment benefit plans other than defined contribution plans.
Derivatives A derivative is a financial instrument or other contract with all three of the following characteristics: a.Its value changes in response to a change in any of the following: a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (provided in the case of a non-financial variable that the variable is not specific to a party to the contract, sometimes called the ‘underlying’); b.It requires no initial net investment, or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and c. It is settled at a future date.
First call date Perpetual subordinated loans have no set maturity. The first call date is the date on which ING has the option to repay and cancel that particular subordinated loan.
Impairment loss The amount by which the carrying amount of an asset exceeds its recoverable amount.
Investment risk 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.
Minimum requirement of eligible liabilities (MREL) The institution-specific loss absorption and recapitalisation requirement established in the EU Bank Recovery & Resolution Directive based on the resolvability assessment of the institution.
Nominal value of share Dutch shares have a nominal value, which is mentioned on all issued share certificates. Shares must be issued against at least the nominal value. The nominal value remains fixed, as opposed to the market value, which fluctuates.
Projected unit credit method This has to do with employee benefit plans, such as retirement plans. It’s an actuarial valuation method that considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.
Redemption value With respect to investments in fixed-interest securities, the amount payable on the maturity date.
Remuneration Committee The Remuneration Committee, consisting of members of the Supervisory Board, advises the Supervisory Board on aspects such as the terms and conditions of employment of Executive Board members and senior managers of ING and its subsidiaries. This includes their remuneration, as well as the policies and principles that the employment terms and conditions are based on.
Resolution plan Resolution planning sets out which action needs to be taken if the bank is found to be failing in order to continue its critical functions and avoid significantly adverse effects on financial stability while minimising public financial support. The Single Resolution Board (SRB) and the National Resolution Authorities (NRAs) are responsible for resolution planning and resolution of a bank and to that end determine the strategy for ING, based on information that ING provided on critical functions, the financial, legal, operational, and organisational structure and internal and external interdependencies.
Structured entity An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
SSA categories are defined per: a.The EU-regulation (EU) 575/2013 CRR, which defines exposure classes in Article 112 – Article 132 (‘CRR’); b.The exemption list in Article 2 of the directive 2013/36/EU
(‘CRD IV’); and c. Delegated act on Liquidity Covered Ratio (EU) 680/2014
Swap contracts Commitments to settle in cash at a specified future date, based on differentials between specified financial indices as applied to a notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party.
Tier 2 capital Tier 2 capital shall consist of the following: a.Capital instruments and subordinated loans where the conditions laid down in Article 63 (CRR) are met; b.The share premium accounts related to instruments referred to in point (a.); c. For institutions calculating risk-weighted exposure amounts in accordance with Chapter 2 of Title II of Part Three, general credit risk adjustments, gross of tax effects, of up to 1,25 % of risk-weighted exposure amounts calculated in accordance with Chapter 2 of Title II of Part Three of the CRR; and d.For institutions calculating risk-weighted exposure amounts under Chapter 3 of Title II of Part Three, positive amounts, gross of tax effects, resulting from the calculation laid down in Articles 158 and 159 up to 0.6 % of risk-weighted exposure amounts calculated under Chapter 3 of Title II of Part Three of the CRR.
Total loss-absorbency capacity (TLAC) The minimum loss-absorbing and recapitalisation standard that the Financial Stability Board (FSB) issued for Global Systemically Important Banks (G-SIBs). The TLAC standards aim to bolster G-SIBs' capital and leverage ratios, ensuring critical functions to continue without threatening financial market stability or requiring further public financial support.
ING Publications • ING Group Annual Report, in English • ING Bank Annual Report • Annual Report on Form 20-F, in English (in accordance with SEC guidelines)