Balance sheet in EUR billion, year-end 2016 2015 2014 Total assets ING Groep N.V. 3 845 1,005 1,179 Total assets ING Groep N.V. 5 845 842 993 Shareholders' equity ING Groep N.V. 50 48 51
+ 18% The increase reflects higher net interest results and lower risk costs, despite a sharp increase in regulatory costs in 2016. Commercial performance was robust with 6.5% net growth in the core lending book.
Risk costs declined to 31 bps of average RWA (which is below ING’s through-thecycle guidance range of 40-45 bps), as macroeconomic conditions improved, especially in the Netherlands.
ING Group’s ROE improved from 8.6% in 2015, reflecting a higher underlying net result. Given the regulatory uncertainty, we believe it is prudent to wait for further clarity before we announce a Group ROE target. ING Bank’s ROE rose to 11.6% from 10.8% in 2015 and is within the earlier announced Ambition 2017 target range of 10-13%.
Sustainability is inherent in our purpose to empower people to stay a step ahead in life and in business. We empower people by striving to make banking clear and easy, available anytime and anywhere and by making financial empowerment tools available to them so they better understand their financial needs and can make well informed financial decisions. Our success in that is reflected by the 23.9 million ING customers in 2016 who said they felt empowered by ING.
Our commitment to sustainable progress is also reflected in our support for the UN Sustainable Development Goals, particularly the goals of sustainable and inclusive economic progress and of sustainable consumption and production.
Converging our various banking models in one go, however, would be impractical and runs the risk of being burdensome for customers and for our organisation. So we will first move to an intermediate state where we converge businesses with similar value propositions.
I believe strongly in the positive role banks can play in promoting a better and fairer world through their financing. In 2016, ING joined other Dutch banks, labour unions, NGOs and the Dutch government in a covenant to ensure that global corporate and project finance done by Netherlands-based banks protects and improves human rights in areas like labour practices, the freedom to form labour unions, child labour and land rights. Our longstanding commitment to human rights is also reflected in our involvement in the OECD Advisory Group, our role on the steering committee for the Equator Principles and through the human rights policy in the Environmental and Social Risk Framework that we apply in the more than 40 countries where we operate.
ING’s achievements in the area of sustainability continue to be recognised and we are ranked among leaders in this area. In 2016, ING was ranked number one out of 395 publicly listed banks, up from third last year, by global sustainability research leader Sustainalytics. ING also scored 90 out of 100 in the Dow Jones Sustainability Index (DJSI), up from 86 last year and compared to an average industry score of 61. ING was also “A-listed” by CDP, the UK-based not-for-profit that discloses corporations’ environmental impact. This places us among 193 global leaders out of the thousands of companies rated.
Regulation The competitive landscape is changing, and so too is the regulatory context. We welcomed the further progress during 2016 in implementing a harmonised approach to regulation of Europe’s banks by the ECB. At the same time, banks were again faced with an increasing amount of new regulations and rising regulatory costs. I am also concerned about the lack of coordination among regulators leading to a sustained unlevel playing field, as for instance in the case of bank taxes, where banks operating across borders often face double taxation. We are also disappointed by the continuing lack of clarity around reforms to capital rules to be set by the Basel Committee. This uncertainty makes it increasingly difficult for banks to actively support the economies where they operate, particularly in financing areas such as mortgages, SMEs and areas that structurally support economic recovery, including utilities, renewables and infrastructure. I feel it is important that regulators recognise this and support banks in their important role as facilitators of the economy. Regulation should also take into account the changing competitive landscape. It should support financial services providers who embrace innovation and new ways of doing business.
Foundation for success Banking is undergoing disruption as never before. Together with the pace of change in the world around us, this creates uncertainty regarding the way forward. But I believe ING’s strong brand, our position as a digital leader, our innovative strength and our social and environmental engagement put us on a solid foundation. We have the ability to adapt and succeed in this new environment so we can continue to meet the needs and expectations of customers and society and play an important role in building a sustainable and prosperous future for all.
A prominent source of regulatory uncertainty in 2016 was the Basel Committee on Banking Supervision (BCBS) proposals regarding risk-weighted assets. The proposals are intended to make risk-weight calculation simpler and more comparable across banks, limiting the use of banks’ own internal models. ING believes that the Basel proposals could allocate too high a risk weight to various lending activities, in particular mortgages, corporates and specialised lending. This would not be in line with historical loss rates and distorts sound economic incentives. ING does support increased comparability of internal models and therefore supports initiatives to address undue risk variability. It is involved in ECB and European Banking Authority (EBA) work underway to address this, such as the Targeted Review of Internal Models (TRIM) by the ECB. Apart from the proposals in the area of credit risk, the BCBS is also considering changes in the areas of operational and market risk. The continuing uncertainty is detrimental for banks and the economy at large.
Alongside the SSM, the Single Resolution Mechanism (SRM) came into force on 1 January 2016. It aims to ensure an orderly resolution process for failing banks. With SSM and SRM, two of the three pillars of the Banking Union have been established. More on this can be found below.
Regulatory costs and uncertainty ING’s regulatory costs increased 36.3% in 2016. One main reason were costs for the new Dutch deposit guarantee scheme (EUR 129 million in 2016 compared with zero in 2015). A new European rule says that banks must pay into these deposit guarantee schemes on a regular basis and not just after a bank failure.
• Strong capital and liquidity position; solid financial and operating performance
• Presence in growth markets with moderate to strong economic growth
• Further improve the customer experience by accelerating innovation and improving efficiency
Competitive landscape Technology is removing a number of the barriers to entry that once insulated our business. We face competition from many different directions, with relatively new players providing more segmented offers to our customers and clients. Technology giants, payment specialists, retailers, telecommunication companies, crowd-funding initiatives and aggregators are all encroaching on the market for traditional banking services. Our customers, in turn, are willing to consider these offers.
We see our purpose – to empower people to stay a step ahead in life and in business – as inherently sustainable. We promote good financial decision-making and empowerment. Next to that, our focus is on what we call sustainable transitions – our own transition, with our environmental programme helping us meet our targets for water, waste and energy reduction; our customers’ transitions, by helping them become more sustainable; and society’s transition, by funding sustainable projects and clients.
What matters most to our stakeholders From customers to business partners, shareholders, employees, non-governmental organisations (NGOs), regulators, governments and society at large – different stakeholders expect different things from us. We strive to respond to their views and concerns.
Human capital Diversity and equal opportunities, preventing discrimination Being a good employer
Material topics primarily covered by our policies, governance framework and/or laws
Customer centricity Innovative business developments Customer privacy and data security Enhancing customer financial capabilities Stability of IT systems and platforms Usability and accessibility of our products and services Fair communication about our products and services Responsible lending and debt prevention
However, if banks don’t lower their retail savings rates below zero in a negative interest rate environment, net interest margins would be impacted, worsening profitability. Other solutions would have to be found, such as increasing margins on lending or implementing other fees, which could reduce market transparency. From our point of view, none of these are desirable because they would conflict with customers’ expectations about fair pricing.
ING believes that we should rely on our strengths and perceive these developments as an opportunity rather than a threat. We have the advantages of scale, capital, a large customer base, marketing and distribution know-how and experience. When it comes to fintechs, ING’s strategy is to pursue partnerships with those that can really add value for our customers, leveraging each other’s strengths.
Also gaining importance as a topic across stakeholder groups is managing risks, both financial and nonfinancial, such as environmental and social risk. Stakeholders expect ING to move beyond improving our risk-management capabilities to also engage with clients to help them improve their own environmental and social performance.
Customers trust us to store their data with care and safety. This trust is also at the core of our relationship with our customers. We abide by our legal obligations to protect customer data, which can differ country to country. The wishes of our customers and clients are critical whenever data is processed for services and offers. In cases where we rely on consent, the customer can withdraw their consent at any time.
We offer training and opportunities for staff to develop professionally, improving people’s general employability, whether with ING or for future positions outside the company. We see this as part of our responsibility as an employer.
Fintechs are developing rapidly and our customers’ expectations are evolving every day. It is up to us to adapt and innovate to remain relevant.
Data privacy and security section in the “Improving the customer experience” chapter.
Helping people make smarter financial decisions through transparent tools, tailored offers and expert advice.
As distribution and communication channels become more direct and available 24/7, customers expect instant and continuous access to their funds and our services. The organisation must evolve accordingly.
Banks should embrace regulatory intent to create sound, secure, unbiased businesses, where regulatory compliance is embedded in the processes and values of day-to-day operations.
Risks: Low interest rates, including negative rates in some countries, are putting banks’ net interest income and net interest margin under pressure. Increased regulatory requirements have an impact on the way banks do business. For instance, enhanced regulation on capital and liquidity will continue to increase regulatory costs. And uncertainty around European regulation on bank taxes, risk-weight calculation and loss-absorption requirement is hampering the new ways of doing business.
“Facts and key figures”, “Our strategy and how we create value” and “The world around us” chapters.
By end-2016 our total number of customers stood at 35.8 million, an increase of around 3 million compared to 2014 when we launched the Think Forward strategy.
We experienced healthy lending growth and declining risk costs resulting from active management of non-performing loans. ING Bank’s nonperforming loans (NPLs) expressed as a percentage of lending credit outstandings further improved. The NPL ratio decreased at the end of 2016 to 2.1% from 2.5% at the end of 2015.
Financing and investing in the transition to a fair and green economy will help create corporate and societal value in mid- to long term.
K Regulatory developments Monitoring regulatory developments and aiming to act in accordance with the expectations of society.
ING monitors external developements to ensure we can assess the impact of and respond to relevant initiatives.
Having clear policies guiding our finance and investment decisions; supporting clients in improving their environmental and social practices; identifying customers and projects that provide sustainable solutions and outperform their sector on environmental or social performance.
Risks: A lack of openness and transparency between banks and their stakeholders may lead to a mismatch between expectations and banks’ services. Trust is another important element for both customer and society.
A lack of all these elements could lead to an unfavourable public image from both customers and society, possibly leading to a decrease in customers and increased regulation.
Being transparent and open about our investments, products and services, and other topics to help the business move forward and earn the trust of our stakeholders.
R Being a good employer Creating an entrepreneurial, open, collaborative, innovative and energetic culture within an organisation to ensure we attract and motivate our employees and deliver on our Customer Promise.
The success of our strategy is reflected in the growing number of customers who want to bank with us, the high level of customer satisfaction and the growth of our lending franchise. By end-2016 our total number of customers stood at almost 36 million, an increase of more than a million year-on-year. Primary customers also increased to 9.7 million, on track to achieve our target of 10 million primary customers by 2017; and we have now increased that ambition to 14 million primary customers by 2020. We enjoyed high customer satisfaction scores in many of our markets, achieving number one Net Promoter Scores (NPS) in 7 of our 13 retail markets. And our net core lending grew during 2016 by more than six percent, supporting the economies of the countries where we are active.
In Retail Banking, we define the primary relationship as a customer with a payment account with recurrent income and at least one other product with ING. In Wholesale Banking, we aim to increase primary relationships by increasing our so-called “flow” relationships (e.g. transaction services, working capital solutions) and the percentage of relationships where we are the client’s lead finance provider.
Material topics: financial performance, pricing of products and services, fair communication about products and services, enhancing customers’ financial capabilities, responsible lending and debt prevention, trust, transparency and openness.
The future of banks is not banking as we know it today. This is challenging us as a bank to re-think who we are. We believe we should be providing our customers, both retail and wholesale, with one platform that extends beyond banking. It should provide customers with their complete financial picture across all institutions, with actionable insights so that they are empowered to make smart financial decisions. We also envisage connecting our customers to solutions offered by third parties. And we will connect our ecosystem to selected digital ecosystems, to be visible and present in the places where customers go when they are online.
To help us achieve this, we announced In October 2016 an investment of EUR 800 million in continued digital transformation to further improve the customer experience and accelerate growth in primary customers and lending. This effort will be overseen by a newly created chief transformation officer role at Management Board Banking level that will be filled by Roel Louwhoff, who will combine the new role with his current one as chief operating officer.
In the Netherlands and Belgium, we intend to improve our customer experience by moving to an integrated banking platform, leveraging the combined strengths of the omnichannel capabilities of the Netherlands with the relationship model and advice capabilities of Belgium. In our Challenger markets, we will work towards a Model Bank, with one retail strategy and harmonised retail proposition focused on increasing customer interaction, and supported by a shared services organisation. Germany’s Welcome banking platform will further digitalise our business there and enable us to pilot key elements of the future integrated platform, which we plan over time to open to non-customers and for selected third parties. In Wholesale Banking we will continue our Target Operating Model (TOM) programme, further driving simplification, business growth and innovation.
Empowering people to stay a step ahead in life and in business
2. Operational excellence Operational excellence requires continuous focus to ensure that ING’s operations deliver a seamless and flawless customer experience. Our operational excellence vision concentrates on delivering the Customer Promise. To meet changing customer expectations arising from increasing digitalisation, we aim to converge to a single platform for financial services that will deliver a uniform customer experience across borders. This will be based on simplified and standardised products and systems supported by modular architecture, integrated and scalable IT systems, and shared services. While pursuing this ambition we are also investing to provide stable IT systems and platforms to ensure we are there for our customers when they need us and to provide them with the highest standards of data security.
Material topics: innovative business developments, usability and accessibility of our products and services 4.Think beyond traditional banking to develop new services and business models Thinking beyond traditional banking is crucial given that disruption in the banking industry puts a significant portion of revenues at risk. Our payments value chain is already under threat from many bank and nonbank players. To be successful, banks need to expand the concept of what a bank is and what it means to customers. We envisage doing this by creating an open digital platform that also includes relevant offers from third parties, providing a complete financial view for customers in one place - including of their holdings at other institutions - so they are empowered to make better financial decisions, and also by finding ways to be relevant to customers earlier in their purchasing decision process. In 2016, ING developed the Yolt aggregation platform, which offers users a view of their complete financial holdings across institutions. Yolt is currently being user tested in the UK.
Management framework. This replaces a backward looking performance assessment with a real-time review process that seeks to empower employees and make them more accountable for their own performance and development. The process has been rolled out to all employees in Spain, managers in Belgium and around 200 senior leaders globally. Step Up will be introduced to all employees from 2017 onwards. We are also committed to accelerating the development of diversity, including in areas such as gender, age, background, sexual orientation, physical ability and religious beliefs. That is why we introduced a diversity manifesto, “Success through difference”, in January 2016 and have a range of initiatives in place designed to improve diversity and foster an inclusive culture.
Material topics: diversity and equal opportunities, preventing discrimination, being a good employer
Ambition 2020 financial targets We have published financial targets for 2020 reflecting our ambitions. These include a common equity Tier 1 ratio for ING Group above the prevailing fully-loaded requirement, currently estimated to be 11.75%, plus a comfortable management buffer, a leverage ratio above 4 percent, a 50-52 percent underlying cost/income ratio and an underlying return on equity to be determined when outstanding regulatory issues are clarified.
Indirect impact by supporting clients in addressing environmental and social challenges impacting their business.
Enhanced skills set and employability of adolescents through volunteering and donation programmes.
Wholesale Banking operations. Strong belief in diversity • Diversity manifesto introduced in all ING countries. • More than 1,000 employees across eight countries have gone through unconscious bias workshops. Focus on performance culture • Distinctive culture through Orange Code. • 99% of employees took part in a formal performance management process.
Increased profitability and healthy development of costs • Increased focus on fee income to compensate for low interest rates.
Financial Strong financial results • Fees and interest results: EUR 15.7 billion. Ensuring stability • 14.2% Common Equity Tier 1 ratio. • Low credit risk due to diversified nature of lending portfolio Wholesale Banking.
Spain introduced an initiative to offer small and medium enterprises (SMEs) loans of up to EUR 100,000.
Growth Markets are those expanding economies that offer above average growth potential: Poland, Romania and Turkey. In addition, ING has stakes in the Bank of Beijing (China), TMB (Thailand) and Kotak Mahindra Bank (India).
In most markets ING offers a full range of retail banking products and services, covering payments, savings, investments and secured and unsecured lending. ING pursues a digital-first approach, complemented by advice when needed, with omnichannel contact and distribution possibilities.
Using the Dutch Financial Fit Test, several business units introduced financial tests in 2016. German customers, for example, can now identify both strengths and weaknesses in their finances through the “DiBadurchblicker” app. The app compares the user’s financial situation to others and makes budgeting suggestions and provides goals. Despite being a minimum viable product, it attracted more than 77,000 visits in 2016.
We define a retail primary relationship as a customer that has recurrent income on their ING payment account and is active with at least one other ING product.
Knowing our customers ING aims to use data to drive decision-making and generate analytical insights that allow it to personalise customer interactions. By doing that it empowers customers, which in turn earns primary relationships for the bank.
Data is an important asset – along with people, processes and systems – underpinning ING’s ambition to become a next-generation digital bank. The bank’s efforts in this area include: • Redesigning data platforms into more customercentric environments. Organising information around the customer (not systems or processes), allows ING to identify relevant insights and put them to work for the benefit of both the bank and its customers.
• Building the bank’s data and communication capabilities to interact immediately with customers. To be relevant, we need to be timely. Our customer-facing platforms offer multiple touch points to interact with customers. Testing insights by providing information to customers and getting their feedback helps us to continue improving services.
Lastly, ING wants to make an impact on the communities we operate in, and on society in general. We put an emphasis on young people because to become a financially capable adult you need to start developing the right skills at a young age. ING funds research, makes donations and shares its knowledge and expertise. For example BAKCYL, an initiative of the Warsaw Institute of Banking that has Polish colleagues teaching students about financial challenges. Also ING and UNICEF’s Power for Youth partnership aims to reach 335,000 adolescents in six less-developed countries by 2018, helping them to develop the social and financial knowledge and skills needed to build a brighter future.
We aim to achieve a real impact for customers and society at large with our financial empowerment activities. However, we encounter challenges in measuring the impact of our products and services. ING works continuously with a number of internal and external experts to refine and improve the way we measure this so we can gain a better understanding of how we can contribute to empowering our customers.
In Germany, the plan is to make operations even more efficient through investments in IT systems. The end result should be a constant stream of mobile innovations to captivate the customer, and a seamless switch between mobile and other channels such as online and the contact centre (omnichannel).
While these steps will benefit customers they will come at a price for our staff. Some jobs will change in nature or location and some will be eliminated. We anticipate that as many as 7,000 jobs will be impacted.
SRI opportunities cover all asset classes, including government bonds, corporate bonds, investment funds and index trackers. At the end of 2016, sustainable assets under management (SAuM) for customers were EUR 3,306 million, up from EUR 2,573 million in 2015.
ING undertook several such initiatives in 2016, including Payconiq, a method of making payments via mobile phone in online and offline shops in an easy way without a credit or a debit card. ING joined forces with two Belgian banks, KBC and Belfius to develop Payconiq. The mobile app has gone live in Belgium. It allows for payments to be integrated with additional features and services, including loyalty programmes and peer-to-peer payments. All users require is a connection to a current account.
Developed in partnership with Zervant and Basware, ING Invoice Solutions features a user-friendly interface where clients can easily make offers, turn them into invoices, create projects and track time as well as send out invoices in whatever form their counterparty prefers (electronically as a PDF, in an email or on paper).
One idea that stemmed from the bank’s first Innovation Bootcamp in 2014 is Direct Lease, which aims to make leasing for SMEs and mid-corporates far simpler and quicker by letting customers handle their leases online. Direct Lease went live in 2016. Now, with just a few clicks, customers can create different scenarios for leasing their asset, get instant credit approval and turn the chosen scenario into a contract. They can then manage their contracts online during the lease.
In October 2016, ING announced its re-entry into the UK retail banking market with a free mobile app to help people keep track of their finances. Yolt allows users to manage money matters with different banks in one place. It is one of the first examples of a bank in the UK providing a platform for customers to manage money held by competitors. The app integrates a user’s bank accounts (including savings and credit card accounts) in one mobile dashboard. It also lets them know how many days are left until payday, predicts their bank balance based on their direct debits and points out any significant changes in their spending patterns.
ING Groenbank ING Groenbank is a 100 percent subsidiary of ING Bank N.V.. It finances sustainable investment by offering lending services at favourable rates to a variety of Dutch sectors. These include organic farming, renewable energy generation, sustainable construction and the re-use of waste materials. All assets covering ING Groenbank loans must receive Dutch government accreditation. This helps ING Groenbank accurately quantify the sustainable impact of its investments.
• ING in Australia was recognised as the “Financial Institution of the Year” and outgoing country head Vaughn Richtor the “Finance Industry Executive of the Year” by the Retail Banking Awards in Australia.
Underlying operating expenses increased 2.5 percent to EUR 6,606 million compared with 2015, mainly due to further increases in regulatory costs. Excluding regulatory costs, expenses declined 0.6 percent on a year ago. Additional expenses related to strategic projects and selective business growth in the retail Challengers & Growth Markets, as well as additional provisioning for Dutch SME clients with interest rate derivatives, were offset by the benefits from the running cost-saving programmes and a EUR 95 million one-off expenses adjustment in Belgium. The underlying cost/income ratio improved to 56.0 percent from 57.2 percent in 2015.
Retail Belgium Retail Belgium includes Record Bank and ING in Luxembourg.
Challengers & Growth Markets Retail Germany Retail Germany includes Interhyp and ING in Austria.
Total underlying income increased by EUR 451 million, or 18.7 percent, to EUR 2,859 million. Excluding the gain on Visa shares in 2016 and the one-off charge in Italy in 2015, underlying income grew by 9.8%. This increase was mainly attributable to revenue growth in most businesses and was furthermore supported by a EUR 32 million one-time gain from the reduction of ING’s stake in Kotak Mahindra Bank. The interest result rose 8.9% due to volume growth in most countries and higher margins on lending, partly offset by lower margins on current accounts. The net production (excluding currency effects and Bank Treasury) in both customer lending and customer deposits was EUR 7.8 billion in 2016. Commission income rose 15.1% on the back of continued client and volume growth in most countries.
Customer satisfaction was again high with 7 out of 13 retail units holding number one NPS positions.
In addition to the basic banking services of lending, payments and cash management and treasury, WB provides tailored banking solutions in areas including corporate finance, commercial finance (factoring), equity markets and debt capital markets to help our clients achieve their business goals. Through our global franchises in Industry Lending we serve clients across sectors where we have proven expertise. We support clients in realising their sustainability ambitions.
Our financing and investment policies and practices include strict social, ethical and environmental risk criteria. We also aim for our financing activities to have a positive impact on the environment and society. Our approach to positive impact initially concentrated on the positive environmental impact of our financing. Following the launch of the Sustainable Development Goals, we developed a structured approach that will enable us to also include the positive social impact of the projects we finance. We primarily focus on promoting sustainable and inclusive economic growth (goal 8) and sustainable consumption and production (goal 12).
More information on ING’s commitment to the Sustainable Development Goals can be found at www.ing.com/16ar2.
The bond proceeds have now been fully allocated, with 24 percent going to new projects. This is higher than our initial commitment of 20 percent. We have worked with an external expert to develop a framework for measuring the positive environmental impact of renewable energy projects. Based on this framework, we estimate that these projects decrease the amount of emissions by 744 kilotonnes of carbon annually, which is comparable to the annual carbon emissions of 93,000 Dutch households.
Financial Markets’ (FM) strategic measures FM will continue to develop its client-driven franchise, delivering a differentiating experience by offering multiple market and trading products efficiently and effectively. At the same time, FM is adjusting to changing market circumstances, higher regulatory costs and more rigorous regulatory standards. Following the ING Investor Day in October, we announced our intention to strengthen FM’s focus on areas in the business that are best aligned to its core clients and WB strategy, to converge functions into one location and to consolidate certain business lines. Some products will be
Real Estate is one of the sectors where improvements in energy efficiency in existing buildings can have a large impact on lowering CO2 emissions. Our international transactions increasingly involve high-grade sustainable real estate collateral. In the Netherlands for example we support clients through our innovative Sustainability App and with the transition to a sustainable portfolio. At year-end, Sustainable Real Estate Finance totalled EUR 7.2 billion, making up 23 percent of the total REF portfolio.
Through FM we also provide our clients with a gateway to global institutional markets. A multi-product global sales force offers a full range of products and services across three main business lines: FX, Rates and Credit Trading; Global Equity Products; and Global Capital Markets. We provide clients with hedging solutions to mitigate financial risk in all markets. We also provide investment solutions to meet specific investment objectives, as well as financing solutions through clients’ public or private debt or equity issuance, or through securities financing. In Debt Capital Markets we continue to transform the business into a consistent
Transaction Services Transaction Services supports our client’s core processes and daily financial operations with tailor-made, integrated solutions and advice. It comprises Payments & Cash Management, Trade Finance Services, Working Capital Solutions and Bank Mendes Gans, our cash pooling business. These are all activities that require a clear focus on operational excellence. After strong performances in previous years, Transaction Services (TS) met headwinds in 2016. Regulatory challenges and negative euro interest rates both drove TS income down. Across all our TS products, we continued to concentrate on innovation and further developing our services to Corporate and FI clients.
Despite a challenging yield curve, Payments & Cash Management’s growth prospects improved this year. The exit of a global competitor has strengthened our position as a top payments and cash management provider in the Benelux and enhanced our ranking amongst the top league pan-European cash management banks.
Trade Finance Services (TFS) finances, settles and mitigates risks of international trade for clients in all markets globally, but primarily in Asia, the Middle East, Central and Eastern Europe and Latin America. Lower import and export trade volumes, combined with lower commodity prices and lower interest rates, are putting pressure on income derived from Trade Finance Services activities. This decline has been partly offset by increased use of risk mitigation instruments by clients.
We intensified our focus on increasing client activity with further expansion of the Global Account Management (GAM) initiative. A global account manager is responsible for FM clients’ needs at holding company level, while working closely with client relationship managers within ING to better understand and serve client needs. This now accounts for 50 percent of FM client revenues, up from 30 percent in 2015. The GAM approach now has two tiers depending on the global or local nature of the client relationship.
Business, market and regulatory environment Markets in 2016 opened with concerns about the Chinese economy. Declines in Chinese equities led to weakness in equity markets worldwide. This, together with the continuing decline in oil prices, impacted markets. As with our peers, this resulted in a challenging first quarter, although markets and profitability returned with a strong performance in the second quarter. Markets were more stable through the rest of the year and profitability returned to more consistent and regular levels, although important political events, such as Brexit and the US presidential election, did trigger short-term spikes in volatility.
Climate change ING sees climate change as one of the biggest challenges of our time. We are committed to reducing the impact of our own operations and helping clients reduce theirs. While we have actively measured and managed our carbon footprint for more than a decade, we still face challenges in measuring the indirect impact of our lending activities. In order to take the next step in tackling this challenge, in 2016, we conducted a pilot to measure the emissions performance of two specific asset classes within our lending portfolio. We worked closely with an external consultant who helped us develop a methodology and tool for carbon accounting. This pilot yielded valuable insights into how we might measure the impact of our entire portfolio but also uncovered the challenge of data availability. Therefore, we welcome initiatives like the Financial Stability Board Taskforce for climate-related financial disclosure (TCFD) which aims to provide guidance to the financial sector on the topic of measuring and disclosing climate-related risk and impact. Such initiatives will help us and our clients achieve measurement with comparable results. We believe this level of awareness will steer action on climate change.
Industry Lending posted an underlying result before tax of EUR 1,736 million, up 14.4 percent compared with 2015, driven by continued business growth in Structured Finance and Real Estate Finance at attractive margins. The underlying result before tax from General Lending & Transaction Services rose by 31.3 percent to EUR 613 million, due to lower expenses and risk costs. Income growth was limited as volume growth was largely offset by some pressure on margins. Financial Markets’ underlying result before tax fell to EUR 134 million from EUR 462 million in 2015, largely due to the afore mentioned negative swing in CVA/DVA impacts. The underlying result of Bank Treasury & Other was EUR 185 million, up from EUR 87 million in 2015, which was negatively impacted by a EUR 92 million impairment on an equity stake. Excluding this impairment, the pre-tax result increased by EUR 6 million as higher Bank Treasury results were offset by lower results in the runoff businesses, mainly due to lower sales results in the Real Estate Development portfolio.
Risk costs declined to EUR 368 million, or 24 bps of average risk-weighted assets, from EUR 478 million, or 33 bps of average risk-weighted assets, in 2015. Lower risk costs were mainly visible in General Lending and to a lesser extent Industry Lending, in part due to larger releases on Ukraine clients.
The bank is working to increase the number of women in leadership positions, ie employees that manage others. ING, as with many financial organisations, is finding this a challenge. Of our managers of managers, 29.3 percent were women as of end-2016.
Internal networks We encourage employees to participate in a number of internal networks that stimulate diversity. These include: • Crossing – a network concentrating on cultural diversity.
ING believes that there is a clear link between more diverse leadership and better financial performance. More diverse companies are more successful at attracting and retaining talent, relate to customers more effectively, have higher employee engagement and are better at decision-making.
How we work What does ING believe in and what sets it apart from other companies? In January 2015, the Orange Code was launched, a framework for a common corporate culture to unite employees, based on input from employees themselves.
• Behaviours. The commitments we make to each other and the standards by which we measure each other’s performance: • You take it on and make it happen. • You help others to be successful. • You are a step ahead.
Communication is also an important part of employee engagement. Global and local communication teams collaborate to make sure employees are engaged in our strategy and direction on a global and local level. In 2016, we also undertook roadshows around the globe where our CEO and Management Board Banking members visited 16 countries to help explain the acceleration of the Think Forward strategy. A further 12 visits are also planned for early in 2017.
The EVP consists of two layers: • Distinctive: These are the promises that make ING
The Top Employer Institute is an independent organisation that measures employee offerings against an international standard. For employees, the classification illustrates that ING is a top-ranked company in its culture, in how we deal with each other and in the way we deal with human talent. The Top Employer Institute gave individual certificates to Spain, Poland, France, Belgium and the UK as well as awarding us Top Employer Europe status.
We are also working to improve performance management through the Step up Performance Management practice. It replaces a backward-looking review process with real-time improvement that aims to empower employees and make them more personally accountable for their own performance and growth.
• Recognition management: An approach where managers are fully empowered and responsible for continually deciding on tailored recognition including financial recognition in line with standard guidelines.
Development and training ING encourages employees to take the lead in their own personal and career development. It allocates a budget for employees for training, professional development and personal development. Around EUR 70 million was spent on training and development in 2016.
Work-life balance We need people to be at their best. That can only happen when they are rested, healthy and enjoying life. ING is an ambitious company and that can bring challenges as employees seek to combine their personal and professional commitments. Nevertheless, we are committed to a positive work-life balance. Local HR teams support this ambition with tailored worklife balance programmes to suit both business and employee needs.
Managing performance Stepping up performance management A strong performance culture is needed if the bank is to achieve its ambitions and deliver on its Customer Promise.
Supporting colleagues in transition We recognise that it is not always easy for colleagues to find new jobs within the banking industry. ING is committed to helping employees to find new roles and/ or supporting them in learning new skills so they are better equipped for their next role, whether that be inside or outside of ING.
ING always aims to treat employees with respect and communicate with them fairly and transparently. How we consult employees depends on local legislation and culture. In some countries, employee consultation is a legal requirement. In much of Europe it is arranged via works councils. At a bank-wide level, ING aims to encourage local employee participation in countries where employee consultation is not already formally established.
Changing resource requirements Like all companies, ING periodically restructures activities in line with business requirements. In some instances this may lead to job losses.
It is always extremely difficult to announce such proposals, because of the possible consequences for many colleagues. We intend to build on our good track record of treating affected colleagues with respect and care, doing our utmost to help them find new job opportunities.
We understand the sensitivities around data collection and privacy and comply with legal and regulatory requirements. We are transparent about how we handle customer data and seek customer consent when using data to personalise our offering. (see Data privacy and security below).
We continuously invest in our security organisation and systems to protect the data of customers. In a world where cyber-attacks are on the rise, both in frequency and intensity, we have created an agile cybercrime resilience control environment designed to predict, protect against, detect, respond and mitigate e-banking fraud, distributed denial of service (DDoS) attacks and targeted attacks.
efficiently to regulatory demands and new technology standards in the rapidly evolving digital environment.
In addition to consumer loans, the identified processes include contact centre operations, opening a current account, getting a mortgage, small business loans and Wholesale Banking lending.
Shared services We took steps in 2016 to improve the operational excellence of our shared services and align bankwide support functions such as Procurement, Human Resources, Finance and Risk Management. We are looking to further centralise operational and IT tasks by bringing people together to create larger, more specialised skill pools in single locations. This could mean transferring some activities to shared service centres, for example in Bratislava or Bucharest, or outsourcing others to external providers as part of our strategy to converge to one digital banking platform.
Improving the customer experience – continued come up with innovative ways to improve the customer experience. A total of 1,194 ideas were submitted to the third edition in 2016. The winners receive funding to develop their concepts further. Innovations from previous Bootcamps that were commercially released in 2016 include Startarium, a starter platform for entrepreneurs in Romania, Direct Lease, for small and medium-sized enterprises in Belgium and the Netherlands, and digital safety box Safe & Sound in Germany.
In total, 16 employee innovations have been transferred to the business since 2014. Some are still in development. Six were shelved. One of these is Kid’ING, an app to help teenagers become more money literate. It won the 2015 Innovation Bootcamp but the pilot in Belgium only attracted 250 users. In 2016, we also pulled our instant payments app Twyp (The Way you Pay) from the Dutch market following feedback from users that they preferred their existing mobile banking app. Twyp is still widely used in Spain where the mobile banking apps have less functionality.
Connect and cooperate We work in an agile way to bring products and services to market quickly and use customer feedback to improve and develop propositions for a better customer experience. We also partner with external financial technology companies – usually start-ups – whose technologies and propositions we can adopt or embed to move even faster. In return, these fintechs benefit from our strong brand, extensive network and large customer base. The ING Innovation Studio links start-ups with internal teams globally to develop ideas into viable products and services.
Our fintech partnerships are spread across several countries and business areas such as instant lending, payments and money management.
At the end of 2016, ING had more than 65 fintech partners, of which we invested in 11. Among these are Zervant, an e-invoicing and money management platform for Belgian SMEs, and Kabbage, an alternative credit scoring method incorporated into our SME lending proposition in Spain. Thirteen partnerships were stopped, mostly after unsuccessful or unsatisfactory proof of concepts.
Creating a culture of innovation Next to operational excellence we will continue to innovate to remain relevant to customers in a digital world. By being innovative we can turn ideas into products faster and use new technologies, like blockchain and artificial intelligence, to improve our efficiency, make things easier for customers and define future competitive advantage. In future, customers could even interact with smart machines (robots or virtual personal assistants and smart advisors) rather than with impersonal menus and buttons on a phone.
Another way we source ideas is through our annual Innovation Bootcamp. It encourages employees to
• Formulates and implements policies and procedures, sets limits and risk appetite
Although these aspects are commercial in nature, there is a major impact on the risk management function. As distribution and communication channels become more direct and are available 24/7, customers expect instant and continuous access to their funds and our services. Our risk management function must evolve accordingly. Therefore, ING has introduced a number of initiatives to further improve the customer experience and to simplify, standardise and automate our core risk processes. This resulted in a new risk organisation starting on 1 March 2017. Risk management helps ensure that we provide this convenience without compromising on our risk standards.
In 2016, ING Bank maintained its liquidity position on a consolidated level above minimum requirements. ING Bank issued EUR 9.5 billion long-term debt, including EUR 7.5 billion of long-term senior unsecured debt and EUR 1.0 billion of CRD IV eligible Tier 2 securities. ING Bank’s loan-to-deposit ratio, excluding securities that are recorded at amortised costs, rose to 1.05 compared to 1.04 at the end of 2015, mostly due to growth of the loan book.
Corporate Audit is the bank’s third line of defence. It tests and evaluates the risk governance and management, as well as its internal control processes. It provides an independent and objective assessment to improve the functional effectiveness of the first two lines.
The ESR policy framework gives ING Bank a competitive advantage by helping us to stay a step ahead as new environmental, social and human rights regulations are implemented globally. It is regularly updated to help ING and our clients enhance gradually the implementation of key standards of the UN Guiding Principles on Human Rights and the OECD Guidelines for Multinational Enterprises. Hence, the ESR policy framework also provides guidance for compliance with new directives and government decisions to combat climate change.
ING Bank also works on strengthening its global cybercrime resilience including strong collaboration against cybercrime with the financial industry, law enforcement authorities, government (e.g. National Cyber Security Center) and Internet Service Providers (ISPs).
In 2016, 4,433 wholesale lending engagements were assessed under the ESR policy framework. Engagements categorised as ESR low (86%) and medium risk (8%) were managed by local and regional risk management, whereas engagements categorised as ESR high risk (5%) required specialised advice by the ESR Department headquartered in Amsterdam. In 2016, this Department issued 214 advices which followed a deeper ESR assessment. Out of 214 cases related to high-risk engagement 47% received ESR positive advice, 26% negative and 27% were granted positive advice subject to conditions. These improvements play an important role in the transition towards an improved environmental and social performance on the ground.
The ESR policy framework contributed to ING being ranked the most sustainable bank out of 395 banks in 2016 by Sustainalytics, a global provider of environmental, social and governance (ESG) research and ratings. And we were again included in the DJSI World Index and the Europe Index in the category “banks”.
By participating in the above initiatives, we aim to contribute positively to a level playing field that provides feasible and pragmatic feedback reflecting the views of our clients, shareholders, employees, regulators and other stakeholders.
• We recognise that regulators are increasingly concerned with climate change risk as more countries ratify the Paris Agreement. We participate in a number of climate change initiatives, including round tables. And ING has been engaging with the Financial Stability Board Task Force on Climate-related Financial Disclosures, which is developing voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to stakeholders.
• ING and Biodiversity: As a member of the Round Table for Sustainable Palm Oil (RSPO), we participate in the RSPO Financial Institutions Task Force, which discusses issues linked to deforestation in the palm oil supply chain. In 2016, we supported the disclosure of concession maps of palm oil suppliers’ plantations in Southeast Asia. This improves transparency and addresses illegal deforestation and fire monitoring by attributing land to the owners.
• During 2016, we actively supported the Cross-Sector Biodiversity Initiative (CSBI), a partnership between the oil & gas industry (IPIECA), mining and metals (ICMM) and the Equator Principles Association to develop and share good practices related to biodiversity and ecosystem services.
On 6 April 2016, ING Bank 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 notes.
Bank Recovery and Resolution Directive Since its adoption by the European Parliament in 2014, the Bank Recovery and Resolution Directive (BRRD) has come into effect in most EU countries after transposition into national law, including in the Netherlands. The BRRD aims to safeguard financial stability and minimise the use of public funds in cases where banks face financial distress or fail. To comply with the new rules, banks across the EU need to have recovery plans in place and to cooperate with resolution authorities to determine and make feasible the preferred resolution strategy.
ING Group’s fully-loaded common equity Tier 1 ratio was 14.2% at the end of 2016. The proposed dividend, to be paid in May 2017, has already been excluded from ING Group’s capital base, in line with regulatory requirements. The Group’s phased-in common equity Tier 1 ratio at the end of the year increased by 1.2%-point from the previous year to 14.1%, largely due to higher capital and lower RWA. The fully loaded CET1 ratio showed a slightly more positive development compared to the phased-in ratio which is largely explained by the larger reduction of the deduction of significant investments in financial institutions due to the sale of the NN Group shares. ING Group’s phasedin (transitional) common equity Tier 1 ratio of 14.1% is well in excess of the 10.25 % common equity Tier 1 2016 requirement and the 9.0% common equity Tier
Dividend ING’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.
Read more in the “Corporate governance” chapter on the share capital of ING Group.
Shareholders and ADR holders with stakes of 3 percent or more Pursuant to the Dutch Financial Supervision Act, shareholders and holders of ADRs 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%. As of 31 December 2016, ING Group is not aware of shareholders, potential shareholders or investors with an interest of three percent or more in ING Group other than BlackRock Inc. and Artisan Investments GP LLC.
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Score: 75 (out of 100) Position: 6 (out of 196 financial peers)
Score: 53 (out of 100) Position: Included 1 Ranked 1st and Industry Leader of 395 listed banks by Sustainalytics in August 2016. 2 Starting 2016, CDP no longer separates disclosure and performance scores. A score of “A” represents the highest possible score across disclosure, awareness, management, and leadership evaluation.
Important dates in 2017 1 2017 Annual General Meeting 8 May 2017 Ex-date for final dividend 2016 (Euronext Amsterdam)
About this report also publish a concise and accessible online overview of our results in 2016 on ING.com. This aims to share our key figures and impacts with customers and society in a clear and easy way.
Reporting guidelines ING’s integrated report, including the Non-financial Appendix, is prepared in accordance with “the GRI Standards: Comprehensive option” and Dutch Accounting Standard 400. The content and quality criteria specified by the standards (for example: sustainability context, stakeholder inclusiveness, materiality, completeness, balance, comparability, accuracy and reliability) are integral to our reporting process. The Framework of the International Integrated Reporting Council served as a reference in drawing up the content for this report, particularly for our value creation model.
Scope and boundaries Through our materiality assessment we ensure that all material economic, social and environmental topics are addressed in this report. The report covers the period 1 January to 31 December 2016 and is published on 16 March 2017. The data and content in the integrated report and Non-financial appendix aim to provide a concise, accurate and balanced account of ING’s economic, social and environmental performance in 2016. Depending on the topic, our approach and performance are explained either in text, by referring to our policies or by providing data and progress on targets.
Our response: We reviewed the process that ING Group executed to identify and prioritize the Non-financial Information to be reported in the Report of the Executive Board. We also conducted a media search and a peer benchmark to assess potential material other topics to be included and compared these with the Company’s materiality assessment. We reviewed the results from the materiality assessment against the Non-financial Information included.
A review is aimed to obtain a limited level of assurance. Procedures performed to obtain a limited level of assurance are aimed at determining the plausibility of information and are less extensive than a reasonable assurance engagement. The procedures performed consisted primarily of making inquiries of staff within the entity and applying analytical procedures on the information in scope. The level of assurance obtained in review engagements is therefore substantially less than the level of assurance obtained in an audit engagement.
Topics on the agenda In the “Report of the Supervisory Board” chapter you can read more about the subjects we discussed and about the most important topics on our agenda in 2016. I highlight a few of these here.
In 2016 there were a large number of new regulatory initiatives related to bank capitalisation, as well as continued uncertainty about how and when additional proposed measures might be implemented. The Supervisory Board had many discussions on how these requirements could develop and on how to define a safe and adequate capital level. ING supports a stable and safe banking sector. However, looking at all the requirements regarding capital and regulatory costs, we are concerned about the cumulative effects of these measures and about the level playing field in Europe. There is still an urgent need for more coordination to ensure banks can continue to play their vital role in stimulating economic growth.
We also have diversity of expertise and thought in our Supervisory Board. At a time of rapid change for the bank, it is helpful to have a Supervisory Board that is based not just on financial experience, but also on expertise from various other backgrounds and industries. In my view you can always learn from this, especially regarding change. One of the Supervisory Board’s tasks is to reflect on the risks of change. What risks are involved in doing new things? What are the risks of not changing? Drawing on diversity of thought is helpful in finding the answers.
Commitment ING is in a process of change, building upon its position of strength. I realise that change is not easy, especially when it impacts many of ING’s employees. I am therefore all the more impressed by the enthusiasm of our people, their preparedness for and commitment to change, to go in new directions, to put the strategy into practice and to serve ING’s customers every day. Thanks to the dedication and hard work of ING’s employees, ING has been able to book good results and to earn a position as one of the digital leaders among Europe’s banks.
Sustainability & diversity Sustainability and diversity are important to be successful. They require a long-term view, and I believe that is a key element of building a great company. I am proud of what ING has achieved in the field of sustainability. You can read more about ING’s achievements in this report.
In September 2016, the Supervisory Board visited Hong Kong and Beijing for four days, allowing it to get a better understanding of the Asian business activities and how these relate and contribute to ING’s strategy. Presentations included Asian economics, trends and challenges, ING’s business and footprint in Asia, including ING’s relationship with the Bank of Beijing, and insights into Asian financial industry fintechs and disruptors such as Alibaba, WeChat and WeLab. The Supervisory Board members also met with various clients and government officials. A number of other educational sessions on specific topics were organised for the Supervisory Board throughout the year, including ones addressing various developments in the regulatory and external supervision landscape, financial reporting including IFRS 9, compliance, sustainability and risk and capital management.
The Supervisory Board self-assessment was also on the agenda. The action points resulting from last year’s self-assessment were acted upon during the year. As was the case in the previous year, an independent external party facilitated the 2016 self-assessment process for the (members of the) Supervisory Board and its committees by drafting the questionnaires as well as the reports with the results. The questionnaires built upon the ones from the previous year were designed in such a way that a comparison between two consecutive years could be made. Similar as for 2015, input was also requested from several executives who regularly interact with the Supervisory Board and attend Supervisory Board meetings. The questionnaires were completed in December 2016, after which in the first quarter of 2017 bilateral meetings were held between the chairman of the Supervisory Board and each member (for the chairman, a bilateral meeting was held between the vice-chairman and the chairman). The respective committee results were then discussed in each committee meeting, with the overall results and conclusions being discussed in the internal Supervisory Board meeting (without the Executive and Management Board Banking members present). In general, the performance of the committees was rated highly overall and the performance of the Supervisory Board was considered to at least have been maintained and even improved in several areas since last year’s review. A number of suggestions were made as priorities for
The Supervisory Board also met in closed sessions, with Supervisory Board members only, in advance of the regular Supervisory Board meetings. The purpose of these pre-meetings is to have a “check-in” and to provide the possibility for airing early concerns in advance of the regular meetings.
Audit Committee meetings In 2016, the Audit Committee met six times. On average, 96 percent of the members were present at the scheduled meetings.
Risk Committee meetings The Risk Committee met four times in 2016 with no absentees. As with the meetings of the other committees, all relevant items discussed by the Risk Committee were reported to the Supervisory Board with the Supervisory Board approving those items as required from a governance perspective.
Nomination Committee meetings The Nomination Committee met seven times in 2016 with no absentees.
In addition, the outcomes and achievements following the Annual Talent Review were discussed. The approach for this year’s process was shared with the Supervisory Board and the 2016 results were discussed in January 2017. Both the process and reporting had improved resulting in increased transparency. Improving diversity at the higher management levels, senior management succession planning and accelerating refreshment continued to be focus points. Special attention was also paid to performance management and how to enhance the process and its effectiveness by means of fostering continuous conversations between managers and employees throughout the year. Attention was also paid specifically to regrettable losses among senior managers who left ING in 2016 for various reasons.
Remuneration Committee meetings In 2016, the Remuneration Committee met seven times with no absentees.
The Remuneration Committee reviewed the thresholds above which the pool for variable remuneration may be used for actually granting variable remuneration. It discussed the variable remuneration pool and reviewed the performance assessment for the Executive Board, Management Board Banking, as well as the variable remuneration proposals. The remuneration proposals for Identified Staff were also reviewed, including potential cases for holdback of deferred compensation by way of malus.
Read more in the “Corporate Governance” chapter on the composition of the Supervisory Board committees at year-end 2016.
The Nomination Committee and the Supervisory Board will continue to strive for an adequate and balanced composition of the Supervisory Board when selecting and nominating new members for appointment, taking into account ING’s diversity policy among other factors.
Appreciation for the Executive Board and ING employees The Supervisory Board would like to thank the members of the Executive Board and the Management Board Banking for their hard work in 2016. Important milestones were the successful completion of the NN Group divestment that led to deconsolidation of NN Group and the sale of a remaining stake of 14.1 percent in April 2016. Also, the delivery on ING’s ambitions and purpose through the Think Forward strategy is something to be proud of, as is the delivery of a programme to further accelerate this strategy to create a scalable banking platform to cater for continued commercial growth, an improved customer experience and a quicker delivery of products. The Supervisory Board would like to thank all ING employees for their contribution in realising this and for continuing to serve the interests of customers, shareholders and other stakeholders of ING.
This chapter reports on the application of the Dutch Corporate Governance Code effective as from 1 January 2009 (“Corporate Governance Code”), at ING Groep N.V. (“ING Group”), including information on ING’s share capital, control, Executive Board, Supervisory Board and external auditor.
Legislative and regulatory developments On 11 February 2016 the proposal for revision of the Corporate Governance Code was published by the Corporate Governance Code Monitoring Committee. The final version of the revised Corporate Governance was published on 8 December 2016. The Code is based on the “comply or explain” principle and applies as from the financial year 2017.
The Corporate Governance Code can be downloaded from the website of the Dutch Corporate Governance Code Monitoring Committee (www.commissiecorporategovernance.nl).
• The shareholder approval requirements for equity compensation plans under Dutch law and the Corporate Governance Code differ from those applicable to US companies that are subject to NYSE’s listing rules that require a shareholder vote on all equity compensation plans applicable to any employee, director or other service provider of a company. The results of such votes are advisory in nature rather than binding. Under Dutch company law and the Corporate Governance Code, binding shareholder approval is only required for equity compensation plans (or changes thereto) for members of the executive board and supervisory board, and not for equity compensation plans for other groups of employees.
Capital Capital structure The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to the ING Continuity Foundation (“Stichting Continuïteit ING”). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issuance of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 93).
Issuance of shares Share issuances are decided by the General Meeting, that may also delegate its authority. Each year, a proposal is made to the General Meeting to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights to existing shareholders.
In the context of ING’s corporate governance review that was performed in 2015-2016 the authorisation of the Executive Board to issue ordinary shares was revised. The new set-up and content has been discussed with many investors, proxy advisors and other stakeholders and ING has taken into account their feedback.
Repurchase of shares ING Group may repurchase issued shares. Although the power to repurchase 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, a proposal is made to the General Meeting to authorise the repurchase of shares by the Executive Board.
Pursuant to this authorisation, no more than 10% of ING Group’s share capital may be held as treasury shares. When repurchasing shares, the Executive Board must observe the price ranges prescribed in the authorisation. For the ordinary shares , the authorisation currently in force stipulates a minimum price of one eurocent and a maximum price equal to the highest stock price on the Amsterdam stock exchange on the date on which the purchase agreement is concluded or on the preceding day of stock market trading.
ING Group is not aware of any investors (or potential shareholders) with an interest of three percent or more in ING Group other than those shown on page 63 as per year-end 2016.
ING Group held an Investor Day on 3 October 2016. “Accelerating Think Forward” was the theme of the strategy update that CEO Ralph Hamers and other executives presented at this event, which was held in Amsterdam, the Netherlands.
General Meeting Frequency, notice and agenda of General Meetings ING’s General Meeting is normally held each year in April or May to discuss the course of business in the preceding financial year on the basis of the reports prepared by the Executive Board and the Supervisory Board, and to decide on: • The distribution of dividends or other distributions; • The appointment and/or reappointment of members of the Executive Board and the Supervisory Board; • Any other items requiring shareholder approval pursuant to Dutch law; and • Any other matters proposed by the Supervisory Board, the Executive Board or shareholders in accordance with the Articles of Association.
General Meetings are convened by public notice via the ING Group website (www.ing.com) at least 42 days before the day of the General Meeting. As of the date of convening a General Meeting, all information relevant for shareholders is made available via the ING Group website and through its head office.
Proposals by shareholders Proposals to include items on the agenda for a General Meeting that have been adequately substantiated under applicable Dutch law can be made by shareholders representing together a certain interest in ING’s share capital. As of 26 July 2016 the Articles of Association of ING Group were amended to the effect that this interest should represent at least one per cent of the issued share capital.
Dialogue with shareholders Shareholders are given the opportunity to contact ING about the Annual General Meeting, via the Annual General Meeting dedicated web page on the website of ING Group (www.ing.com).
General Meetings are webcast via ING Group’s website (www.ing.com), so that shareholders who do not attend the General Meeting in person may nevertheless follow the meeting online.
• The issuance of shares or rights to subscribe for shares, the restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board.
Candidates for appointment to the Executive Board must comply with the suitability and reliability requirements as set out in the Dutch Financial Supervision Act and must continue to meet these while in function.
Profile of members of the Executive Board The Supervisory Board has drawn up a profile to be used as a basis for selecting members of the Executive Board. It is available on the website of ING Group (www.ing.com) and at the ING Group head office.
Supervisory Board Appointment, suspension and dismissal Members of the Supervisory Board are appointed, suspended and dismissed by the General Meeting. For the appointment of Supervisory Board members, the Supervisory Board may draw up a binding list, which may be rendered non-binding by the General Meeting.
Function of the Supervisory Board The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of affairs of ING Group and its business, as well as to provide advice to the Executive Board.
ING’s wide range of activities that such individuals may become members of the Supervisory Board of ING Group. Former Executive Board members must wait at least one year before becoming eligible for appointment to the Supervisory Board.
Former members of the Executive Board are not eligible for appointment to the position of chairman or vicechairman of the Supervisory Board, unless they are independent within the meaning of the Corporate Governance Code.
ING Group needs to balance several relevant selection criteria when composing its Supervisory Board but strives for an adequate and balanced composition of the board by taking into account all relevant selection criteria including, but not limited to, experience in retail and wholesale banking, gender balance, executive experience, experience in corporate governance and experience in the political and social environment.
Corporate Governance - continued exception of Eric Boyer de la Giroday, are to be regarded as independent on 31 December 2016. Eric Boyer de la Giroday is not considered independent because of his position as Chairman of the Board of Directors of ING Belgium S.A./N.V. and his former positions as member of the Executive Board of ING Group and vice-chairman of the Management Board Banking of ING Bank N.V. On the basis of the NYSE listing standards, all members of the Supervisory Board are to be regarded as independent.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING Group’s internal and external auditors. On 31 December 2016, the members of the Audit Committee were: Hermann-Josef Lamberti (chairman), Eric Boyer de la Giroday, Isabel Martín Castellá, and Robert Reibestein. No member of the Audit Committee was considered as a “financial expert” as defined by the SEC in its final rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. Eric Boyer de la Giroday is a financial expert as defined in the Corporate Governance Code considering his academic background as well as his knowledge and experience in his previous role as board member and vice-chairman of ING Groep N.V. and ING Bank N.V.
The Nomination Committee’s tasks include advising the Supervisory Board on the composition of the Supervisory Board and Executive Board. On 31 December 2016, the members of the Nomination Committee were: Jeroen van der Veer (chairman), Henk Breukink and, Isabel Martín Castellá.
More information on ING’s regulations regarding insiders can be found at www.ing.com/16ar7.
Relevant positions pursuant to CRD IV: Chairman of the Supervisory Board of ING Groep N.V./ ING Bank N.V., Chairman of the Supervisory Board of Koninklijke Philips Electronics N.V., Member of the Supervisory Board of Koninklijke Boskalis Westminster N.V. and Member of the Supervisory Board of Statoil ASA.
Other relevant ancillary position: Non-Executive Director of Instituts Internationaux de Physique et de Chimie fondé par Ernest Solvay, asbl.
Former Managing Director of F&C and country head for F&C Netherlands (asset management firm).
Other relevant ancillary position: Member of the Supervisory Board of Stichting World Wildlife Fund.
External auditor At the Annual General Meeting held on 11 May 2015, KPMG was appointed as the external audit firm for ING Group for the financial years 2016 through 2019. This appointment includes the responsibility to audit the financial statements of ING Group for the financial year 2016, to audit the effectiveness of internal control over financial reporting on 31 December 2016, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Additionally KPMG performs a review of the sustainability information in the annual report to obtain limited assurance about whether this information is free from material misstatement.
ING Group provides the Audit Committee with a full overview of all services provided by the external auditor, including related fees, supported by sufficiently detailed information. This overview is periodically evaluated by the Audit Committee throughout the year.
Depositary receipts Prior 26 July 2016, more than 99.9 percent of the issued ordinary shares were held by ING Trust Office (“Stichting ING Aandelen”). In exchange for these shares, ING Trust Office issued depositary receipts. These depositary receipts were listed on various stock exchanges (see page 63 for an overview of the listings). Depositary receipts could be exchanged upon request of the holders of depositary receipts for non-listed ordinary shares, without any restriction, other than payment of an administrative fee of one eurocent (EUR 0.01) per depositary receipt with a minimum of 25 euros (EUR 25.00) per exchange transaction.
Voting on the ordinary shares by holders of depositary receipts as proxy of ING Trust Office during 2016 Although the depositary receipts for shares did not formally carry any voting rights, holders of depositary receipts, in practice, ranked equally with shareholders with regard to voting. ING Trust Office granted, subject to certain restrictions, a proxy to a holder of depositary receipts allowing such holder, in the name of ING Trust Office, to exercise the voting rights attached to the number of ordinary shares that corresponds to the number of depositary receipts held by such holder of depositary receipts. On the basis of such a proxy, the holder of depositary receipts could vote such shares according to his or her own discretion.
• The relevant holder of depositary receipts could delegate the powers conferred upon him or her by means of the voting proxy, provided that the relevant holder of depositary receipts had announced his or her intention to do so to ING Trust Office observing a term before the commencement of the General Meeting, which term was determined by the ING Trust Office.
Voting instructions of holders of depositary receipts to ING Trust Office Holders of depositary receipts not attending a General Meeting were entitled to give binding instructions to ING Trust Office, concerning ING Trust Office’s exercise of the voting rights attached to the ordinary shares. ING
Activities Board meetings During the 2016 Reporting Year, the board of ING Trust Office (the “Board”) held seven meetings. The topics discussed in these meetings included: • the Annual General Meeting of ING Group (“AGM”) of 25 April 2016, the items on the agenda of the AGM, the proxy voting results and the voting by ING Trust Office during the AGM 2016; • the annual report and the annual accounts of ING Trust Office, the results of the audit concerning the book year 2015 and the applicable accountancy rules; • the corporate governance review of ING Group, including the preparation and the completion of the exchange of depositary receipts of ING Group into shares of ING Group; • press releases of ING Group; • the functioning of ING Trust Office and the composition of the board; • the meeting and the preparation of the meeting of holders of depositary receipts of 25 April 2016; • developments at ING Group on the basis of the quarterly report Q1 2016, the annual report of ING Group and the presentations of ING Group to analysts; and
Meetings with ING Group During the 2016 reporting year, the board had two meetings with the chairmen of the Executive Board and the Supervisory Board of ING Group. In these meetings, among other things, the following topics were discussed: • the results of ING Group as reported in the annual report 2015 and the results of Q1 2016; • the corporate governance review of ING Group, including the preparation and the completion of the exchange of depositary receipts of ING Group into shares of ING Group; • the ratio requirements imposed by the ECB, Basel and the Financial Stability Board; • the legal structure of ING; • several topics of the agenda of the AGM 2016, such as the proposal to amend the corporate governance resulting in the abolishment of the depositary receipt structure and the share issue authorisation; • risk related costs and exposure in certain countries; • IT strategy and IT investments; • the development of the cost/income ratio and of risk costs; • impact of fintechs on the financial sector; and • innovation.
The main topic of this meeting was the decision of the Executive Board and the Supervisory Board to abolish the depositary receipt structure subject to the condition that the AGM resolved to amend the Articles of Association of ING Group. The board explained its intention to amend the Trust Conditions to facilitate a swift exchange of depositary receipts ING for ordinary shares ING.
Moreover a report was made on the activities of ING Trust Office and the board answered various questions from holders of depositary receipts attending the meeting. The minutes of the aforementioned meeting are published on the website of ING Trust Office (www. ingtrustoffice.com).
Abolition of depositary-receipts structure As announced in the 2014 Annual Report of ING Group, ING Group conducted a review of the company’s corporate governance, including the depositary receipt structure, in 2015. ING Trust Office was informed by and discussed with ING Group the key elements of the proposed amendments to the corporate governance. One of these elements was the proposal to abolish the depositary receipt structure. In this respect, ING Trust Office was informed that ING Group recognised the increased attendance rates at the AGM’s over the past five years. During the years 2010-2016, participation of shareholders, other than ING Trust Office, and holders of depositary receipts in the decision-making process in annual general meetings of ING Group continually increased from 41.3 percent to around 57 percent. On average, the attendance rate was 54% over the past three years.
Depositary receipts On 25 July 2016, the day before the Conversion Date, the nominal value of administered ordinary shares amounted to EUR 930,711,798 for which 3,877,965,825 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts increased by 7,791,484.
In 2016 the board of ING Continuity Foundation (the “Board”) held two meetings, on 5 April and 28 November.
Internal control over financial reporting Due to the listing of ING shares on the new York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant op Section 404 of the Sarbanes-Oxley Act, SOX 404.
• Provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use of disposition of our assets that could have a material effect on our financial statements.
The Board of Directors and Stockholders ING Groep N.V. We have audited ING Groep N.V.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Report of the Executive Board on Internal Controls over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with international financial reporting standards, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
ING’s remuneration policy forms an integral part of our strategy, performance culture and risk management framework. Its objective is to enable ING to retain and recruit expert leaders, senior staff and other highly qualified employees to ensure we meet our responsibilities towards stakeholders, now and in the future.
Considering ING’s international footprint and in order to maintain its competitive position, the Executive Board and the Supervisory Board wish to continue the possibility to apply increased caps outside the EEA.
Remuneration report - continued starting in 2017, and can only be applied to staff outside the EEA working in the Corporate Staff, Wholesale Banking and Retail Banking business lines. The total number of staff that may be awarded more than 100% variable remuneration will constitute no more than 1% of the global ING staff base. The increased caps will not limit the ability of ING to strengthen its capital base.
To ensure the autonomy of staff in control functions (such as risk management functions), financial performance metrics are dependent on objectives determined at the next higher organisational level (i.e. not at the level of the business they directly control) and the functional line is in the lead for the performance assessment.
Total direct compensation The Executive Board remuneration policy aims to award total direct compensation slightly below the median of comparable positions in the chosen peer group.
Bearing in mind international scope, complexity, revenue, assets and market capitalisation, the companies in the Euro Stoxx 50 index are the appropriate peer group for ING. The index comprises 50 companies, including ING, in a range of financial and non-financial industries from 12 countries within the Eurozone, mainly operating in an international context. Total direct compensation is determined in line with the relevant international market environment and reviewed periodically by the Supervisory Board. ING’s Executive Board remuneration policy is compliant with applicable laws and regulations, including the WBFO, the Dutch Banking Code and the Dutch Corporate Governance Code.
The policy provides for an at-target variable remuneration of 16% of base salary if performance criteria are met. If performance criteria are exceeded, the variable component can be increased by the Supervisory Board from target to maximum, but may not exceed 20% of base salary at the time of award. If performance is below target, the variable component will be decreased, potentially down to zero.
The Executive Board remuneration policy combines the short- and long-term variable components into one structure, aiming to support both long-term value creation and short-term company objectives. The emphasis on long-term performance indicators within the variable component of the compensation package is increased by means of deferral, retention, holdback and clawback mechanisms.
Pension As of 1 January 2015, all members of the Executive Board participate in the Collective Defined Contribution (CDC) pension plan with respect to their salary up to a certain amount. As of 1 January 2016 this amount was set at EUR 101,519 per year. As is the case with all employees who earn a salary above that amount per year, the Executive Board members are compensated for the lack of pension accrual by means of a savings allowance to be annually determined (see further details on page 101).
The Supervisory Board has the authority to impose holdback and/or clawback on variable remuneration awarded to a member of the Executive Board based on the same criteria that apply to all staff within ING (including inaccurate data and/or behaviour that led to significant harm to ING). The Supervisory Board also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in undesired outcomes. The Supervisory Board has decision-making authority in situations not addressed in the policy.
• Strengthening ING’s high performance culture through the Step Up Performance Management and Think Forward Leadership programmes
• Invested in capability building of senior leaders at Management Board level and two hierarchical levels below, as well as all employees in Spain and senior managers in Belgium, ahead of a global roll-out in 2017 of the Step Up Performance Management programme.
• Demonstrated excellent performance on sustainability in the ratings (e.g. ranked as number one Sustainable Bank out of 395 publicly listed banks by sustainability research leader Sustainalytics and scored 90 out of 100 in the Dow Jones Sustainability Indexes compared to an average industry score of 61).
• Grew core lending by EUR 34.8 billion (6.5%); increased customer deposits by EUR 28.5 billion (5.6%).
In 2016, no holdback or clawback was applied to paid, unvested or vested variable remuneration of any of the Executive Board members. The total direct compensation of former members of the Executive Board amounted to nil for 2016, nil for 2015 and nil for 2014.
Variable remuneration (fully in shares) ¹ 217 15,838 153 14,850 - -
Variable remuneration (fully in shares) ¹ 217 15,838 189 18,278 - 1 The number of shares is based on the average ING stock price on the day on which the 2016 year-end results were published. The shares will be awarded in May 2017.
Other emoluments amounts in thousands of euros 2016 2015 1 2014 1 The significant increase in 2015 results from the introduction of savings allowances to compensate for the loss of pension accrual for salary above EUR 100,000 and the increase in base salaries in that year.
Benefits The individual members of the Executive Board receive other emoluments, including savings allowances for the loss of pension benefits for salary above EUR 101,519, employer contributions to savings schemes, reimbursement of costs related to home/work commuting, costs associated with company cars and housing (for expats).
LSPP Upfront 1 Shares granted to Ralph Hamers in March 2013 and 2014 were awarded for his performance in positions prior to his appointment to the
For the Executive Board members the following shares vested during 2016:
ING shares held by Executive Board members Executive Board members are encouraged to hold ING shares as a long-term investment to maintain alignment with ING. The table below shows an overview of the shares held by members of the Executive Board at 31 December 2016, 2015 and 2014.
In accordance with guidelines issued by the European Banking Authority (EBA), the variable remuneration of the members of the Executive Board will, as from 2017, be subject to tiered vesting over a period of five years. This will be applied for the first time in 2018 with regard to variable remuneration earned for the performance year 2017.
The current Supervisory Board remuneration structure is set out in the below table: Supervisory Board remuneration structure Amounts in thousands of euros Annual remuneration Chairman Supervisory Board 125 Vice Chairman Supervisory Board 95 Supervisory Board Member 70 Committee fees (annual amounts) Chairman Committee (excluding Corporate Governance Committee) 20 Member Committee (excluding Corporate Governance Committee) 10 Chairman Corporate Governance Committee 7,5 Member Corporate Governance Committee 5 Attendance fees (per meeting) Attendance fee outside country of residence 2 Attendance fee outside continent of residence 7,5
In addition, members of the Supervisory Board are reimbursed for travel and business expenses.
4 Ann Sherry is a member of the Supervisory Board as of 25 April 2016. The remuneration figures for 2016 reflect a partial year as a member of the Supervisory Board.
Loans and advances to Supervisory Board members Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The Supervisory Board members do not receive privileged financial services. Currently there are no loans and advances outstanding to Supervisory Board members.
ING shares and employee stock options held by Supervisory Board members Supervisory Board members are permitted to hold ING shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board at 31 December 2016, 2015 and 2014.
Parent company annual accounts Parent company statement of financial position 322 Parent company statement of profit or loss 323 Parent company statement of changes in equity 324 Accounting policies for the parent company annual accounts 326 Notes to the parent company annual accounts 327
Share of result from associates and joint ventures 7 88 492 138
Exchange rate differences –232 –232 –22 –254 Share of other comprehensive income of associates and joint ventures and other income 251 –265 –14 –14
Investments and advances: – associates and joint ventures –49 –40 –528
Cash and cash equivalents at beginning of year 20,379 17,113 17,180
‘Accounting policies’ – Changes in accounting policies in 2016, on the basis that the change in policy does not comprise a change in actual cash flows for the respective periods.
Notes to the accounting policies Reporting entity ING Groep N.V. is a company domiciled in Amsterdam, the Netherlands. Commercial Register of Amsterdam, number 33231073. These Consolidated annual accounts, as at and for the year ended 31 December 2016, comprise ING Groep N.V. (the Parent company) and its subsidiaries, together referred to as ING Group. ING Group is a global financial institution with a strong European base, offering a wide range of retail and wholesale banking services to customers in over 40 countries.
ING Group applies International Financial Reporting Standards (IFRS) as adopted by the European Union (EU), which are IFRS Standards and IFRS IC Interpretations as issued by the International Accounting Standards Board (IASB) with some limited modifications such as the temporary ‘carve out’ from IAS 39 ‘Financial Instruments: Recognition and Measurement’ (herein, referred to as IFRS).
The central team also finalised an approach for performing the SPPI test and is in the process of performing a detailed analysis of the cash flow characteristics of our financial assets to detect whether they meet SPPI criteria. The SPPI test is performed on groups of assets that have a set of similar characteristics resulting in a homogenous population. Where testing is being performed at a local level, these local teams are trained and supported by the central team to ensure IFRS 9 is understood and implemented consistently across the Group.
Impact ING is currently assessing the impact of IFRS 9 on the classification and measurement of its financial assets. The classification and measurement of financial liabilities remains essentially the same as under IAS 39.
Measurement The calculation of ECL will be based on ING Group’s expected loss models (PD, LGD, EAD) currently used for regulatory capital, economic capital, and collective provisions in the current IAS 39 framework. The IFRS 9 ECL model builds on existing IRB models, removes embedded prudential conservatism (such as PD floors), and includes forward-looking point in time information based on macroeconomic indicators, such as unemployment rates and GDP growth. The expected loss parameters will be determined by using historical statistical relationships and macroeconomic predictions. For the small portfolios outside the IRB approach, existing framework for loan loss provisions will be applied to set the parameters to measure credit risk. The lifetime risk assessment will be based on historical observations enriched with forward-looking information. The data series will be shorter compared to the assets under the IRB approach.
In 2016, enhanced data was collected from all source systems within ING and significant progress has been made in the implementation of IFRS 9 concepts in the central credit risk system. Furthermore, ING Group’s asset portfolios are split into a number of sub-portfolios based on asset class and jurisdiction (e.g. mortgages in the Netherlands) in order to accurately measure ECL.
IFRS 16 ‘Leases’ In January 2016, the IASB issued IFRS 16 ‘Leases’ the new accounting standard for leases. The new standard is effective for annual periods beginning on or after 1 January 2019 and will replace IAS 17 ‘Leases’ and IFRIC 4 ‘Determining whether an Arrangement contains a Lease’. IFRS 16 is not yet endorsed by the EU. The new standard removes for lessee accounting, the distinction between operating or finance leases, resulting in all leases being treated as finance leases. All leases will be recognised on the statement of financial position with the optional exceptions for short-term leases with a lease term of less than 12 months and leases of low-value assets (for example mobile phones or laptops). A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. The main reason for this change is that this approach will result in a more comparable representation of a lessee’s assets and liabilities in relation to other companies and, together with enhanced disclosures, will provide greater transparency of a lessee’s financial leverage and capital employed. The standard permits a lessee to choose either a full retrospective or a modified retrospective transition approach. Furthermore the standard provides some practical options and exemptions to ease the costs of transition. Lessor accounting remains substantially unchanged. ING will adopt the standard at its effective date and is currently assessing the impact of this standard.
The identification of impairment and the determination of the recoverable amount are inherently uncertain processes involving various assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices, and expected net selling prices.
The identification and measurement of impairment is an inherently uncertain process involving various assumptions and factors, including financial condition of the counterparty, expected future cash flows, statistical loss data, discount rates, observable market prices, etc. Estimates and assumptions are based on management’s judgement and other information available prior to the issuance of the financial statements. Significantly different results can occur as circumstances change and additional information becomes known.
Fair values of financial assets and liabilities All the financial assets and liabilities are recognised initially at fair value, whereas financial assets and liabilities classified as held-fortrading or designated at fair value through profit or loss and financial assets classified as available-for-sale are subsequently measured at fair value in financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It uses the assumptions that market participants would use and takes into account the characteristics of the asset or liability that market participants would take into account when pricing the asset or liability. Fair values of financial assets and liabilities are based on unadjusted quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed financial instruments. Where an exchange price is not available, quoted prices in an active market may be obtained from independent market vendors, brokers, or market makers. In general, positions are valued at the bid price for a long position and at the offer price for a short position or are valued at the price within the bid-offer spread that is most representative of fair value in the circumstances. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated. When markets are less liquid there may be a range of prices for the same security from different price sources, selecting the most appropriate price requires judgement and could result in different estimates of fair value.
The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Group controls another entity.
For interests in investment vehicles, the existence of control is determined taking into account both ING Group’s financial interests for own risk and its role as investment manager.
All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies are eliminated to the extent that there is no impairment. Where necessary, the accounting policies used by subsidiaries are changed to ensure consistency with group policies. In general, the reporting dates of subsidiaries are the same as the reporting date of ING Groep N.V.
On consolidation, exchange rate differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, the corresponding exchange rate differences are recognised in the statement of profit or loss as part of the gain or loss on sale.
Realised gains and losses on financial assets For financial assets at amortised cost, realised gains and losses on investments are determined as the difference between the sale proceeds and (amortised) cost. For available-for-sale financial assets, the accumulated fair value adjustments in other comprehensive income are included in the statement of profit or loss when the asset is disposed. For equity securities, the cost is determined using a weighted average per portfolio. For debt securities, the cost is determined by specific identification.
Investments Investments (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale and are initially recognised at fair value plus transaction costs. Investment debt securities and loans quoted in active markets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as available-for-sale financial assets.
Borrowings are recognised initially at their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Repurchase transactions and reverse repurchase transactions Securities sold subject to repurchase agreements (repos) are retained in the consolidated financial statements. The counterparty liability is included in Deposits from banks, Subordinated loans, Customer deposits, or Trading, as appropriate.
Securities purchased under agreements to resell (reverse repos) are recognised as Loans and advances to customers, Loans and advances to banks, or Financial assets at fair value through profit or loss - Trading assets, as appropriate. The difference between the sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method.
Impairments of financial assets at amortised cost ING Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired: • The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance of or delays in repayment of the financial asset; • The borrower has failed in the repayment of principal, interest, or fees and the payment failure has remained unsolved for a certain period;
If there is objective evidence that an impairment loss on an asset carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (Loan loss provision) and the amount of the loss is recognised in the statement of profit or loss under Addition to loan loss provision. If the asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the provision. The amount of the reversal is recognised in the statement of profit or loss.
In most Retail portfolios, ING Bank has a write-off policy that requires 100% provision for all retail exposure after two years (three years for mortgages) following the last default date.
Disposals The difference between the proceeds on disposal and net carrying value is recognised in the statement of profit or loss under Other income.
Share options with fixed or determinable terms are treated as options in the calculation of diluted earnings per share, even though they may be contingent on vesting. They are treated as outstanding on the grant date. Performance-based employee share options are treated as contingently issuable shares because their issue is contingent upon satisfying specified conditions in addition to the passage of time.
g) Parent company accounts The parent company accounts of ING Groep N.V. are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. In accordance with subsection 8 of section 362, Book 2 of the Dutch Civil Code, the recognition and measurement principles applied in the Parent company accounts are the same as those applied in the Consolidated annual accounts.
Cash advances, overdrafts and other balances 3 531 2 425 5 956
In 2016, the decrease is mainly caused by lower market activities.
Trading assets and trading liabilities include assets and liabilities that are classified under IFRS as Trading but are closely related to servicing the needs of the clients of ING Group. ING 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 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, 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 lending. These products are used by ING as part of its own regular treasury activities, but also relate to the role that ING 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 statement of financial position. However, IFRS does not allow netting of these positions in the statement of financial position. Reference is made to Note 14 ‘Financial liabilities at fair value through profit or loss’ for information on trading liabilities.
As at 31 December 2016, Loans and receivables designated at fair value through profit or loss includes EUR 3,001 million (2015: EUR 1,766 million) with regard to reverse repurchase transactions.
Exposure to debt securities ING Group’s exposure to debt securities is included in the following lines in the statement of financial position: Held-to-maturity investments 8,751 7,826
Sub-sovereign Supranationals and Agencies (SSA) comprise amongst others, multilateral development banks, regional governments, local authorities, and US agencies. Under certain conditions, SSA bonds may qualify as Level 1 High Quality Liquid Assets for the Liquidity Coverage Ratio (LCR).
Reference is made to Note 23 ‘Investment income’ for details on Impairments.
The decrease in Loans and advances to customers compared to 2015 is primarily due to a change in accounting policies implemented in 2016. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies in 2016.
As at 31 December 2016, Loans and advances to customers includes receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 47 million (2015: EUR 418 million).
Loans and advances to customers, as at 31 December 2015, increased by EUR 163.5 billion from EUR 537.3 billion to EUR 700.8 billion. Reference is made to Note 1 ‘Accounting policies’ – Change in accounting policies and Changes in presentation in 2016.
Loans and advances to customers and Loans and advances to banks include finance lease receivables and are detailed as follows: 2016 2015 Maturities of gross investment in finance lease receivables
− more than 1 year but less than 5 years 5,635 5,246
Transfers to and From Investments/Other assets and liabilities In 2016 transfers included EUR 82 million reclassification from Available-for-sale equity securities to associates and EUR –7 million reclassification from/to other assets and other liabilities.
Share of results In 2016, Share of results from associates and joint ventures of EUR 88 million as presented in the statement of profit or loss, includes: • Share of results, as presented in the table above of EUR 91 million mainly attributable to results of TMB amounting to EUR 68 million and a gain of EUR 21 million on disposal of shares held in VISA Europe Limited; and • Impairments of investments in associates and joint ventures of EUR –3 million.
Accumulated depreciation as at 31 December –950 –828 –1,740 –1,774 –2,690 –2,602
Accumulated amortisation as at 31 December –1,147 –1,128 –17 –12 –1,164 –1,140
No goodwill impairment was recognised in 2016 (2015: nil). Changes in the goodwill per group of CGUs in 2016 is due to changes in currency exchange rates.
Accrued interest and rents As at 31 December 2016, the line item includes accrued interest of EUR 1,939 million (2015: EUR 2,290 million) on trading derivative assets and EUR 2,773 million (2015: EUR 2,895 million) on loans and available-for-sale bonds. Accrued interest on trading derivative assets should be considered together with accrued interest on trading derivative liabilities as included in Other liabilities. Reference is made to Note 16 ‘Other liabilities’. The remainder of the balance relates mainly to accrued interest on cash flow hedges, fair value hedges and other non-trading derivatives.
Amounts to be settled Amounts to be settled are primarily transactions not settled at the balance sheet date. They are short term in nature and are expected to settle shortly after the balance sheet date. The increase in 2016 is partly attributable to the reclassification of Items to be settled in respect of securities transactions. Items to be settled in respect of securities transactions of nil, at 31 December 2016 (31 December 2015: EUR 1,499 million), were previously reported under Loans and advances to customers and Loans and advances to banks. On the basis of materiality, comparative amounts as at 31 December 2015 have not been adjusted. Furthermore, the increased balance, as at 31 December 2016, is due to higher market activity compared to year end .
ING Group Annual Report 2016 153 11 Assets held for sale As at 31 December 2015, Assets held for sale related to the investment of 25.75% in the associate NN Group which amounted to EUR 2,153 million.
In 2016, the change in the fair value of financial liabilities designated at fair value through profit or loss attributable to changes in credit risk is EUR 50 million (2015: EUR –163 million) and EUR 170 million (2015: EUR 119 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).
Changes in the composition of the group and other changes –7 –2
More than 1 year but less than 2 years 12,151 7,807
More than 4 years but less than 5 years 8,674 7,845
The average interest rate on subordinated loans is 4.94% (2015: 4.89%). The interest expense during the year 2016 was EUR 816 million (2015: EUR 901 million).
ING Groep N.V. - Anchor investors Subordinated loans issued by ING Groep N.V. include subordinated notes issued by the Anchor investors amounting to nil (2015: EUR 337.5 million).
Equity 19 Equity 2016 2015 2014 Share capital and share premium
Shareholders’ equity (parent) 49,793 47,832 51,344 Non-controlling interests 606 638 8,072
In 2016, ING Groep N.V. issued 8.3 million depositary receipts for ordinary shares (converted into ordinary shares per 26 July 2016) (2015: 11.3 million and 2014: 18.0 million: depositary receipts for ordinary shares). These issues were made in order to fund obligations arising from share-based employee incentive programmes.
Realised gains/losses transferred to the statement of profit or loss –4
Changes in composition of the group and other changes –127 –6 2
In 2016, the EUR –127 million is a transfer of revaluation reserve to retained earnings.
Net defined benefit asset/liability remeasurement reserve Reference is made to Note 35 ‘Pension and other post-employment benefits’.
In 2016, a cash dividend of EUR 2,521 million was paid to the shareholders of ING Group.
In 2014, the repurchase premium of EUR 750 million was paid in relation to the repayment of the EUR 1,500 million non-voting equity securities to the Dutch State.
Minimum capital requirements for ING Group’s subsidiaries, associates and joint ventures are as follows: 2016 ING Bank Other Total
Required minimum total regulatory capital* 30,664 * Requirement is based on Pillar I only.
ING Group Annual Report 2016 166 2015 ING Bank Other Total
Cumulative preference shares (not issued) Pursuant to the Articles of Association of ING Groep N.V. the authorised cumulative preference share capital consists of 4.6 billion cumulative preference shares, of which none have been issued. The par value of these cumulative preference shares is EUR 0.01.
Interest income on non-trading derivatives (no hedge accounting) 623 788 1,520
Brokerage and advisory fees 166 140 87 22 Valuation results and net trading income
Corporate Line Banking –5 24 Result on disposal of group companies
In 2016, Other income – Other includes EUR 16 million related to the disposal of shares held in VISA Europe Limited. For further information on the VISA transaction, reference is made to Note 51 ‘Other events’. The remainder of the Other income - Other is made up of a number of small items, which are individually insignificant.
In 2014, a charge of EUR 871 million was recognised in Pensions costs related to the Dutch defined benefit plan settlement which resulted in the ING Pension Fund being financially independent from ING. Reference is made to Note 35 ‘Pension and other postemployment benefits’ for information on pensions.
ING Group at the end of May 2015. Staff expenses, for the five months ended May 2015 was included in the Consolidated statement of profit or loss of ING Group in the line item Net result from discontinued operations. Reference is made to Note 28 ‘Discontinued operations’.
ING grants three types of share awards, deferred shares, performance shares, and upfront shares. The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period between the grant date and the vesting date, the entitlement becomes unconditional. In addition to the employment condition, the performance shares contain a performance condition. The number of ING shares that would ultimately be granted at the end of a performance period is dependent on ING’s performance over that period. Upfront and deferred shares, with retention periods as soon as it becomes unconditional, were awarded to the Management Board members of ING Bank and NN Group (in periods prior to 2015), as well as identified staff. ING has the authority to apply a hold back to awarded but unvested shares and a claw-back to vested shares.
Range of exercise price in euros 2016 2015 2014 2016 2015 2014 2016 2015 2014
All options outstanding are exercisable. As at 31 December 2016, the aggregate intrinsic value of options outstanding and exercisable is EUR 64 million (2015: EUR 68 million; 2014: EUR 68 million).
As at 31 December 2016 the share awards consists of 7,294,633 share awards (2015: 7,485,634; 2014: 11,282,373) relating to equitysettled share-based payment arrangements and 1,088,330 share awards (2015: 1,251,380; 2014: 1,423,891) relating to cash-settled share-based payment arrangements.
Audit and non-audit services Audit and non-audit services include fees for services provided by the Group’s auditors.
32 million). 2 The Group auditors did not provide any non-audit services except tax.
Regulatory costs Regulatory costs represent contributions to the Deposit Guarantee Schemes (DGS), The Single Resolution Fund (SRF) and local bank taxes. As of 1 January 2016, the new ex-ante DGS in the Netherlands and the SRF came into effect resulting in increased Regulatory costs for the period. Included in Regulatory costs for 2016, are contributions to DGS of EUR 316 million (2015: EUR 233 million; 2014: EUR 159 million) mainly related to the Netherlands, Germany, Belgium, Poland, Turkey and Spain and contributions to the SRF of EUR 176 million (2015: EUR 143 million related to National Resolution Funds; 2014: nil).
In 2016 local bank taxes increased by EUR 108 million from EUR 243 million to EUR 351 million mainly due to a new Polish bank tax and higher taxes in Belgium.
The nationalisation of SNS Reaal in 2013 had as a consequence, a one-time bank tax of EUR 1 billion to be paid by ING Bank and other Dutch banks. In accordance with the relevant legislation, the bank tax was charged in three equal instalments. For ING, this resulted in a charge of EUR 304 million in 2014.
As of 2016, the amortisation period for capitalised software is changed from three to five years. The change is applied prospectively. The change results in a lower charge to the statement of profit or loss. The change has no significant impact on the statement of profit or loss for the year ended 31 December 2016 and is not expected to have a significant impact on the statement of profit or loss of ING Group in future years. Reference is made to Note 9 ‘Intangible assets’.
28 Discontinued operations Total net result from discontinued operations comprises the results from NN Group and Voya.
In 2014, Net result from disposal of discontinued operations mainly included the total net divestment loss of EUR –1,546 million on the further sale of Voya.
interests 1 NN Group statement of profit or loss, until deconsolidation at the end of May 2015. 2 ING Group’s share of NN Group statement of profit or loss, until deconsolidation at the end of May 2015. 3 Net result, excluding NN Group’s non-controlling interest.
interests 1 NN Group’s comprehensive income, until deconsolidation at the end of May 2015. 2 ING Group’s share of NN Group comprehensive income, until deconsolidation at the end of May 2015.
As per 31 December 2014, Total assets and Total liabilities of NN Group as presented above, to which the minority interest in NN Group related, are all presented in the Consolidated statement of financial position in Assets held for sale and Liabilities held for sale, respectively.
Effect of dilutive instruments: Stock option and share plans 3.5 5.5 6.3 1 Until the repayment of the final tranche in November 2014, the ‘Attribution to non-voting equity securities’ represented the amount that would be payable on the non-voting equity securities if and when the entire net result for the period would be distributed as dividend. This amount was only included for the purpose of determining earnings per share under IFRS and did not represent a payment (neither actual nor proposed) to the holders of the non-voting equity securities.
Basic earnings from continuing operations 4,210 4,466 1,907 3,875.0 3,864.8 3,849.7 1.09 1.16 0.50
Diluted earnings from continuing operations 4,210 4,466 1,907 3,878.5 3,870.3 3,856.0 1.09 1.15 0.49
Basic earnings from discontinued operations 441 –456 –1,406 3,875.0 3,864.8 3,849.7 0.11 –0.12 –0.37
Effect of dilutive instruments: Stock option and share plans 3.5 5.5 6.3
ING Group Annual Report 2016 182 32 Cash and cash equivalents
Cash and cash equivalents at end of year 16,164 20,379 17,113
–614 –2,383 9,156 Total as included in the statement of financial position: – deposits from banks –31,964 –33,813 –29,999
The Executive Board of ING Group and the Management Board of ING Bank set the performance targets, approve and monitor the budgets prepared by the business lines. Business lines formulate strategic, commercial, and financial policy in conformity with the strategy and performance targets set by the Executive Board of ING Group and the Management Board of ING Bank.
Wholesale Banking Income from wholesale banking activities (a full range of products is offered from cash management to corporate finance), real estate and lease.
Wholesale Banking. The presentation of previously reported underlying profit or loss amounts has been adjusted to reflect this change.
ING Group evaluates the results of its banking segments 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 allows investors to understand the primary method used by management to evaluate the Group’s operating performance and make decisions about allocating resources. In addition, ING Group believes that the presentation of underlying net result helps investors compare its segment performance on a meaningful basis by highlighting result before tax attributable to ongoing operations and the underlying profitability of the segment businesses. Underlying result is derived by excluding from IFRS the following: special items; the impact of divestments and Legacy Insurance.
In addition to the segments by business line as described above, ING Group reconciles the total segment results to the total result of Banking using Corporate Line Banking. The Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in.
Underlying result before taxation 1,705 961 1,055 858 2,668 –219 7,028 Taxation 422 306 315 178 753 2 1,977
Underlying result before taxation 1,495 845 1,012 604 2,533 –530 5,959 Taxation 391 255 328 142 676 –125 1,668
– Total investment and other income 164 288 –17 52 266 115 –238 630
34 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. 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 geographical areas operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated. The Netherlands is ING Group’s country of domicile. The tables below provide additional information, for the years 2016 and 2015 respectively, on names of principal subsidiaries and branches, nature of main activities and average number of employees on a full time equivalent basis by country.
Other Mauritius ING Mauritius Investment management – 32 715 32 –
1 Public subsidies received, as defined in article 89 of the CRD IV, amounts to EUR 1 million (2015: EUR 3 million; 2014: EUR 2 million).
USA ING Financial Holdings Wholesale banking 492 720 47,784 423 122
Other Mauritius ING Mauritius Investment management – 380 1,186 380 –
Changes in the composition of the group and other changes 2
Actuarial gains and losses arising from changes in financial assumptions –498 86
The assumptions above are weighted by defined benefit obligations. The rates used for salary developments, interest discount factors, and other adjustments reflect country-specific conditions.
The discount rate is approximately 2.1% on 31 December 2016 (2015: 3.0%). The discount rate used by ING is based on AA-rated corporate bonds. 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.
As at 31 December 2016, the actuarial assumption for Indexation for inflation is 2.5% (2015: 2.6%). The percentage for 2016 was mainly based on the expected inflation and the best estimate assumption for future indexation in the pension plans in the United Kingdom, Belgium, the Netherlands, the United States, and Germany.
The average duration of the benefit obligation at the end of the reporting period is 17 years (2015: 17 years). This number can be subdivided into the duration related to: • active members: 16 years (2015: 15 years); • inactive members: 24 years (2015: 23 years); and • retired members: 13 years (2015: 13 years).
The deferred tax charge in 2016 in the Netherlands has decreased and the current tax charge has increased as a result of the full utilisation of prior year tax losses.
37 Fair value of assets and liabilities a) FinanciaI assets and liabilities The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain items per the statement of financial position 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.
– designated as at fair value through profit or loss 5,099 3,234 5,099 3,234
• Bid-Offer adjustments are required to adjust mid-market values to appropriate bid or offer value in order to best represent the exit value, and therefore fair value. It is applicable to financial assets and liabilities that are valued at mid-price initially. If financial assets or liabilities have been quoted at bid and offer price, then no Bid-Offer adjustment is necessary. In practice this adjustment accounts for the difference in valuation from mid to bid and mid to offer for long and short exposures respectively. In principle assets are valued at the bid prices and liabilities are valued at the offer price. For certain assets or liabilities, where market quoted price is not available, the price within the bid-offer spread that is most representative of fair value is used.
• Credit Valuation Adjustment (CVA) is the valuation component for counterparty credit risk of the derivative contracts. It has bilateral nature, where both counterparty’s credit risk and ING own credit risks are taken into account. The calculation is based on the estimation of the expected exposure, counterparties’ risk of default, and taking into account the collateral agreements as well as netting agreements. The counterparties’ risk of default is measured by probability of default and expected loss given default, which is based on market information including credit default swap (CDS) spread. Where counterparty CDS spreads are not available, relevant proxy spreads are used. Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty deteriorates) and right-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty improves) are included in the adjustment.
The following methods and assumptions were used by ING Group to estimate the fair value of the financial instruments: a.1) Financial assets Cash and balances with central banks The carrying amount of cash approximates its fair value.
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 market. 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.
If certain inputs in the model are unobservable, the instrument is still classified in this category, provided that the impact of those unobservable inputs on the overall valuation is insignificant. The notion of significant is particularly relevant for the distinction between Level 2 and Level 3 assets and liabilities. ING Group has chosen to align the definition of significant with the 90% confidence range as captured in the prudent value definition by EBA. Unobservable parameters are shifted down and upwards to reach this 90% confidence range. The same 90% confidence range is applied to model uncertainty. If the combined change in asset value resulting from the shift of the unobservable parameters and the model uncertainty exceeds the threshold, the asset is classified as Level 3. A value change below the threshold results in a Level 2 classification.
There were no changes in the valuation techniques during the year.
Main changes in fair value hierarchy in 2015 There were no significant transfers between Level 1 and Level 2.
Changes in the composition of the group and other changes –1 59 -25 33
Included in ‘Amounts recognised in the statement of profit or loss during the year, is EUR 163 million related to the release of revaluation reserves on shares held in VISA Europe Limited. For further information on the VISA transaction, reference is made to Note 51 ‘Other events’.
Included in ‘Revaluation recognised in equity during the year’, was an amount of EUR 154 million related to available-for-sale equity securities held in VISA Europe Limited. References is made to Note 5 ‘Investments’, Note 19 ‘Equity and Note 51 ‘Other events’.
Changes in the composition of the group and other changes –3 –3
Level 3 Financial assets and liabilities Financial assets measured at fair value in the statement of financial position as at 31 December 2016 of EUR 205 billion includes an amount of EUR 2.5 billion (1.2%) which is classified as Level 3 (31 December 2015: EUR 2.3 billion, being 1.0%). Changes in Level 3 from 31 December 2015 to 31 December 2016 are disclosed above in the table Changes in Level 3 Financial assets.
ING Group Annual Report 2016 213 2016 Assets Liabilities Valuation techniques Significant unobservable inputs
Loans and advances 326 3 Price based Price (%) 60% 101%
– FX 642 688 Present value techniques Inflation rate (%) 2% 3%
– Credit 33 43 Present value techniques Credit spread (bps) 0 1,596
– Equity 258 208 Option pricing model Equity volatility (%) 0% 140%
– Other 1 Option pricing model Commodity volatility (%) 13% 55%
All non-listed equity investments, including investments in private equity funds, are subject to a standard review framework which ensures that valuations reflect fair values.
Price For securities where market prices are not available fair value is measured by comparison with observable pricing data from similar instruments. Prices of 0% are distressed to the point that no recovery is expected, while prices significantly in excess of 100% or par are expected to pay a good yield.
As ING has chosen to apply a 90% confidence level already for its IFRS valuation of fair valued financial instruments as of end of 2014, the downward valuation uncertainty has become immaterial, whereas the potential upward valuation uncertainty, reflecting a potential profit, has increased. Specifically for the AFS Debt positions the upward valuation uncertainty decreased.
For more detail on the valuation of fair valued instruments, refer to the section ‘Risk Management – Market risk’, paragraph ‘Fair values of financial assets and liabilities’ in this document.
Financial liabilities 56,112 70,608 81,383 208,103 1 Financial assets and liabilities that are on demand are excluded from the fair value hierarchy as their fair value approximates the carrying value.
b) Non-financial assets and liabilities ING Group’s non-financial assets comprise Investments in associates and joint ventures, Property in own use, and Investment properties as included in the Statement of financial position in the line items Investments in associates and joint ventures, Property and equipment, and Other assets respectively.
38 Derivatives and hedge accounting Use of derivatives and hedge accounting As described in the sections ‘Risk management – Credit risk and Market risk’, 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 objective 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.
To qualify for hedge accounting under IFRS, strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS. The fair value changes of derivatives relating to such nonqualifying hedges are taken to the statement of profit or loss. However, in certain cases, the Group mitigates the statement of profit or loss volatility by designating hedged assets and liabilities at fair value through profit or loss. If hedge accounting is applied under IFRS, it is possible that during the hedge a hedge relationship no longer qualifies for hedge accounting and hedge accounting cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in the statement of profit or loss may be higher than would be expected from an economic point of view.
Change in fair value of assets and liabilities (hedged items) –167 –1,229
Cash flow hedge reserve as at 31 December, gross 1,015 859
This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the statement of profit or loss 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 28 years, with the largest concentrations in the range of 3 to 4 years.
As at 31 December 2016, the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting purposes was EUR 0 million (2015: nil).
ING Group Annual Report 2016 221 39 Assets by contractual maturity Amounts presented in these tables by contractual maturity are the amounts as presented in the statement of financial position and are discounted cash flows. Reference is made to the section ‘Risk Management – Funding and liquidity risk’.
Remaining assets (for which maturities are not applicable)5 3,066 3,066 1 Includes assets on demand. 2 Loans and advances to customers, as at 31 December 2015, is adjusted as a result of a changes in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies and Changes in presentation in 2016. 3 Includes Other assets and Current and Deferred tax assets as presented in the Consolidated statement of financial position. 4 Assets held for sale consist of the assets of the disposal groups classified as held for sale as disclosed in Note 11 ‘Assets held for sale’. For these assets, the underlying contractual maturities are no longer relevant for ING. For businesses for which a binding sale agreement exists, all related assets held for sale are classified in accordance with the agreed or expected closing date. For other businesses, for which no sale agreement exists, assets held for sale are included in Maturity not applicable.
ING Group Annual Report 2016 223 40 Liabilities by maturity The tables below include all financial liabilities by maturity based on contractual, undiscounted cash flows. Furthermore, the undiscounted future coupon interest on financial liabilities payable is included in a separate line and in the relevant maturity bucket. Derivative liabilities are included on a net basis if cash flows are settled net. For other derivative liabilities the contractual gross cash flow payable is included.
Coupon interest due on financial liabilities 1,081 1,160 3,355 10,948 5,818 22,362 1 Includes liabilities on demand. 2 This column reconciles the contractual undiscounted cash flows on financial liabilities to the statement of financial position values. The adjustments mainly relate to the impact of discounting, and for derivatives, to the fact the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net).
– designated as at fair value through profit or loss 207 452 1,374 4,835 6,089 –341 12,616
Coupon interest due on financial liabilities 3,033 1,482 4,595 13,892 8,798 31,800 1 Includes liabilities on demand. 2 This column reconciles the contractual undiscounted cash flows on financial liabilities to the statement of financial position values. The adjustments mainly relate to the impact of discounting, and for derivatives, to the fact the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net).
3 Customer deposits, as at 31 December 2015, is adjusted as a result of a changes in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies and Changes in presentation in 2016.
Loans and advances to customers 70,457 74,506 1 Excludes assets classified as held for sale.
Financial assets at fair value through profit or loss 4,339 7,892
Included in the tables above, are the carrying amounts of transferred assets under repurchase agreements, and securities lending that do not qualify for derecognition.
Impact of enforceable master netting arrangements or similar arrangements1 Derivatives –7,300 4,743 2,557 1 The line ‘Impact of enforceable master netting agreements or similar arrangements’ contains derivative positions under the same master netting arrangements being presented in different statement of financial position line items.
Impact of enforceable master netting arrangements or similar arrangements2 Derivatives –7,104 3,791 3,313 1 Loans and advances to customers, as at 31 December 2015, is adjusted as a result of a change in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies in 2016. 2 The line ‘Impact of enforceable master netting agreements or similar arrangements’ contains derivative positions under the same master netting arrangements being presented in different statement of financial position line items.
Other items where offsetting is applied in the statement of financial position 5,041 –4,472 569 28 541
Impact of enforceable master netting arrangements or similar arrangements1 Derivatives –10,513 8,047 2,466 1 The line ‘Impact of enforceable master netting agreements or similar arrangements’ contains derivative positions under the same master netting arrangements being presented in different statement of financial position line items.
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. Further, a complaint has been filed against ING Bank in January 2015 in the New York District Court by Alfredo and Gustavo Villoldo and the executor of their father’s estate (Villoldo). Villoldo holds two judgments against the Cuban government and other Cuban entities in the aggregate amount of USD 2.9 billion. Those judgments remain outstanding and uncollected. The complaint against ING Bank alleges that if ING Bank had complied with the applicable US sanction laws, Cuban assets would have been frozen by OFAC and available for execution and seizure by Villoldo. The complaint alleges that the acts set out in ING’s settlement with OFAC in 2012 constitute wire fraud, money laundering, and fraudulent transfer and that Villoldo is therefore entitled to actual damages in the amount to be believed no less than USD 1.654 billion and treble damages of not less than USD 4.962 billion. In July 2015 the New York District Court dismissed all claims with prejudice. The Court of Appeals affirmed this judgment in April 2016. This judgement is now final.
Other For details on the transactions in 2015 with regard to ING’s interest in ING Vysya, reference is made to Note 7 ‘Investments in associates and joint ventures’, Note 49 ‘Related parties’.
Financial assets at fair value through profit or loss 46,425 79,339
Financial liabilities at fair value through profit or loss 2,105 2,280
Reference is made to Note 51 ‘Other events’ for the earlier and subsequent transactions related to NN Group and Voya. 2 Cash outflow/inflow on group companies in the cash flow statement included, in addition to the cash amounts in this table, also cash outflows/inflows on individually insignificant disposals. 3 IFRS required the derecognition of the subsidiary and the recognition of the respective retained investments in NN Group of 42.43% and Voya of 43.2% at the fair value on the date of disposal. 4 The loss on disposal only reflects the impact on the statement of profit or loss of the transaction that resulted in derecognition of the company and includes the sales proceeds, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves. 5 The portion of the loss attributable to measuring the retained investment in NN Group and Voya at its fair value amounted to EUR –5,412 million and EUR –1,467 million respectively.
48 Structured entities ING Group’s activities involve transactions with various structured entities (SE) in the normal course of its business. A structured entity is 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 any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. ING Group’s involvement in these entities varies and includes both debt financing and equity financing of these entities as well as other relationships. Based on its accounting policies, as disclosed in the section Principles of valuation and determination of results of these financial statements, ING establishes whether these involvements result in no significant influence, significant influence, joint control or control over the structured entity.
2. Consolidated ING originated Covered bond programme (CBC) ING Group has entered into a covered bond programme. Under the covered bond programme ING issues bonds. The payment of interest and principal is guaranteed by an ING administered structured entity, Covered Bond Company B.V. (CBC). In order for CBC to fulfil its guarantee, ING legally transfers mainly Dutch mortgage loans originated by ING to CBC. Furthermore ING offers CBC protection against deterioration of the mortgage loans. CBC is consolidated by ING Group.
4. Unconsolidated Securitisation programme In 2013 ING transferred financial assets (mortgages loans) for an amount of approximately EUR 2 billion to a newly established special purpose entity (SPE). The transaction resulted in full derecognition of the financial assets from ING’s statement of financial position. The derecognition did not have a significant impact on net result. Following this transfer ING continues to have two types of on-going involvement in the transferred assets: as counterparty to the SPE of a non-standard interest rate swap and as servicer of the transferred assets. ING has an option to unwind the transaction by redeeming all notes at their principal outstanding amount, in the unlikely event of changes in accounting and/or regulatory requirements that significantly impact the transaction. The fair value of the swap as at 31 December 2016 amounted to EUR –4.6 million (2015: EUR 1.3 million); fair value changes on this swap recognised in the statement of profit or loss in 2016 were EUR –5.9 million (2015: EUR –32.4 million). Fee income recognised in the statement of profit or loss in 2016 amounted to EUR 0.0 million (2015: nil).
5. Other structured entities In the normal course of business, ING Group enters into transactions with structured entities as counterparty. Predominantly in its structured finance operations, ING can be instrumental in facilitating the creation of these structured entity counterparties. These entities are generally not included in the consolidated financial statements of ING Group, as ING facilitates these transactions as administrative agent by providing structuring, accounting, funding, lending, and operation services.
49 Related parties In the normal course of business, ING Group enters into various 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, among others, its subsidiaries, associates, joint ventures, key management personnel, and various defined benefit and contribution plans. Transactions between related parties 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 further information on the NN Group divestment transactions, reference is made to Note 51 ‘Other events’.
In April 2015, the merger between ING Vysya and Kotak was completed and the legal entity ING Vysya Bank ceased to exist. As a result of this transaction, ING holds a stake in the combined company, which operates under the Kotak brand. As of April 2015, ING Vysya was no longer a related party of ING Group. Reference is made to Note 7 ‘Investments in associates and joint ventures’.
Total number of shares and stock options 555,064 633,918 446,022 652,562
50 The European Commission Restructuring Plan ING’s Restructuring, which began in 2009, has come to an end with the sale of the company’s remaining stake in NN Group on 14 April 2016. Due to the restructuring ING’s has transformed from a diversified financial services company into a standalone, leading European bank.
ING’s Restructuring 2008 – 2016 In 2008 and 2009, as a consequence of the financial crisis, ING Group, like other major financial institutions in Europe, received state aid from the Dutch State. In order to receive approval from the European Commission (EC) for the Dutch State aid, ING Group together with the Dutch State were required in 2009 to develop and submit a restructuring plan to the EC that included the divestment of ING Group’s insurance and investment management businesses across the world. The sale of ING Direct USA was also included in the package of restructuring measures. This Restructuring Plan was initially approved by the EC in November 2009. Subsequently, the insurance and investment management businesses of ING Group were operationally separated from ING as of 31 December 2010 for the purpose of divesting it. The Restructuring Plan was amended and re-approved by the EC in 2012 and 2013.
In line with the Restructuring Plan, ING Group divested a number of businesses around the world from 2011 to 2013, including divestments of insurance and investment management businesses in the United States, Latin America and Asia/Pacific (other than Japan). ING Group had indicated in 2012 that the intended base case for divestment of its European insurance and investment management businesses was through an Initial Public Offering (IPO), while keeping all other options open. In November 2013, ING Group expanded the scope of this intended base case IPO with the inclusion of the Japan Life and Japan Closed Block VA businesses.
In the course of the continued streamlining of the company’s business portfolio, ING also made other major divestments including ING Direct Canada (2012), ING Direct UK (2012) and ING Car Lease (2011).
In 2009, ING agreed to transfer/sell a portfolio of US mortgage securities to the Dutch State. The unwinding of this facility, also known as the Illiquid Assets Back-up Facility (IABF), was completed in early 2014, when the Dutch State sold the remaining securities in the market. This generated a EUR 1.4 billion cash profit for the Dutch State.
The total gross financial benefit to the Dutch State for ING’s support was approximately EUR 5.3 billion.
Group divested in the IPO (including the exercise of the over-allotment option); and • EUR 661 million, being the difference between the market value of the NN Group shares exchanged for the first tranche of the mandatorily exchangeable subordinated notes and the related IFRS carrying value.
With deconsolidation of NN Group, ING Group fulfilled its commitment to the EC pertaining to the divestment of NN Group, per the EC decision of 16 November 2012. The restrictions from this decision regarding acquisition and price leadership no longer applied to ING Group.
September 2015 – Further divestment of NN Group On 30 September 2015, ING Group sold 40 million ordinary shares of NN Group. As part of the transaction, NN Group repurchased 6 million ordinary shares. The gross proceeds to ING Group, including the repurchase by NN Group, amounted to EUR 1 billion. The transaction reduced ING’s interest in NN Group to 25.76%. The transaction resulted in a loss of EUR 17 million in 2015 and was recognised in the statement of profit or loss in the line Net result from disposal of discontinued operations. The transaction was settled on 5 October 2015.
Reference is made to Note 50 ‘The European Commission Restructuring Plan’ for an overview of ING’s restructuring.
The sale of the total 45.6 million shares from the combined transactions reduced ING Group’s stake in Voya from 18.9% (at 31 December 2014) to zero. The transactions resulted in a profit of EUR 323 million as was recognised in the statement of profit or loss in the line Net result from disposal of discontinued operations.
The risk management section is in line with the accounting standards relating to the nature and the extent of the risks as required by IFRS7 ‘Financial Instruments: Disclosures’ as adopted by the European Union and covered by an opinion of the External Auditors as part of the notes to the consolidated financial statements.
Funding and liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet the financial liabilities when they come due, at reasonable cost and in a timely manner.
Compliance risk is the risk of impairment of ING Bank’s integrity, leading to damage to ING’s reputation, legal or regulatory sanctions, or financial loss, as a result of failure (or perceived failure) to comply with applicable laws, regulations, ING Bank policies and minimum standards and the ING Values.
The head of ING’s line of business and their delegates form the first line of defence and have primary accountability for the performance, operations, compliance and effective control of risks affecting their respective businesses. They originate loans, deposits and other products within applicable frameworks and limits, they know our customers well and are well-positioned to act in both the customers’ and ING’s best interest. The COO is responsible and accountable for proper security and controls on global applications and IT-platforms servicing the Bank.
As a member of the MBB, the CRO ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation both at head-office and business-unit level, which supports the commercial departments in their decision-making, but at the same time has sufficient countervailing power to keep the risk profile within the risk tolerance. Every quarter, the CRO reports to the board committees on ING Bank’s risk appetite levels and on ING Bank’s risk profile. In addition, the CRO briefs the board committees on developments in internal and external risk related issues and ensures the board committees understand specific risk concepts.
Regional and business unit level The CRO is supported by regional and/or business unit CROs focussing on specific risks in the geographical and/or business areas of their responsibilities. ING Bank’s regional and/or business unit management have primary responsibility for the management of risks (credit, market, funding and liquidity, operational, legal and compliance risks) that arise in their daily operations. They are accountable for the implementation and execution of appropriate risk frameworks affecting their businesses to ensure compliance with procedures and processes at Corporate level. The implementation is adapted if necessary to local requirements.
The Global Risk Management function consists further of corporate risk departments headed by General Managers directly reporting to the CRO. The corporate risk departments support the CRO to set the Bank's risk appetite, develop the corporate policies, rules and global procedures and infrastructures. The General Managers bear direct responsibility for risk (mitigating) decisions at Bank level. The General Managers and the CRO are responsible for the harmonisation and standardisation of risk management practices.
Risk model governance and validation Risk models are built according to the internal risk modelling methodology standards and model life cycle, in line with regulatory requirements. After thorough review and documentation of the model by the modelling and Model Validation (MV) departments, specific model risk committees for each risk type approve new models. After approval by the specific risk committee, and where necessary the regulator, a new risk model is implemented and entitled for usage. In addition, MV validates each model on a regular basis. Validation results and its capital impact are reported on a quarterly basis to senior management, the risk committee and to the supervisor.
Risk culture The risk management framework based on the three lines of defence governance model is effective when a sound and consistent risk culture is present throughout the whole organisation. The reputation and integrity of ING Bank’s organisation are considered key requirements to operate successfully in the financial world. It 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 transparent within the different levels of the organisation and holding every employee accountable for his/her acts, the risk culture and awareness are embedded in the organisation. This leads to effective risk management.
Financial risks: • Credit risk: the risk of potential loss due to default and/or credit rating deterioration by ING Bank’s debtors (including bond issuers)
Risk assessment and control Each identified risk is assessed to determine the importance, or risk level, of the risk for the ING Bank entity in scope. This enables the entity to decide which of the identified risks need control measures and how strict or tolerant these measures must be. Known risks are re-assessed to either confirm the risk level or detect change.
Funding and liquidity risk management has two dimensions: liquidity risk management focuses on having a sufficient buffer to cope with the short-term situation, funding risk management ensures long-term compliance with both internal and external targets. Managing funding and liquidity risk focuses both on ‘business as usual’ (based on the run-off profile to show the stickiness of deposits combined with the run-off of assets without new production) and on a stressed situation. For liquidity risk, we use the time to survive under specific scenario, while for funding risk we focus on having a stable funding profile.
Process The stress testing process of ING consists of several stages, which are summarised in below diagram.
Step 1. Risk assessment & scenario selection ING formally determines its main risks on an annual basis through the execution of a so called risk assessment. Senior management, business representatives and risk specialists are involved in this process which covers risks in the macroeconomic circumstances, political and regulatory developments as well as portfolio specific risks. Based on the risk assessment, scenarios are selected to be evaluated in the remainder of the year The results of the risk assessment and scenario selection are discussed and endorsed in the Stress Testing Steering Committee (STSC). All stakeholders are represented in the STSC, such as representatives of the different Corporate Risk departments, Capital Management, Finance and the Global Research organisation. The STSC submits the results of the risk assessment and scenario selection to the BF&RC for endorsement.
On Basel III revisions (Basel 3.5), several changes to the regulatory framework are being considered by regulators. These may have an impact on the strategy of ING, especially as they often amplify each other. The proposals and their potential impact are monitored via semi-annual monitoring exercises in which ING Bank participates. As a result of such monitoring exercises and ongoing discussions within the regulatory environment, revisions have been made to the original Basel III proposals as was the case with the revised Liquidity Coverage Ratio in January 2013 and the revised Net Stable Funding Ratio and Leverage Ratio in January 2014. In January 2017, the BCBS announced that it expected to complete finalisation of all revisions to the Basel III framework, including the calibration of an aggregate capital floors framework and a leverage ratio minimum requirement.
The past years a dedicated team within the risk and finance functions, supported by the CFO and COO domain, has implemented BCBS239 across the key risk types. The implementation has covered all key BCBS239 principles, resulting in improvements across the data management and reporting chain. By incorporating the BCBS239 principles in ING’s internal control Framework, the principles have become a key driver of ING’s data aggregation and risk reporting practices. Also in today’s continuously changing environment, ING will ensure that key risk data aggregation and reporting practices remain aligned with the BCBS239 principles.
During 2016, two changes to our top and emerging risks were made. ‘Climate change risk’ was added as a new emerging risk, reflecting the impact a deterioration of the climate may have for the reputation of ING. ‘Business lending Benelux’ was removed as the credit quality improved and the risk costs reduced following the gradual improvement of the economy. Further, ‘Impact of low interest rate environment’ moved into ‘Macroeconomic developments’.
Another element which can affect the real economy and gives rise to geopolitical risk is the instability in international relationships. In this perspective, ING Bank continued to carefully monitor the international developments.
We can play a role in trying to find solutions. We have been climate neutral since 2007, adapting the organisation to the new world and taking effective measures to mitigate our impacts. We are aware that our greatest impact however, is through our financing portfolio. ING’s decision to end financing new coal fired power plants and coal mines, and continued reduction of our coal portfolio, demonstrates climate change risk is part of our ESR framework and applies to all financial products and services offered by ING.
Credit analysis at portfolio level is monitored using metrics such as economic capital, regulatory capital, exposure at default (EAD), probability of default (PD) and loss given default (LGD). To ensure efficient use of ING Bank’s capital, the risk appetite is monitored and managed at portfolio level by risk and finance together. Credit analysis at transactional level focuses on the risk amount, tenor, structure of the facility and profile of the borrower. ING Bank’s credit risk managers make use of publicly available information, information provided by the counterparty, peer group comparisons, industry comparisons and quantitative techniques.
Credit risk categories Credit risk uses risk categories to differentiate between the different types of credit risk. All products within ING Bank are aggregated to one of the following risk categories: • Pre-settlement (PS) risk: arises when a counterparty defaults on a transaction before settlement and ING Bank has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk is the (potential or expected risk) cost of ING Bank replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using a 3-7 year historical time horizon and a 97.5% confidence level.
For the reconciliation between credit risk outstanding categories and financial assets we refer to the section ’Credit risk management classification’ as included in Note 1 ‘Accounting policies’.
Economic capital is calculated using the economic values of rating models (PD, EAD and LGD). In line with regulatory requirements, socalled ‘significant changes’ to these rating models are communicated to the regulator for approval. Significant changes depend on the impact on credit RWA (Pillar I) or on the significance (size) of the model for the ING Bank portfolio.
• Exposure at Default (EAD): The second element is the counterparty’s exposure at default. EAD models are intended to estimate the outstanding amount or obligation at the moment of default in the future. Since the fact that a counterparty will go into default is not known, and the level of outstanding that may occur on that date is also not known, ING Bank uses a combination of statistical and hybrid models to estimate the EAD. With the exception of guarantees and letters of credit, the EAD is always equal to or higher than the associated credit risk outstanding, under the assumption that counterparties tend to absorb liquidity from available credit resources before financial problems become apparent to the counterparty’s creditors. The EAD is largely a function of the type of credit facility (revolving, overdraft, term) offered to the borrower.
ING Bank uses the internal assessment approach for the support facilities it provides to asset backed commercial paper (ABCP) conduit Mont Blanc Capital Corp., based on externally published rating agency methodologies.
• Scenario Simulation approach (Monte Carlo approach): Scenario Simulation approach is the most complex of the methods for PS risk calculations. This approach takes into account daily market conditions, including correlations between the risk factors and portfolio benefits. This Monte Carlo approach is currently used in ING Bank for the largest volume of derivative products such as FX and interest rate derivatives.
Risk ratings assigned to counterparties are regularly, at least annually, reviewed, and the performance of the underlying models regularly monitored. Over 95% of ING Bank’s credit risks have been rated using one of the in-house developed PD rating models. Within the AIRB Portfolio, the level of Regulatory compliant ratings exceeds 99% coverage by exposure. Some of these models are global in nature, such as models for Large Corporates, Commercial Banks, Insurance Companies, Central Governments, Local Governments, Funds, Fund Managers, Project Finance and Leveraged Companies. While other models are more regional or country specific, such as PD models for Small Medium Enterprise (SME) companies in Central Europe, the Netherlands, Belgium, Luxembourg, as well as residential mortgage and consumer loan models in the various retail markets.
• Retail - Secured by immovable property SME (included in tables with Other Retail) includes all retail loans which are covered by commercial properties.
• Loss – Distressed Restructuring: ING Bank restructures the loan agreement so as to recover the exposure after allowing some discount. The relationship with the borrower continues after the restructuring. ING Bank suffers (some) loss in the process.
The credit risk data lifecycle describes the interlinked stages of the lifecycle from data definition to data usage as shown in the figure below:
• Data Definitions: this process step ensures that atomic and derived credit risk data terms have a single definition and definition owner throughout the organization. It also ensures that defined data is fit for the purpose it will be used for.
• Exchange: ensures data exchange is executed as agreed between data owner and data user. • Processing & Calculation: processes delivered atomic data and uses it to calculate credit risk derived data. The outcome of this stage is used as input for credit risk data aggregation in for example risk reporting. • Data Usage: ensures data aggregation and usage fit for multiple purposes for example modelling, regulatory and statutory reporting. Ensures that data usage or distribution is according to agreed purpose and data confidentiality, protection, security and retention rules.
Credit risk portfolio ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as mortgage backed securities and asset backed securities are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other assets) held by the security‘s issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
The portfolio breakdown of ING Bank per exposure class and per risk category, based on regulatory Exposure at Default (READ) is shown below. The figures shown in the Credit Risk section are including loans to Group, unless stated otherwise: Lending Investment Money Market Pre-Settlement Total Total (ALL) 2016 AIRB SA AIRB SA AIRB SA AIRB SA AIRB SA AIRB + SA
A concentration increase in the exposure class corporates was mainly observed in the Wholesale Banking business lines: structured finance, corporate & financial institutions (C&FI) lending, trade finance services and real estate finance. This was driven by the implementation of the EU equivalence rule, which resulted in a shift from exposure class institutions to corporates, and by actual lending growth in these portfolios. The lower concentration in exposure class institutions was also driven by a decrease in covered bond investments and pre-settlement exposures. The EU equivalence rule applies to certain countries outside the EU that have supervisory and regulatory arrangements in place that are at least equivalent to those applied in the EU. Since 2016 the EU equivalence indicator, which determines the exposure class allocation and correlation, is based on the combination of country and customer type, while before it was only based on the country.
Risk rating buckets per line of business and credit risk types Risk rating buckets are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade to non-performing loan expressed in S&P, Moody’s and Fitch equivalents.
The total ING Bank portfolio outstandings amounted to EUR 775 billion at the end of December 2016. The overall ING Bank exposure increase was concentrated in the BBB and BB rating classes. The risk rating distribution across business lines and credit risk types showed various shifts over the year.
Concentration in the BBB rating class in Retail Challengers & Growth Markets decreased due to reduced Italian government bond exposures, and the country rating downgrade of Turkey which shifted concentration to rating class BB across all risk categories. The risk profile for residential mortgages in Retail Benelux improved due to enhanced arrears management, stricter screening rules and forbearance clients reaching their 1-year minimum default period in the Netherlands. This led to a decreased concentration in the BB and CCC & NPL rating buckets and increased share for the BBB rated category. Additional decreased concentration in the 17-22 (CCC & NPL) bucket was due to write-offs combined with positive rating migration in the commercial property finance portfolio.
The valuation method also depends on the type of covers. For asset collateral, the valuation sources can be the customer’s balance sheet (e.g. inventory, machinery, and equipment), nominal value (e.g. cash, receivables), market value (e.g. securities and commodities), independent valuer (commercial real estate) and market indices (residential real estate). For third party obligations, the valuation is based on the value which is attributed to the contract between ING Bank and that third party.
Cover values This section provides insight on the type of covers and to which extent a loan is collateralised. The cover disclosures are presented by risk category: Lending, Investment, Money-Market and Pre-settlement. The cover amounts are presented by the most relevant collateral forms, being mortgages and financial collateral (cash and securities), and the most relevant third party obligation being guarantees. ING Bank obtains covers which are eligible for credit risk mitigation under CRR/CRDIV, as well as those that are not eligible.
Cover values including guarantees received - Total ING Bank – 20161,2
Cover values including guarantees received - Total ING Bank – 20151,2
Cover values including guarantees received - Consumer lending portfolio – 20161
Non-performing Residential Mortgages (Private Individuals) 4,323 5,148 40 5 403 649 0.9% 0.3% 0.9% 7.4% 33.9% 56.6%
Total Consumer Lending 297,866 460,892 3,363 475 26,283 35,017 5.3% 0.1% 0.2% 1.5% 16.2% 76.7% 1 Excluding intercompany positions.
The numbers shown are conservative as the savings pledged to the mortgage product, ‘Spaarhypotheek’ (or mortgage with external saving account) present in the Dutch mortgage portfolio are not taken into account in the table above. For the residential mortgages portfolio, the guarantees relate to mortgages covered by governmental insurers under the Nationale Hypotheek Garantie (NHG) in the Netherlands. The NHG guarantees the repayment of a loan in case of a forced property sale.
Total business lending outstandings increased by EUR 14.4 billion, of which EUR 1.2 billion was FX driven. Largest outstandings increase was seen in the industry Natural Resources (20.1%, mainly in the oil sector. The increase was driven by growth in structured finance trade and commodity financing and the appreciation of the US Dollar. Increases in outstandings were also observed in the lending portfolios of Transportation & Logistics (13.2%) and Real Estate (6.6%).
Total Investment and Money Market 110,218 989 114,116 6 3,113 35 of which Non-performing 10 171 1 Including loans to ING Group. 2 Excluding intercompany positions.
The use of Central Clearing Parties (CCPs) is becoming more important for the derivatives business and as a consequence the credit risk is shifting from Counterparties to CCPs. In 2016, the notional Pre-Settlement exposure that was cleared via CCPs formed 55.5% of the total notional (51.2% in 2015).
MtM after netting and collateral Outstandings Africa 84 49 47 89 71 48 46 55 America 20,866 10,891 6,549 9,241 18,648 10,237 7,127 8,734 Asia 8,318 4,743 3,558 3,918 6,598 3,455 2,823 3,242 Australia 537 303 228 492 470 259 236 344
Total Pre-settlement 173,887 59,626 45,484 50,003 167,522 62,261 48,675 52,562 of which Non-performing 37 36 36 36 52 52 52 55 1 Including transactions with ING Group. 2 Excluding intercompany positions.
The total ING Bank portfolio increase was driven by both asset origination and FX movements. The credit quality of the ING Bank portfolio improved with lower past due and non-performing assets. Both developments were mainly observed in Dutch mortgages and the commercial property finance portfolio. The improvement in the past due but performing portfolio was largely driven by Retail Benelux resulting from better arrears management. The reduction in the non-performing portfolio was due to write-offs combined with positive rating migration to the performing portfolio and it was partly offset by an increase in non-performing loans in structured finance.
Wholesale Banking: for business loans (governments, institutions, corporates), ING Bank classifies the relevant obligors as nonperforming when any of the below listed default triggers occurs: • Bankruptcy or financial reorganisation: The borrower has sought or has been placed (or is likely to seek or be placed) in bankruptcy or similar protection, where this would avoid or delay repayment of the financial asset; • The borrower has failed in the payment of principal or interest/fees and such payment failure has remained unresolved for the following period: • Corporates: more than 90 days; and • Financial Institutions and Governments: from day 1, however, a research period of 14 calendar days will be observed in order for ING Bank to establish whether the payment default was due to non-operational reasons (i.e. the deteriorated credit quality of the financial institution) or due to operational reasons. The latter does not trigger default.
Credit restructuring Global Credit Restructuring (GCR) is the dedicated and independent corporate department that deals with non-performing loans and loans that hold a reasonable probability that ING will end up with a loss, if no specific action is taken. GCR deals with accounts or portfolios requiring an active approach, which may include renegotiation of terms & conditions and business or financial restructuring. The loans are managed by GCR or by the regional restructuring units in the various regions and business units.
The overall amount of NPLs decreased in 2016, mainly thanks to Private Individuals and improvements in the Real Estate sectors. The decrease in NPLs for the Private Individuals segment was mainly due to the improved credit quality in the Dutch mortgage portfolio as a result of the improved economic conditions in the Netherlands. The decline in NPLs in the Real Estate sector was observed in Wholesale Banking Netherlands and Spain/ Portugal Real Estate Finance and was driven by both cures and file resolutions or sales. The total decrease in the NPL portfolio outstandings was partly offset by an increase in Shipping Netherlands and UK (part of Transportation & Logistics).
Provisioning Loan Loss Provisions (LLP) are calculated and accounted for in accordance with IFRS. LLP are reported for financial assets that are measured against amortised costs (loans and receivables, held-to-maturity investments). There are three types of LLP: • Individually Significant Financial Asset (ISFA) provisions: when there is objective evidence that a financial asset is defaulted as result of one or more prescribed default trigger events. In such cases, ING assigns a risk rating 20, 21 or 22. Specific provisions are calculated if the exposure to a borrower exceeds the threshold amount. The threshold amount varies per business unit, but generally is EUR 1 million. Provisions are calculated based on discounted future cash flows under 1 or more likely scenarios to arrive at a best estimate of future recoveries. Provisions are made on a quarterly basis.
For ING Bank retail units, clear criteria have been established to determine whether a client is eligible for forbearance – generally as part of an automated process. Specific approval mandates are in place to approve the measures, as well as procedures to manage, monitor and report the forbearance activities.
Excluding the policy revision, the forborne assets increased by EUR 1.0 billion mainly visible in Natural Resources (EUR 0.4 billion) and Transportation & Logistics (EUR 0.3 billion), driven by the respective Oil & Gas and Shipping portfolios. The non-performing portfolio in Natural Resources mainly decreased due to the bankruptcy of a large client. The performing Real Estate portfolio increased due to new inflow of clients, while the non-performing Real Estate portfolio mainly decreased due to repayments and write-offs.
The main concentration of forborne assets was in the Netherlands with 61% of the total forborne assets (2015: 61%) and 60% of the non-performing forborne assets (2015: 68%). Retail Banking forborne assets only increased slightly by EUR 0.1 billion compared to 2015. The policy revision impacted the Retail Banking portfolio to a much lesser extent (increase of EUR 0.4 billion) and was primarily seen in the Dutch business portfolio.
Securitisations ING Bank primarily plays three roles in its exposure to securitisations programs which are: ING Bank as Investor ING Bank’s goal is to maintain a portfolio of high quality liquid assets that meets the regulatory requirements of CRR/CRD IV and the Delegated Act of October 2014 regarding liquidity. ING invests in high quality residential mortgage backed securities (RMBS) and asset backed securities (ABS) keeping close track of the securitisation investment positions via monthly monitoring reports and weekly update calls. Additionally, ING may invest in securitisation positions in order to facilitate client business from its Global Capital Markets Unit
The Balance Sheet Risk (BSR) department and the Credit & Trading Risk (C&TR) department are the designated independent departments that are responsible for the design and execution of the bank’s market risk and counterparty credit risk management functions in support of the ALCO function. Balance Sheet Risk focuses on the market risks in the banking books, Capital Management department and the Bank Treasury department, whereas Credit & Trading Risk is responsible for counterparty credit risk and market risks resulting from the Financial Markets trading books. The organisational structure recognises that risk taking and risk management to a large extent occur at the regional/local level. Bottom-up reporting allows each management level to fully assess the market risk relevant at the respective levels.
- Loans are typically hedged from an interest rate risk perspective and consequently do not bear any material remaining interest rate risk as no interest rate dependent prepayment behaviour is observed.
Linear interest rate risk is transferred from the commercial business to the treasury books (Bank Treasury), if necessary using estimations of customer behaviour. The originating commercial business is ultimately responsible for estimating customer behaviour, leaving convexity risk and (unexpected) customer behaviour risk with the commercial business. Risk measurement and the risk transfer process take place on a monthly basis, but more often if deemed necessary, for instance in volatile markets.
Risk profile In the following sections, the interest rate risk exposures in the banking books are presented. ING Bank uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective. Also corrective management actions are not taken into account in these figures.
Year-on-year variance analysis The overall BPV decreased in 2016 by EUR 0.9 million. This mainly results from a lower duration of capital investments. The changes in BPV in Retail Banking Benelux and Retail Challengers and Growth Markets reflect volume and duration changes of originating assets and liabilities. Cash flow hedges were executed at the Bank Treasury function to mitigate these changes. The Bank Treasury function for Retail Challengers and Growth Markets is reported under Wholesale Banking business. Besides the change of the overall BPV exposure there is a change in the exposure per accounting category. This is mainly the result of increased volume of both savings and mortgages. This move was mitigated by cash flow hedges, which revaluate through equity, and the lower duration of capital investments.
In order to measure the remaining sensitivity of the target CET1 ratio against FX rate fluctuations, the CET1 at Risk (cTaR) measure is used. It measures the drop in the CET1 ratio from the target when stressing a certain FX rate. A negative sign in the stress scenario thus indicates that a depreciation of the corresponding currency against the Euro will result in a drop of the CET1 ratio.
2016 2015 2016 2015 Continent Sector Europe 968 1,136 Residential 104 115 Americas 36 45 Office 895 1,045 Australia 0 0 Retail 19 68 Asia 0 35 Industrial 18 16 Other 104 118 Other 72 91 Total 1,108 1,334 Total 1,108 1,334
Year-on-year variance analysis In total, real estate market risk exposure in the banking books decreased by EUR 0.2 billion mainly as a result of divestments. The remainder is due to impairments and fair value changes.
Fair values of financial assets and liabilities ING Bank aligns the pricing sources it uses with the Fair Value Hierarchy. The best evidence of Fair value are published price quotations in active markets. Where quoted prices are not available, other pricing sources and valuation techniques are used to determine fair value.
Value at Risk Credit & Trading Risk uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital.
Stressed VaR The Stressed VaR (SVaR) is intended to replicate a VaR calculation that would be generated on the bank’s current portfolio with inputs calibrated to the historical data from a continuous 12-month period of significant financial stress relevant to the bank’s portfolio. To calculate SVaR, ING Bank uses the same model that is used for VaR (historical simulation). The historical data period used includes the height of the credit crisis around the fall of Lehman Brothers, and is reviewed regularly.
ING Bank’s Event Risk policy is based on a large set of possible stress scenarios per risk type (fixed income, equity, foreign exchange, credit and related derivative markets). For example, for equity products we assume both a crisis scenario (prices decreasing) as well as a bull scenario (prices increasing). Stress parameters are set per country. Scenarios are calculated based on events happening independently, jointly by region, or in all countries simultaneously. This way, for each risk type, a large set of scenarios is calculated. The worst scenarios per market are combined across markets by assessing both independent events per market, and worst events happening in all markets at the same time.
In 2016 there were two cases with large positive trading results. The first large positive trading result was driven by a combination of position changes; the second large positive result was driven by volatile market moves on the day of Brexit.
In 2016, the average VaR was at a similar level as last year, as notable also in different risk types. The VaR was volatile during the year driven by position changes. Position changes decreased VaR by the end of the year in a response to increased market volatility.
Standardised Approach amounts in EUR millions RWA Capital requirements RWA Capital requirements Outright products 1 Interest rate risk (general and specific) 2 Equity risk (general and specific) 3 Foreign exchange risk 1,081 87 1,328 106 4 Commodity risk Options 5 Simplified approach 6 Delta-plus method 7 Scenario approach 8 Securitisation (specific risk) 9 Total 1,081 87 1,328 106
The Market risk regulatory capital under Standardized Approach is fully driven by the foreign exchange risk in the non-trading portfolio. The decrease in foreign exchange risk in 2016 mainly relates to the decrease in INR (Indian Rupee) currency exposure, caused by the sale of shares in Kotak Mahindra Bank.
(sVaRavg) x multiplication factor (ms) (Article 366) 2,546 204 2,931 235 3 Incremental risk charge -IRC (higher of values a and b) 1,910 153 3,579 286 (a) Most recent IRC value (incremental default and migration risks section 3 calculated in accordance with Section 3 articles 370/371) 1,500 120 3,339 267 (b) Average of the IRC number over the preceding 12 weeks 1,910 153 3,579 286 4 Comprehensive Risk Measure – CRM (higher of values a, b and c) (a) Most recent risk number for the correlation trading portfolio (article 377) (b) Average of the risk number for the correlation trading portfolio over the preceding 12-weeks (c) 8 % of the own funds requirement in SA on most recent risk number for the correlation trading portfolio (Article 338(4)) 5 Total 5,579 446 8,307 665
ING Bank incorporates funding and liquidity management in its business strategy. In order to optimise its funding and liquidity risk management, ING Bank has developed a funding and liquidity risk framework aimed at maximising liquidity access and minimising funding risks and costs. The main objective of ING’s funding and liquidity risk management is to maintain sufficient liquidity to ensure safe and sound operations under normal market circumstances and in times of stress.
Governance Within ING Bank, the MBB, staff departments from the CRO and CFO domain, Capital Management and Bank Treasury have oversight of and are responsible for managing funding and liquidity risk. The MBB defines the funding and liquidity strategy, target funding and liquidity position and the risk appetite based on recommendations from Bank Treasury, Capital Management, Balance Sheet Risk and Finance.
ALCO Bank determines the liquidity risk (limit) framework and appetite after which this is cascaded down in the organisation under the responsibility of the lower level ALCOs. ING Bank’s liquidity risk framework is based on the three lines of defence concept, whereby risk principles are implemented, monitored and controlled in conjunction with both first and second line functions within the Bank.
Liquidity risk appetite ING’s liquidity risk appetite expresses the level of liquidity risk ING is willing to take in pursuit of its strategic objectives. The Liquidity Risk Appetite Statements (RAS) are aligned with the ING strategy and are allocated to the ING entities by way of limits, where needed per ING entity. ING’s Liquidity RAS is build up of three levels: • RAS Level 1 are considered in conjunction with each other for the purpose of steering the ING Bank liquidity positions as they differ in assumptions, horizon and scope. The level 1 risk appetite statements (i) assure compliance with regulatory requirements (LCR and NSFR) and (ii) set adequate buffers related to internally defined stress scenarios; • RAS Level 2 are additional principles that allow assessing different aspects of ING consolidated liquidity position and/or balance sheet (ratios). They can ultimately affect RAS Level 1, or they can be complementary to RAS Level 1 (where the differences lie in either the metrics, the assumption, the data source or both). The level 2 risk appetite statements focus on (i) ING Bank’s cash & collateral position, (ii) the asset encumbrance ratio, (iii) assure sufficient levels of funding diversification; and
Liquidity risk transfer and pricing Funds Transfer Pricing (FTP) is an internal measurement and allocation system that assigns a profit contribution to funds raised, lent, or invested. FTP is the pricing mechanism used within ING to transfer interest rate risk, basis risk and liquidity risk positions from commercial units to Bank Treasury. The FTP framework enables local ALCOs to set their local FTP levels and manage these risks for all internal transfers at local level. This means that these risks are transferred from the business to a separate Bank Treasury book where they can be monitored and managed more efficiently and effectively. Any negative carry resulting from necessity to keep a buffer of liquid assets as contingent liquidity is not captured in FTP. This negative carry is captured and allocated through a separate contingent liquidity charging (CLC) mechanism. The liquidity costs, benefits and risks are considered in the product pricing, design and offering and in the Product Approval and Review Process (PARP) or deal approval and other related processes for commercial products by the business units.
The European Commission proposal also contains guidance on disclosure. This means that disclosure requirements will come into force after the approval by the European Parliament and Council.
The Head of Corporate Operational Risk Management (CORM) and the Chief Compliance Officer report to the Chief Risk Officer (CRO) and are jointly responsible for developing the framework of non-financial risk policies and standards within ING Bank and for monitoring the quality of non-financial risk management in the divisions.
The NFR function uses a layered functional approach within divisions to ensure systematic and consistent implementation of the framework of policies and minimum standards within ING Bank. To avoid potential conflicts of interests, it is imperative that staff in this function are independent and objective when advising business management on non-financial risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level within Operational Risk Management (ORM) and Compliance is in place. The functional reporting line has clear accountabilities with regard to objectives setting, remuneration, performance management and appointment of new staff as well as obligations to veto and escalate.
Framework Non-financial risk is the risk of financial loss, legal or regulatory sanctions, or reputational damage due to inadequate or failing internal processes, people and systems; a failure to comply with laws, regulations and standards; or external events. ING Bank has a comprehensive framework for non-financial risks that supports and governs the process of identifying, measuring, mitigating, monitoring and reporting non-financial risks. It reflects the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
Risk mitigations ING Bank is currently not using any insurance or risk transfer mechanisms for the mitigation of risk in the context of the AMA capital calculation.
ING Bank continues working on strengthening its global fraud resilience and to strengthen its control environment as fraudsters turn their interest to the end-user. Exploring and combining automated fraud detection tools that can be used for monitoring or early detection of fraudulent incoming and outgoing payments remains important in fraud prevention. These are used to further enhance an effective set of organisational controls.
Main developments in 2016 Regulatory developments Compliance with applicable laws and regulations is resource-intensive and costly. Banks continue to be faced with new and increasingly onerous regulatory requirements, and we expect the scope and extent of regulations in the jurisdictions in which we operate to generally increase further. ING is concerned that the lack of coordination among policy makers and the lack of clarity on future regulatory requirements is making it increasingly difficult to actively support the economies where we operate.