Report of the Supervisory Board 56 Corporate governance 60 Report of ING Trust Office 73 Report of ING Continuity Foundation 76 Conformity statement 77
Accounting policies for the consolidated annual accounts 98 Notes to the consolidated annual accounts 118 Risk management 218 Capital management 304
There are two milestones I would like to mention. First, with the tranche repaid on 26 November 2012,
In 2012, we further simplified our organisation, and we took significant further steps to reduce our risk profile, but at a cost. We also streamlined our product range and anticipated and implemented new regulations. On the banking side, we refined the strategy, and although our results were under pressure, we managed to strengthen the balance sheet and improve our capital and funding position. Moreover, our liquidity position remained strong.
“An important priority is to win back trust because trust is the cornerstone of financial services. Restoring trust starts by being a strong and financially sustainable company that puts its customers first.”
The streamlining and the sale of parts of the business adversely impact jobs at the bank and the insurance and investment management businesses. This is something we regret, but these measures are necessary and keep our organisation flexible in the current uncertain climate.
Through a range of activities, we contribute to society. One example is our renewed partnership with UNICEF to give children all over the world the chance of a better future via education. We engage with all our stakeholders; actively observing and listening to their needs and comments and responding accordingly. That is what financial services are all about, and we are determined to deliver on that in a sustainable way. This is a challenge we are embracing with full conviction. I am convinced that we can build on the foundations we have laid.
As of 1 October 2013, I will step down as CEO. The Supervisory Board intends to propose Ralph Hamers to be appointed as a member of the Executive Board at the annual General Meeting on 13 May 2013 and to succeed me as the next CEO as of 1 October 2013. I am sure that Ralph Hamers will continue to execute ING’s strategic course.
OUR STRATEGY To serve the interests of all stakeholders, increase management focus and create value for shareholders, ING is moving towards full separation of its banking and insurance operations. The separation is part of the Restructuring Plan required by the European Commission in order to gain approval for the Dutch state aid received in 2008/2009.
On the insurance side, the focus will be to optimise returns and value for the business as we prepare for separation. We will focus on earning our customers’ trust through transparent products, value for money and superior service. This reflects our universal customer ideal: saving and investing for the future should be easier.
OUR STAKEHOLDERS ING conducts business on the basis of clearly defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders such as customers, employees, supervisors, shareholders, civil society organisations and regulators.
OUR CORPORATE RESPONSIBILITY ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and to be a good corporate citizen. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible.
Repayment to the Dutch State ING has made good progress in repaying the EUR 10 billion of capital support from the Dutch State. As part of the amended Restructuring Plan, ING has filed a schedule to repay the Dutch State in four equal tranches of EUR 1.125 billion each. The first payment was made on 26 November 2012. The other tranches are due to be paid by November 2013, March 2014 and May 2015.
BANKING ING’s banking operations are divided into two main activities: Retail Banking and Commercial Banking.
INSURANCE/INvESTMENT MANAGEMENT ING’s insurance and investment management businesses include its life and non-life insurance, pension and asset management activities.
** Operating result is underlying result before tax excluding gains/ losses and impairments, revaluations and market and other impacts.
* Excluding discontinued operations. The results of the Asia insurance and investment businesses are classified as ‘net result from discontinued operations’.
Result Banking result before taxation 4,134 6,028 5,830 –838 106 Insurance result before taxation (1) –238 –608 –2,182 –1,537 –1,282 Result before taxation 3,896 5,420 3,648 –2,375 –1,176
Better business Sustainable assets allocated (in EUR billion) (2) 5.7 2.9 3.0 Better environment CO2 emissions per FTE (in tonnes) (3) 2.4 2.1 2.3 Better workplace – Employee engagement score ING Bank
Jan H.M. Hommen (69), CEO and chairman Patrick G. Flynn (52), CFO Wilfred Nagel (56), CRO
Audit Committee Joost Kuiper, chairman Tineke Bahlmann Henk Breukink Jan Holsboer Yvonne van Rooy Luc Vandewalle
Risk Committee Piet Klaver, chairman Tineke Bahlmann Joost Kuiper Luc Vandewalle Jeroen van der Veer
Corporate Governance Committee Henk Breukink, chairman Jeroen van der Veer Lodewijk de Waal
(3) The current composition of the Supervisory Board Committees can be found on the Company’s website (www.ing.com).
Nomination Committee Jeroen van der Veer, chairman Peter Elverding Piet Klaver Lodewijk de Waal 9ING Group Annual Report 2012
ING’s policy is to pay dividends in relation to the long-term underlying development of cash earnings. Dividends will only be paid when the Executive Board considers such a dividend appropriate. Given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repay the remaining outstanding core Tier 1 securities, the Executive Board will not propose to pay a dividend over 2012 at the annual General Meeting. ING intends to resume dividend payments on common shares when all remaining core Tier 1 securities have been repaid to the Dutch State and regulatory capital requirements have been met.
Prices depositary receipts for ordinary shares Euronext Amsterdam by NYSE Euronext in EUR 2012 2011 2010
ING FTSE 300 Banks FTSE 300 Life Insurance 1 W h o w e are 2 R
N.V. and ING Verzekeringen N.V. carry a negative outlook. (3) Moody’s rating for ING Groep N.V. and the long-term rating of ING Bank N.V.
carry a negative outlook, while the long-term rating of ING Verzekeringen N.V. carries a developing outlook.
> Financial environment still highly challenging > ING adapting to financial sector reform
Whilst Europe was mired in recession, the US economy showed some signs of revival in the second half of 2012. The US housing market slowly recovered, with prices stabilising and construction activity recovering. Unemployment was trending downward, reinforcing ING’s view of a recovery slowly taking hold in the US.
The uncertain economic outlook and the turbulence on financial markets in 2012 were among the factors that made ING Bank put extra focus on funding, capital and liquidity.
Underlying net result held up well at EUR 2,603 million, compared with an underlying net result of EUR 2,746 million in 2011. Underlying net result is derived from the total net result by excluding the impact of divestments, discontinued operations and special items.
IMPORTANT CHANGES IN REGULATION AND SUPERVISION The most prominent development in 2012 was the agreement reached among the heads of European Union member states on the introduction of a European banking union. Agreement on the details and timetable is likely to take some time.
BANKING UNION/SINGLE SUPERVISORY MECHANISM ING supports the concept of a banking union based on four main pillars: a single supervisory mechanism (SSM), a single rulebook for prudential regulation, a common framework for recovery and resolution, and a harmonised deposit guarantee scheme. Such a union is likely to reduce fragmentation in the interbank and wholesale markets and increase the integrity of the European single market and European single currency.
REGULATIONS DRIVE UP CAPITAL REQUIREMENTS The Capital Requirements Directives (CRD III and CRD IV) have already affected and will continue to increase the capital requirements for all banks in Europe, including ING. ING recognises the importance of mitigating systemic risk. As expected, the G20 in 2012 included ING on its list of Global Systemically Important Banks (G-SIBs). G-SIBs will be required to hold an additional buffer above the 7% core Tier 1 buffer of Basel III, to be phased in between 2016 and 2019. ING is in one of the lower categories, and therefore subject to an additional requirement of 1%. In addition, the Dutch regulator indicated that the national capital requirements for systemically important banks in the Netherlands will be in the range of 1-3% including the G20 international requirement mentioned above. ING is expected to be in the highest category in the Netherlands. These requirements must be met by 2019. The Dutch Government agreed in October 2012 that the timetable for the additional buffers for Systemically Important Financial 13ING Group Annual Report 2012 1 W h o w e are 2 R
ING believes in the strength of the universal banking model, combining retail and commercial banking activities. The universal banking model brings major benefits in terms of risk diversification, capital and liquidity management, consumer choice and fulfilling the needs of long-term customer banking relationships. Commercial banking activities within ING provide key support in terms of debt capital markets, hedging, cash management, trade finance and project finance, which helps serve the growing demand for integrated services, from large corporations and small and medium-sized enterprises (SMEs). The synergies achieved by combining this wide range of services within a universal bank would be lost if parts of these activities were separated or ringfenced. ING is of the opinion that moving activities not permitted in a deposit bank into a trading bank would be detrimental to the ability of banks to serve their customers.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE During 2012, ING Investment Management spent considerable time and effort familiarising the organisation with the requirements of the Alternative Investment Fund Managers Directive (AIFMD), which was agreed in 2011 and comes into effect in July 2013. In July 2012, further details of the AIFMD became clear through a draft text publication. Since then the EC has missed its deadline of September 2012 for the publication of the final version of that text due to discussions on some of the detailed AIFMD measures. ING is awaiting publication of the final text and will continue to prepare the organisation for timely compliance with the AIFMD.
ING BANK REACHED AGREEMENT wITH U.S. AUTHORITIES On 12 June 2012, ING Bank entered into a Settlement Agreement with U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Deferred Prosecution Agreements with the Department of Justice, the United States Attorney’s Office for the District of Columbia and the District Attorney of the County of New York (together the “U.S. Authorities”) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until 2007. Under the terms of the Deferred Prosecution Agreements, no further action will be taken against ING Bank if it meets the conditions set forth in the agreements during an 18-months period. As part of the settlement, ING Bank has paid a total penalty of EUR 473 million. As announced on 9 May 2012, ING Bank recognised a provision in the first quarter of 2012 by which this issue has been sufficiently covered. ING Bank has cooperated closely and constructively with regulators and other authorities throughout this process. The U.S. Authorities have recognized ING’s substantial cooperation in the resolution and ING’s efforts and commitment to continuously enhance compliance within the organization.
• Dutch government support for a possible financial transaction tax (FTT) for the financial sector and membership of the group of EU member states exploring the possibilities of imposing an FTT in parts of the EU. However, a condition for the Dutch Government’s support of any form of FTT is the exemption of Dutch pension funds.
• Legally capping variable remuneration, such as annual bonuses, in the financial sector at 20% of fixed remuneration.
The coalition agreement also contains a number of measures affecting the Dutch housing market. One of these is the curtailment of mortgage interest deduction for income tax purposes: interest on new mortgages will only be tax deductible under specified repayment conditions.
• The increase of the insurance premium tax from 9.7% to 21% per 1 April 2013, causing a significant increase in insurance policy premiums.
Bank Levy On 1 July 2011, the Dutch Ministry of Finance announced a temporary reduction of the real estate transfer tax from 6% to 2% (a tax on property transactions). In this announcement, several ways of funding the reduction were identified, the introduction of a bank tax being one of them. The levy entered into force in 2012. Dutch and nonDutch entities with banking activities in the Netherlands come within its scope. The taxable base of the levy is the liability side of the global consolidated balance sheet, with exemptions for equity, for deposits that are covered by a deposit guarantee scheme, and for certain liabilities that relate to insurance business.
Since the financial crisis of 2008/2009, ING has put more emphasis on its priorities to put the customer first, to better balance the interests of all stakeholders, and to have strong, financially sustainable, simpler businesses. In 2012, several important milestones were reached. First, we strengthened our capital, funding and liquidity positions to meet future regulatory requirements (Basel III), and continued to take a prudent approach to risk in a volatile external environment. Second, ING and the Dutch State reached an agreement with the European Commission (EC) in November 2012 on an amended Restructuring Plan. This has given us more flexibility in completing the divestments and making adjustments on other commitments in light of the market environment, economic climate and more stringent regulation. Third, ING’s repayments (including premium payments) to the Dutch State exceeded the principal amount of capital support provided in 2008. Among all the European banks that received state aid following the crisis, ING is one of the furthest advanced in repaying it; above that with a significant premium.
ING Bank’s decrease of its underlying result before tax was mainly driven by higher loan losses, losses from active de-risking, negative credit and debt valuation adjustments and the Dutch bank levy. Our strong funding position enabled us to continue supporting 17ING Group Annual Report 2012 1 W h o w e are 2 R
DELIVERING ON RESTRUCTURING To obtain approval from the EC in November 2009 for the support received from the Dutch State during the financial crisis, ING had to divest WestlandUtrecht Bank by 2012, and ING Direct USA and all ING’s insurance and investment management operations by the end of 2013.
AMENDMENTS TO THE RESTRUCTURING PLAN ING announced in November 2012 that, together with the Dutch State, it had reached an agreement with the EC on significant amendments to the Restructuring Plan.
The amendments extend the time horizon and increase the flexibility for the completion of divestments and adjust other commitments in light of the market conditions, economic climate and more stringent regulation. Under the amendments, the final dates for divesting the insurance and investment management businesses have been extended as follows: • The divestment of more than 50% of the Asian Insurance/IM
• The divestment of more than 50% of Insurance/IM Europe has to be completed by year-end 2015, with the remaining interest divested by year-end 2018.
The base case scenario for the divestment of Insurance/IM Europe and ING U.S. is through an IPO process. We are determined to maintain the momentum of the programme achieved over the past four years. We will continue our efforts to improve our performance, serving our customers, prudently managing risks and expenses to make sure that when the circumstances are right, we will be ready for the next phase in restructuring and realigning our businesses. The timing of divestments will depend on market conditions and readiness, including performance. The process of divesting the remaining Insurance and IM units in Asia continues. ING is committed to conduct these processes with the utmost diligence in the interest of all stakeholders, including customers, employees, distribution partners and shareholders.
The amended Restructuring Plan was formally approved by an EC decision on 16 November 2012. As a result, the EC closed its formal investigations that were announced on 11 May 2012 and ING also withdrew its appeal at the General Court of the European Union, which was filed in July 2012. For principal legal reasons, the EC has continued with its appeal against the General Court ruling of March 2012. However, ING, the Dutch State and the European Commission agreed that any outcome of this procedure will not affect the agreement as announced in November 2012. We believe that the amended Restructuring Plan is in the interest of all stakeholders.
However, ING Bank was able to continue delivering on its priorities to strengthen its financial position, reduce risks, meet the restructuring measures as approved by the European Commission and to build a stronger bank. The Bank has made good progress on the ambitions for 2015, defined in January 2012. The main pillars on which the Bank’s strategy is based are customer centricity, operational excellence and optimising the balance sheet. Customer centricity is about restoring trust through transparency and fair pricing, improving service and focusing on providing solutions for customers. Operational excellence goes beyond cost cutting and is about streamlining processes and improving efficiency (simplifying the organisation to reach a structural and sustainable new level of efficiency). This is an imperative competitive edge as regulatory costs rise. Optimising the balance sheet entails managing the balance sheet to optimise returns to help offset the impact of higher capital requirements.
Bank is a stand-alone business, the emphasis will be on increasing our deposit base and integrating the balance sheet by matching the deposits of ING Direct with loans from Commercial Banking. This will allow us to increase the size of the business without growing the balance sheet. ING Bank aims to produce a competitive return on (IFRS-EU) equity of 10% to 13% through low costs and with a low-risk balance sheet.
Our ambition to be a world-class and trustworthy financial institution includes being a company that takes its responsibilities towards people and the environment seriously. We leverage our unique resources, skills and expertise to contribute to economic growth, general well-being and positive change.
We strengthened our commitment to minimising any potential unethical, illegal or harmful consequences of our business activities, investments or transactions by applying strict policies and principles. An example of integration into our business practice is that ING became one of the founding signatories to the United Nations Principles for Sustainable Insurance. These were launched at the UN Conference on Sustainable Development in Rio de Janeiro in 2012.
Despite volatile markets, we have continued to work towards the full separation of our insurance and investment management companies with the goal of being ready to move ahead in time with the base case IPOs for ING U.S. and ING Insurance/IM Europe, as well as with the sale of the remaining insurance and investment management businesses in Asia. ING will make further efforts to simplify the structure of the company, to focus on core activities, to improve our risk profile and to bolster the capital base. In light of changing customer expectations and demands for more simplicity, easy access and sustainable entrepreneurship, ING has stepped up its efforts to take charge of these changes. We have been working hard to regain the trust of all of our stakeholders, but particularly of our customers, who are at the heart of our businesses; for example by simplifying the product range and making products more transparent, while ensuring suitability and a reasonable, attractive price. In spite of the challenging financial and regulatory environment, we are determined to stay true to our roots and keep helping customers build their future. We intend to remain ambitious in making further improvements to our businesses and in strengthening customer relationships.
cAPITAL MANAGEMENT DEVELOPMENTS AT ING GROUP In line with the amended agreement with the EC, one of the focus areas at ING Group is to repay the core Tier 1 securities to the Dutch State and to eliminate double leverage. As ING has committed itself to eliminate double leverage, the proceeds from divestments will be used to that end, provided they are not needed to reduce the leverage of the remaining insurance businesses. Repayment of the core Tier 1 securities will primarily be funded out of capital generated by ING Bank.
For more details, please see the ‘Strategy’ and ‘Insurance overview’ chapters in this Annual Report.
cAPITAL MANAGEMENT DEVELOPMENTS AT ING BANK ING Bank manages its capital position primarily based on its published core Tier 1 ratio, which is the key constraining factor and the most widely used variable to assess the capitalisation of banks. The published ratio today is a Basel 2.5 ratio, but this will over time move towards a fully loaded Basel III ratio. ING Bank has set an ambitious target for its core Tier 1 ratio of 10% under Basel III, based on ING’s risk appetite and which compares well to its peer group. While optimising the amount of core Tier 1 capital is the first priority, ING needs to take into account a multitude of other constraints. These include: • Other regulatory capital requirements: such as the amount of additional capital, lower Tier 2 capital, the impact of the Basel I floor and the leverage ratio (as part of Basel III).
Capital management 1 W h o w e are 2 R
As a financial services company, ING is exposed to a variety of risks. Risks can have a negative financial impact, but as a financial intermediary performing a ‘transformation’ function ING cannot operate without taking measured and managed risks. To ensure risk-taking is properly controlled, ING has integrated risk management into its daily business activities and strategic planning.
THREE LINES OF DEFENCE The key objective of risk management at ING is to make sure that all risks are managed in the best possible way for all relevant stakeholders. We apply a ‘three lines of defence’ governance model for risk management, whereby ownership for risk is taken at three levels in the organisation.
ING has set up a risk appetite framework that projects and restricts the impact of adverse markets on ING’s capital and liquidity position, based on a number of different risk metrics. In addition, ING increasingly conducts company-wide and portfolio-specific stress tests as a supplementary tool to assess resilience to adverse market conditions and to act upon if mitigating actions are deemed necessary. Customer behaviour and demographics have an important bearing on risk management and are consequently modelled and incorporated in our risk appetite framework. Given the continuously changing environment, the underlying assumptions are regularly reviewed, as are all relevant metrics.
In 2012, economic conditions remained volatile, especially in Europe. Within this environment both the Bank and the Insurance units continued selectively to de-risk their balance sheet, for example by selling Spanish assets, asset-backed securities and real estate investments. The total exposure in the GIIPS (Greece, Ireland, 24 ING Group Annual Report 2012
Italy, Portugal, Spain) countries decreased by EUR 13.8 billion to EUR 67.6 billion. The Spanish funding mismatch was reduced to EUR 9.3 billion, and will continue to decline as securities run off.
In addition, ING has integrated sustainability objectives in its business strategies and activities and manages the related social and environmental risks. Furthermore, in line with European Union requirements, risk management plays an important role in evaluating the performance and determining the remuneration of senior management, ensuring that remuneration is properly correlated with our risk profile and the interests of all stakeholders.
A more detailed section in the Annual Accounts provides further insight into the risk management practice within ING Group.
Total underlying income was virtually stable at EUR 14,241 million. The underlying interest result decreased by 2.2% to EUR 11,712 million. The main reasons for this decrease were lower interest results on savings, reflecting the low interest rate environment, and the impact of de-risking, and higher liquidity costs as the Bank lengthened its funding profile. The underlying interest margin declined to 1.32%, from 1.38% in 2011. Commission income fell 3.0% to EUR 2,162 million, mainly in Commercial Banking. Total investment and other income rose to EUR 368 million, from EUR 84 million in 2011. The increase is mainly explained by a EUR 323 million gain on the sale of ING’s equity stake in Capital One, lower combined losses from impairments and de-risking in the European debt securities portfolio and improved performance at Bank Treasury, partly offset by the negative swing in CVA/DVA adjustments.
The underlying net addition to the provision for loan losses increased to EUR 2,122 million, from EUR 1,336 million in 2011. Risk costs were 73 basis points of average risk-weighted assets 26 ING Group Annual Report 2012
Where We oPerate* ING Bank builds on its international network from its Northern European home markets, capitalising on its leadership position in gathering savings, multi-channel distribution, simple propositions, cost leadership and marketing.
Commercial Banking has an international network in 40 countries, with key positions in Structured Finance and Financial Markets ing’s presence at 31 dec 2012 * ING announced a sale agreement for ING Direct UK on 9 October 2012. ing direct *
ING Bank made significant progress on its strategy of integrating its banking businesses, in particular their balance sheets, a central part of its One Bank strategy, as launched in January 2012. Total balance sheet integration for the year was EUR 11 billion. Much of this was achieved by the transfer of Commercial Banking loans and securitised mortgages from the Dutch legal entity to funding-rich countries like Belgium, Germany, Spain and Italy. These transfers support ING’s strategy of using local funding to finance local assets. They also help diversify risk and income streams as well as build-up own-originated assets (loans) in these countries. It also enables ING to continue to grow lending while simultaneously curtailing balance sheet growth.
Given the weak economic climate in Europe, ING took pro-active measures to reduce exposure to European debt, particularly related to the GIIPS countries (Greece, Italy, Ireland, Portugal and Spain). In total, ING Bank sold six billion of debt securities, taking EUR 0.6 billion of de-risking losses, and reducing risk-weighted assets by EUR 7 billion.
ING Bank began to centralise its Treasury operations into a One Bank Treasury operation, which helps the company to better co-ordinate its programme of funding and liquidity and investment portfolio management.
In every banking business unit, there are many initiatives taken to boost ING’s credentials as a top employer. Local Top Employer programme teams are organised in each business line and they are responsible for executing at the local level the bank-wide Top Employer action plan. Across the banking businesses, best practices in employee development are shared.
Commercial Banking conducted a strategic review of its business portfolio against the backdrop of increasing regulatory requirements and challenging operating conditions. This will involve rationalising operations, simplifying the client coverage model and exiting certain markets and products. It is expected to result in annual pre-tax cost savings of EUR 260 million by 2015.
CUStoMer CentriCity Customers rightfully demand products and services that best meet their evolving financial needs, and seek access to banking services when, where and how it suits them. ING is committed to ensuring these preferences are fully met. ING aims to support its customers in their financial needs by providing advice when needed, flexibility where possible and a range of clear and simple products.
ING has defined a concrete approach to help all employees across different business lines translate ING’s commitment to customer 28 ING Group Annual Report 2012
In terms of employee engagement, in 2012, the Bank expanded its traditional employee engagement survey to assess ‘sustainable employee engagement’. This new measurement provides ING with a better picture of how employees can deliver high performance for customers in challenging times. The overall ‘sustainable engagement’ score was a strong 73%, which is higher than the average of the financial services norm.
The focus in Retail Banking is on the simplification of our model using the ‘direct when possible, advice when needed’ approach.
Retail Banking maintained its solid positions in the Benelux, Western Europe and Australia and remains well placed to seize opportunities in Central Europe and Asia. Amid economic and social uncertainty, its performance remained solid, but some countries came under pressure due to the deteriorating situation.
FINANCIAL DEVELOPMENTS Retail Banking’s underlying result before tax declined to EUR 1,698 million, from EUR 2,282 million in 2011, mainly due to higher risk costs and lower interest results, especially on savings. The 2012 result included EUR 584 million of de-risking losses on the selective sale of European debt securities, while 2011 included EUR 181 million of de-risking losses and EUR 363 million of impairments on Greek government bonds. Net production in client balances was strong, with a net inflow of EUR 28.1 billion in funds entrusted and EUR 11.6 billion net growth in lending, of which EUR 9.2 billion was in residential mortgages and EUR 2.5 billion in other lending.
Total underlying income 9,019 9,286 Underlying operating expenses 6,154 6,144 Underlying additions to loan loss provisions 1,167 860 Underlying result before tax 1,698 2,282 Underlying cost/income ratio 68.2% 66.2% Underlying cost/income ratio (excl. market impacts) 64.1% 62.4% Customer balances: net production funds entrusted (EUR billion) 28 22 Customer balances: net production lending (EUR billion) 12 27 Underlying risk costs in bp of average risk-weighted assets 80 61 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 146 143 Underlying return on equity based on 10% core Tier 1** 7.6% 12.0%
ING Direct Australia and the School for Social Entrepreneurs have entered into a partnership agreement. ING Direct Australia will build the professional and personal capacity of Australia’s budding social entrepreneurs, helping them realise their potential. The longer term objective is to support the social innovation and entrepreneurship sector in Australia. A total of 200 entrepreneurs were supported as a direct result of ING’s involvement.
The underlying income decreased by 6.0% to EUR 3,897 million in 2012, particularly due to a 6.5% decline in interest result. The interest margin on savings and current accounts declined as a reduction in client savings rates could not fully offset a lower return from the investment portfolio due to lower interest rates.
BUSINESS DEVELOPMENTS The Dutch economy performed poorly in 2012, in common with most of the rest of Europe. Dutch consumers are concerned about their personal finances (for example the risk of negative equity, that is the gap between mortgage debt and market value of the house) and the effects of several government policies on their personal budgets.
Retail Netherlands (Retail NL) worked hard during 2012 to help customers manage their financial concerns. For example, with mortgages we have a transparent price policy, with all fees published on our website. Customers receive an interest renewal notification by email three months ahead of time, the Hypotheekrentewekker (mortgage interest alert). We also offer support to customers who are one month overdue on their mortgage payments and assign them a fixed contact person to see how ING can support them. In December, ING started a Hypotheek Hulplijn (mortgage help line) which provides tailor-made advice and support for those customers who seek assistance, in addition to specific information on the ING.nl website.
Market consolidation, continued competition and customers’ preferences for simpler, lower cost products required a number of specific counter measures. We enhanced the number of direct channels, invested in the capacity and quality of our internet and mobile channels and improved paperless services. We continuously evaluated our product offering and adjusted it where appropriate.
Private Banking Private Banking, which serves close to 31,000 wealthy individuals, gained in strength and delivered a good performance, especially in asset management; assets under management amounted to EUR 8.3 billion at year-end. It delivered the highest returns on its model portfolios compared to its main competitors for the third year in a row.
A new internet platform was introduced for ING’s customers, including a new look and feel and a different log-in portal. Over four million retail customers transferred to the new online banking system Mijn ING and now benefit from this more user-friendly and accessible platform.
ING NL, for example, introduced a mobile banking application for SMEs, in addition to the mobile app for private customers. The launch was backed up by an advertising campaign, showing that ING makes everyday banking easier by giving customers access to their accounts anytime, anywhere.
Some of the WUB employees will transfer to Nationale-Nederlanden Bank while others will remain at the separate WUB entity within ING Retail Banking Netherlands, managing a mortgage portfolio. Unfortunately, this reorganisation will result in redundancies. ING will do its utmost to support affected staff members.
Operating expenses declined slightly to EUR 1,418 million compared with 2011. The lower contribution to the deposit guarantee scheme and lower personnel expenses were largely offset by inflation-driven cost increases and a new bank levy. Risk costs increased by 15.9% on 2011 to EUR 168 million, or 83 basis points of average risk-weighted assets, mainly due to higher net additions in the mid-corporate segment.
BUSINESS DEVELOPMENTS Despite challenging economic and financial circumstances, ING Belgium (ING BE), the fourth-largest retail bank in the country, improved on its already solid position. Since customers are increasingly performing day-to-day banking transactions themselves, ING BE continued to offer more direct banking services and products.
Operational excellence ING BE strengthened its operations by working on a number of online improvements.
Mid-corporate and Institutional Banking Lending to mid-corporate and institutional customers was up 10% at EUR 22.4 billion (2011: EUR 20.4 billion), mainly as a result of higher demand from the latter group.
ING has been awarded ‘European Structured Finance Bank 2012’ by Project Finance International – a reputable magazine dealing with project-finance matters globally – for its sheer range and quality of deals it supported in 2012, recognising its contribution both as lender and as advisor. ING Belgium accounted for three out of the eight ‘Deals of the Year’.
ING Luxembourg ING Luxembourg is a full universal bank with three business lines, domestic retail banking, private banking and commercial banking. The Bank serves private individuals, SMEs, large companies and financial institutions. It is a top-five retail bank, serving 100,000 customers. It has 16 branches. It is the number four in the midcorporate segment and number three in the corporate segment.
RETAIL GERMANY FINANCIAL DEVELOPMENTS Retail Germany’s underlying result before tax rose 11.6% to EUR 441 million in 2012 compared with EUR 395 million in 2011, due to lower impairments and de-risking losses.
Customer centricity ING-DiBa launched a new product, ‘Riester-Rente Plus’, in cooperation with a large German insurance company – a product for customers who seek a long-term state-supported retirement plan. It also launched ‘ING Markets Germany’, a financial-market product for retail customers.
In Poland the integration of processes between ING Bank Slaski, ING Lease and ING Commercial Finance was enabled, resulting in fast and easy access to leasing and factoring for our customers and the ING relationship managers with just one internet application. ING Bank Romania introduced a new front-end system for its sales force. It gives a 360-degree view of each customer, providing information about all their portfolios (banking and insurance products). It also has a special section for lead management and a reporting area.
CONCLUSIONS AND AMBITIONS ING’s ambition is to be the Preferred Bank for its customers, driven by operational excellence, customer centricity, balance sheet optimisation, and also on being a top employer. It will continue its efforts to reach this goal in 2013.
ING Netherlands will continue to build on ‘Orange is ING’ – the new brand campaign aimed at becoming the Preferred Bank of the Netherlands.
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Adapting to a challenging environment > Commercial Banking reported resilient results despite negative credit and debt valuation adjustments and higher risk costs > The impact of increased risk costs due to difficult market circumstances were tempered by pro-active cost management > Despite active balance sheet de-risking and reductions, revenues held up well > Commercial Banking builds on its strategy > Operating model adapted to meet changing economic and regulatory pressures > Customer focus remains paramount 2012 was a year of change and challenge. Increasing regulatory demands and capital requirements, heightened funding and risk costs, and other headwinds have placed pressure on the industry and ING’s operations. Commercial Banking adapted well to the adverse market and regulatory circumstances and continued to build a sustainable and resilient business.
Commercial Banking continued 2012 strong progress was made on a number of key priorities, the most crucial being the developments in balance sheet optimisation. This was achieved through a number of important initiatives, including matching originated assets with originated liabilities across business units in different countries, asset transfers, integration of a number of legal entities, a focus on increasing client deposits, and the creation of a consolidated Bank Treasury function for the entire Bank.
The business line continued to increase efficiency and reduce operational complexity through a decrease in the number of booking locations and front office IT systems. This has reduced costs and operational risk, and helped the business unit meet new regulatory requirements.
GENERAL LENDING AND TRANSACTION SERVICES GENERAL LENDING Lending is core to building and supporting customer relationships in Commercial Banking’s target markets, with both corporate and financial institution clients.
RE & O continued to close legacy divestments in 2012, reducing exposure substantially despite the continued challenging and deteriorating market. Residual future commitments have been dissolved, through a combination of stake sales and negotiated exits. Although impairments are still at relatively high levels, the portfolio is adequately provisioned and being wound down in a controlled manner. In 2012 RE & O closed operations in various countries and the organisation and costs have been reduced to minimum level.
In 2012, a dedicated Lease run-off organisation was established to oversee the discontinuation of General Lease operations outside its core markets ensuring the necessary control and management oversight.
Financial Markets (FM) also made good progress with the implementation of its target operating model, allowing for the decommissioning of IT systems, achieving cost savings and a reduction in operational risks globally.
To complement the PCM and FM initiatives, Commercial Banking businesses have launched a programme which consolidates operations and streamlines technology across all product lines over the next three years. This initiative includes moving to more centralised booking and processing of Commercial Banking business and greater use of investment in global IT applications. The simplified operating model will also enable support activities to be further streamlined.
TOP EMPLOYER As banking is essentially a people’s business it is important as an employer to have engaged and motivated staff. Remaining a top employer is therefore a priority at ING.
In July 2012, ING and the International Finance Corporation launched a USD 500 million facility to support global commodities trade. The facility aims to reduce the risk of food and energy shortages and maintain stable prices for buyers in emerging markets.
Commercial Banking continues to develop new core businesses for the future while streamlining and optimising existing operations. It will steadfastly ensure that its customers are at the core of its business, maintaining an unwavering focus on providing superior products and services.
ManageMent Board InSUranCe on 31 december 2012 44 ING Group Annual Report 2012
Total operating result** 1,095 1,658 Gains/losses and impairments 119 –609 Revaluations –126 206 Market and other impacts –776 –1,581 Underlying result before tax 311 –325
** Operating result is underlying result before tax excluding market and other impacts.
Wilfred Nagel chief risk officer 2012 was a challenging year marked by continuing low interest rates and financial volatility largely related to the European sovereign debt crisis. ING Insurance focused on the restructuring of its operations and preparing its businesses for standalone futures. Progress was made on the sale of Asia Insurance and Investment Management (IM). ING U.S. moved closer to its planned IPO, and ING Insurance/IM Europe stepped up its efforts to prepare for a base case IPO, a major aspect of which is the transformation of Nationale-Nederlanden.
Market and other impacts improved to EUR –776 million from EUR –1,581 million in 2011, which was significantly impacted by a EUR 1,099 million charge related to a comprehensive policyholder behaviour assumption review for the US Closed Block VA business in that year. The remaining change in market and other impacts is mainly explained by a EUR 280 million decline in the Benelux, due to a change in the provision for guarantees on separate account pension contracts (net of hedging) and macro interest rate hedges.
The Life/IM administrative expenses ratio deteriorated from 43.3% in 2011 to 47.5% in 2012 as a result of 0.5% lower Life/IM income and 9.1% higher administrative expenses. Expenses, especially in the US, were higher in 2012 compared with 2011 as a result of the one-off impact of pension plan changes in 2011.
d d itio n al in fo rm atio n for the insurance businesses in Hong Kong, Macau and Thailand (closed 28 February 2013), the investment management operations in Malaysia and Thailand, and a 33.3% stake in China Merchants Fund, an investment management joint venture.
goVernanCe eurasia In November 2011, the Management Board of the new holding company for the European and Asian insurance and investment activities, ING Insurance Eurasia N.V. (ING Insurance EurAsia, a subsidiary of ING Verzekeringen N.V.), was activated. The Management Board Insurance EurAsia manages the ING Insurance EurAsia insurance and investment management businesses and is responsible for strategic, operational and business decisions.
To ensure employees at the insurance and investment operations in Europe remain engaged as they work towards preparing the business for a standalone future, the emphasis has been on two priorities: talent and leadership management, and engagement and diversity. Talent and leadership development are important for building the new organisation. Mid-2012, an extensive talent review was carried out, resulting in an up-to-date overview with succession plans in place for all key positions. In terms of engagement, a new annual engagement survey was developed for employees within Europe, resulting in an overall engagement score of 70%. This shows that despite turbulent times, commitment levels remain high. For diversity, three priorities were defined and these are: inclusive culture, female leadership and connection to a younger generation.
The composition of the Board of ING U.S., Inc. is as follows: • Jan Hommen • Patrick Flynn • Wilfred Nagel • Rodney Martin • Alain Karaoglan • Ewout Steenbergen • Robert Leary (until 6 December 2012).
ING Investment Management worked towards preparing its three regional businesses (ING IM International, ING IM US and ING IM Asia/Pacific) for separate standalone futures.
In Europe, ING is aiming to create a leading European wealth management and protection company. It will have a combination of cash-generating businesses and leading positions in growth markets. The business will concentrate further on improving the customer experience, focusing on product and service innovation, distribution excellence and effective and efficient operations.
> Results impacted by negative non-operating items > Accelerated transformation programme in Nationale-Nederlanden > Customer-focused strategy
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Benelux decreased by 112.3% to EUR –91 million in 2012 compared with EUR 739 million in 2011, partly due to a lower operating result, lower result on equity hedges and negative real estate revaluations, as well as lower results from a change in the provision for guarantees on separate account pension contracts (net of hedging) and lower results from macro interest rate hedges. This was partly offset by higher capital gains on loans, debt and public equity. The equity and macro interest rate hedges were in place to protect regulatory capital.
Nationale-Nederlanden’s position as one of the leading pension providers in the Netherlands and its strengths in providing insurance, pension administration (AZL) and investment management services position it well to support existing and new clients with the important transition from DB to DC plans.
In the individual life insurance market in the Netherlands, consumers are switching to tax-favourable bank products for their pension savings (banksparen). Nationale-Nederlanden responded to this by introducing banksparen products in 2011 and continued this strategy in 2012. Nationale-Nederlanden Bank will expand the development in the banksparen field, which will be boosted by the upcoming merger with the commercial activities of WestlandUtrecht Bank. The existing individual life insurance contracts will be serviced by a so-called closed-block organisation focused on excellent customer service, process rationalisation and lower administration costs. In 2012 Nationale-Nederlanden stepped up its total compensation for customers with individual unit-linked policies. By early 2013, all customers were informed about their compensation.
Nationale-Nederlanden holds a leading position in the non-life market, especially in the segment of small and medium-sized enterprises. Nationale-Nederlanden will continue to build on this stronghold and will continue to focus on profitable growth and efficiency.
of insurance products were adjusted into new retail products to enable sales through direct channels of Nationale-Nederlanden; a new banksparen product was launched through direct channels in 2012 and a further roll-out is planned for 2013.
Insurance Belgium will concentrate on its insurance strategy separate from ING Bank, and ING Life Luxembourg will concentrate on further developing private wealth insurance products.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Central and Rest of Europe in 2012 was a profit of EUR 170 million compared with a EUR 198 million loss in 2011. Contrary to the lower operating result, the gains/losses and impairments improved in 2012 at EUR –35 million compared with EUR –404 million in 2011. The latter amount reflects EUR 324 million in impairments on Greek government bonds, EUR 34 million capital losses on the sales of Italian sovereign bonds and EUR 18 million capital losses on the sales of Portuguese bonds issued by financial institutions.
The investment margin of EUR 59 million in 2012 was 18.1% lower than EUR 72 million in 2011, in part due to lower investment yields in Greece, reflecting de-risking measures. Fees and premium-based revenues declined by 6.9% compared with 2011. This decline was driven by lower fees in the life business and by regulatory changes to pension funds in Poland and Hungary. The technical margin increased by 3.6%, largely due to the release of a technical provision in Romania. Life administrative expenses fell by 7.5% compared with 2011, reflecting strict control and provision releases in 2012, while 2011 was impacted by higher project costs related to building a regional IT organisation and by reorganisation expenses.
The Spanish economy lapsed back into recession, while Greece remained in deep recession. Poland and Bulgaria recorded growth while Turkey exhibited solid GDP growth.
ING achieved a modest operating profit and recorded double-digit sales growth. Life sales grew by 12.8% across the region and pension sales by 7.9%.
In 2012 Turkey became the region’s number 1 market in terms of new sales (Life and pensions). Sales doubled (up 101%) compared to 2011. The Czech Republic, Slovakia, Greece and Romania also increased new sales, in most cases recording double-digit growth.
Multi-channel distribution Insurance CRE has life insurance and pension operations in nine countries – Poland, the Czech Republic, Slovakia, Hungary, Romania, Bulgaria, Turkey, Greece and Spain. Tied agents remain Insurance CRE’s dominant distribution channel. Improving the quality and productivity of the tied agent sales forces through the Tied Agents Transformation Programme is one of the key strategic initiatives of Insurance CRE. One of the goals for this channel is to further improve customer centricity. To this end, ING in Romania has developed new tools to help agents recruit better qualified staff and to help them provide e-learning facilities and online personal finance plans for customers and prospective customers. Spain finalised the implementation of the transformation programme for all its agent branches and it is working on further refinements and upgrades.
Though tied agents remain the largest single channel for sales, the majority of Insurance CRE’s new sales came from other channels combined, especially from brokers (Slovakia, the Czech Republic and Turkey), bancassurance (the Czech Republic and Turkey) and direct channels (Poland, Romania and the Czech Republic). In Turkey, ING is successfully building broker distribution from scratch, for example, by selling voluntary pensions through non-life brokers.
ING Insurance Romania’s pension business won the ‘Company of the Year’ title in awards organised by PRIMM Magazine Insurance & Pensions, a major publication in the Romanian insurance and pensions sector. ING Insurance Romania also won the ‘Best Insurance Product of the Year’ award for adding a provision to its existing life 50 ING Group Annual Report 2012
> Solid financial performance > Steady progress towards standalone future > Focus remains on customers and distribution partners
The investment margin increased by 21.9%, primarily due to higher general account assets in the Retirement Services business, partially due to customer transfers from equity accounts, and lower average crediting rates.
Gains/losses and impairments improved to EUR 36 million, from EUR –171 million in 2011, primarily driven by lower impairments and credit losses as well as an increase in gains on securities sold.
Market and other impacts improved to EUR 29 million, from EUR –36 million in 2011, primarily due to net favourable DAC unlocking in the third quarter related to model refinements and assumption updates, largely in Annuities.
New sales (APE) were EUR 2,047 million, a 14.4% increase compared with 2011, primarily due to growth in the full-service retirement plans, partly offset by lower Annuity and Individual Life sales due to management actions to reduce sales in the current low interest rate environment.
As part of the plan to establish an independent capital structure, ING U.S. entered into a USD 5 billion senior unsecured credit facility agreement with a syndicate of 27 banks. The credit facility was the first based on the standalone credit of ING U.S.
In November, the company filed an initial registration statement on Form S-1 with the US Securities and Exchange Commission (SEC) in connection with its proposed initial public offering.
The company’s Retirement Solutions business comprises two major product lines: Retirement and Annuities.
Industry expertise ING U.S. often served as a source of information about important industry trends and information during the year. The company issued findings from an extensive consumer study that highlighted the retirement saving behaviours, attitudes and trends of multicultural and women’s groups. In addition, ING U.S. conducted and shared findings from a separate study that highlighted consumer behaviours, attitudes and trends on purchasing life insurance. Finally, the company launched a research-based programme that re-promoted ING U.S.’s pioneering peer benchmarking web-tool, www.INGCompareMe.com, as well as created an interactive map – www.INGStateofSavings.com – to illustrate how Americans are saving across the country.
This operating platform strengthened further in 2012 as ING U.S. has successfully attracted and retained talent, adding highly qualified executives in several key positions. New heads were appointed for Human Resources, Individual Retirement and Tax Exempt Markets.
The fees and premium-based revenues decreased to EUR 100 million, from EUR 168 million in 2011. This decrease is mainly due to lower fee income and higher hedge and reserve costs.
Market and other impacts were EUR –274 million compared with EUR –1,295 million in 2011. Excluding the EUR 1.1 billion charge in the fourth quarter of 2011, market and other impacts in 2012 decreased, mainly reflecting a higher loss on hedges, net of reserve changes, due to the rising equity markets. The hedge programme is focused on protecting regulatory capital rather than mitigating earnings volatility.
In 2012, ING Investment Management (ING IM) started preparing the three regional IM businesses for their separate futures. ING announced the intention to sell ING IM Asia, whereas ING IM US as well as ING IM International are both preparing for their standalone future in conjunction with ING Insurance US and ING Insurance Europe respectively.
ING IM is a signatory to the United Nations Principles for Responsible Investment (UN PRI) and believes that integrating environmental, social and governance (ESG) factors into the investment process enables its investment professionals to take into account factors which are often outside the scope of traditional financial analysis, but which can have a significant impact on long-term performance.
Administrative expenses were 11.2% higher than the previous year, for a large part attributable to currency effects. On a constant currency basis, expenses rose 5.7% during the same period, mainly as a result of a non-recurring expense reduction from a change to the IM US pension plan in the prior year, and investments in Europe in the current year related to rebuilding its capabilities in the US.
ING IM International and ING IM US are preparing for separate futures with their respective Insurance counterparts, providing a wide variety of actively-managed strategies, investment vehicles and advisory services in all major asset classes and investment styles. Both businesses deliver a wide range of investment strategies and services to both ING Insurance US and ING Insurance Europe as well to other retail and institutional clients including other ING affiliates.
In its retail business, ING IM International had a strong year, launching four of its successful Credit Select funds gathering almost EUR 800 million in AuM in Belgium and becoming market leader in the Netherlands. Furthermore, ING IM International announced a partnership with Dutch actor Thom Hoffman and Dutch Olympic gold medal swimmer Ranomi Kromowidjojo. They will feature in various initiatives aimed at increasing awareness among consumers about investing and the need to build a financial future.
ING IM US In 2012 ING IM US investment performance remained strong across the equities and fixed income platforms, and continued to improve in the multi-asset platform. Total assets grew from USD 161.6 billion to USD 180.3 billion, with USD 10.8 billion of this growth coming from net inflows.
The Supervisory Board also approved the proposed EUR 1.125 billion repayment in November on the outstanding core Tier 1 securities to the Dutch State.
The Supervisory Board also approved a mandate to the Executive Board to divest ING Direct UK and ING Direct Canada under certain terms and conditions.
The Nomination Committee assigned an executive search firm to identify European Supervisory Board candidates with financial expertise. Another ambition the Committee would like to see fulfilled is that female members of the Supervisory Board will account for at least 30% of total Supervisory Board members. Various candidates were interviewed by members of the Nomination Committee. This Committee subsequently advised the Supervisory Board to nominate certain candidates as members of the Supervisory Board, subject to approval by DNB.
Audit Committee meetings In 2012 the Audit Committee met five times, with no absentees, to discuss the annual and quarterly results, the annual US GAAP results and the reports from the external auditor.
CHANGES IN THE COMPOSITION OF THE EXECUTIVE BOARD AND MANAGEMENT BOARDS The Supervisory Board will propose to the 2013 General Meeting to appoint Ralph Hamers, presently CEO of ING Belgium as a member of the Executive Board from the 2013 AGM on 13 May. Following his appointment to the Executive Board, Ralph Hamers will also become a member of the Management Board Banking and Management Board Insurance EurAsia. As of 1 October 2013 he will succeed Jan Hommen as CEO, who will be recommended for reappointment for the period as from the 2013 AGM until 1 October 2013.
The Supervisory Board will propose to reappoint Patrick Flynn as a member of the Executive Board for a consecutive period of four years, ending after the annual General Meeting in 2017.
As of 1 November 2012 Delfin Rueda and Dorothee van Vredenburch joined the Management Board Insurance EurAsia. Doug Caldwell joined the Management Board Insurance EurAsia per 1 December 2012. Delfin Rueda became the CFO of Insurance EurAsia while Doug Caldwell became the CRO of Insurance EurAsia. Both succeeded Matthew Rider, who left ING per 1 January 2013.
Please see page 9 for the composition of the Supervisory Board Committees at year-end 2012.
Jeroen van der Veer is nominated for reappointment. Tineke Bahlmann is recommended for reappointment by the Dutch State. Lodewijk de Waal has decided not to apply for reappointment. The Dutch State has indicated to not use its right to recommend a second candidate for appointment as a member of the Supervisory Board at this moment.
This section discusses the application by ING Groep N.V. (‘ING Group’) of the Dutch Corporate Governance Code effective as from 1 January 2009 (‘Corporate Governance Code’) and provides information on the share capital and control, the Executive Board, the Supervisory Board and the external auditor.
In addition, several legislative proposals with corporate governance implications were under discussion, or were adopted, by the Lower House of the Dutch Parliament, or were under discussion in the Upper House of the Dutch Parliament in 2012. These proposals concern, among other things, a legislative proposal on revision and claw back of executive bonuses and profit-sharing of directors and persons determining the day-to-day policy (wetsvoorstel aanpassing en terugvordering van bonussen en winstdelingen van bestuurders en dagelijks beleidsbepalers).
On 26 January 2009, ING Group reached an agreement with the Dutch State regarding the Illiquid Assets Back-up Facility (‘IABF’), as amended on 13 November 2012 and as further described in note 34 to the consolidated annual accounts. During 2009, ING Bank N.V. issued various series of debt instruments under the 2008 Credit Guarantee Scheme of the Dutch State, for the first time on 30 January 2009.
As part of these transactions, certain arrangements with respect to corporate governance and remuneration were agreed with the Dutch State which will remain in place as long as the IABF remains in place.
ING Group voluntarily applies the principles of the Banking Code regarding remuneration with respect to the members of its Executive Board, and considers these principles as a reference for its own corporate governance. ING Group’s remuneration policy for the Executive Board and Senior Management is compliant with these principles.
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 73-75.
The purpose of this delegation of authority is to allow the Company to respond promptly to developments in the financial markets. Without such delegation, if the Company wished to issue new shares, there would be an increased risk that conditions in the financial markets may have changed during the time needed for convening a general meeting, especially due to the 42-day statutory convocation period. In view of the importance of flexibility with respect to the issuance of shares, the Executive Board and the Supervisory Board will periodically evaluate the delegation of authority to issue shares and, if necessary, make adjusted proposals to the General Meeting.
• In contrast to the Sarbanes-Oxley Act of 2002, the Corporate Governance Code contains a ‘comply-or-explain’ principle, offering the possibility to deviate from the Corporate Governance Code as long as any such deviations are explained. To the extent that such deviations are approved by the General Meeting, the company is deemed to be in full compliance with the Corporate Governance Code.
• The shareholder approval requirements for equity compensation plans under Dutch law and the Corporate Governance Code differ from those applicable to US companies which are subject to the NYSE’s listing rules that require the 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.
DEPOSITARY RECEIPTS More than 99.9% of the issued ordinary shares are held by ING Trust Office. In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges (see page 10 for an overview of the listings). Depositary receipts can 62 ING Group Annual Report 2012
Investor Relations department is the main point of contact for these communications. However, Executive Board members also participate in investor meetings. Information provided during such occasions is always limited to that which is already in the public domain, and no bilateral contacts take place shortly before the publication of regular quarterly results releases. If bilateral communication between ING Group and investors is organised and/or facilitated through a broker, an analyst or specialist salesperson representing the broker may be present in the meeting. ING Group does not provide brokers with any form of compensation pertaining to such meeting organisation and/or facilitation services.
ING Group is actively covered by approximately 25 analysts who frequently issue reports on the Company. A list of these analysts can be found under ‘Analyst Coverage’ of the Investor Relations section of the Company’s website. During 2012, ING Group did not provide any form of compensation to parties that are directly or indirectly involved in the production or publication of analysts’ reports, with the exception of credit-rating agencies.
REPORTING Resolutions adopted at a general meeting are generally published on the website of ING Group (www.ing.com) within one week after the meeting. The draft minutes of the general meeting are, in accordance with the Corporate Governance Code, made available to shareholders and holders of depositary receipts on the website of ING Group (www.ing.com) no later than three months after the meeting. Shareholders and holders of depositary receipts may react to the draft minutes in the following three months, after which the final minutes will be adopted by the chairman of the meeting in question and by a shareholder or holder of depositary receipts appointed by that meeting. The final minutes are made available on the website of ING Group
VOTING RIGHTS ON SHARES Each share entitles the holder to cast one vote at the general meeting. The Articles of Association do not restrict the voting rights on any class of shares. ING Group is not aware of any agreement pursuant to which voting rights on any class of its shares are restricted.
REMUNERATION AND SHARE OWNERSHIP Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Transactions by members of the Executive Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the website of ING Group (www.ing.com). Details of the remuneration of members of the Executive Board, including shares granted to them, together with additional information thereto, are provided in the Remuneration report, starting on page 80.
EXECUTIVE BOARD APPOINTMENT AND DISMISSAL Members of the Executive Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. The list will be rendered non-binding if a resolution of the General Meeting to that effect is adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital. Candidates for appointment to the Executive Board must comply with the suitability and reliability requirements set out in the Dutch Financial Supervision Act and must continue to meet these while in office.
FUNCTION OF THE EXECUTIVE BOARD The Executive Board is charged with the management of ING Group, which means, among other things, that it is responsible for the setting and achieving of the Company’s objectives, strategy and policies, as well as the ensuing delivery of results. It also includes the day-to-day management of ING Group. The Executive Board is accountable for the performance of these duties to the Supervisory Board and the General Meeting. The responsibility for the management of ING Group is vested in the Executive Board collectively. The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the website of ING Group (www.ing.com).
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.
As a consequence of the transaction between ING Group and the Dutch State, the Dutch State recommended Lodewijk de Waal and Tineke Bahlmann for appointment to the Supervisory Board. Following such recommendation, Lodewijk de Waal and Tineke Bahlmann were appointed by the General Meeting on 27 April 2009. The current terms of appointment of Tineke Bahlmann and Lodewijk de Waal will expire at the end of the 2013 annual General Meeting. Tineke Bahlmann is recommended for reappointment by the Dutch State. Lodewijk de Waal has decided not to apply for reappointment. The Dutch State has indicated to not use its right to recommend a second candidate for appointment as a member of the Supervisory Board at this moment.
PROFILE OF MEMBERS OF THE SUPERVISORY BOARD The Supervisory Board has drawn up a profile to be used as a basis for its composition. It is available on the website of ING Group (www.ing.com) and at the ING Group head office.
The Supervisory Board has determined that Joost Kuiper is a financial expert as referred to in the Corporate Governance Code. Joost Kuiper was appointed as the chairman of the Audit Committee on 9 May 2011. Joost Kuiper is considered by the Supervisory Board as financial expert because of his relevant knowledge and experience.
The Remuneration Committee advises the Supervisory Board, among other things, on the terms and conditions of employment (including remuneration) of the members of the Executive Board and on the policies and general principles on which the terms and conditions of employment of the members of the Executive Board and of senior managers of ING and its subsidiaries are based. On 31 December 2012, the members of the Remuneration Committee were: Peter Elverding (chairman), Piet Klaver, Jeroen van der Veer and Lodewijk de Waal.
The Nomination Committee advises the Supervisory Board, among other things, on the composition of the Supervisory Board and Executive Board. On 31 December 2012, the members of the Nomination Committee were: Jeroen van der Veer (chairman), Peter Elverding, Piet Klaver and Lodewijk de Waal.
REMUNERATION AND SHARE OWNERSHIP The remuneration of the members of the Supervisory Board is determined by the General Meeting and is not dependent on the results of ING Group. Details of the remuneration are provided in the Remuneration report on page 86. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Details are given on page 87. Transactions by members of the Supervisory Board in these shares and depositary receipts for shares are subject to the ING regulations regarding insiders. These regulations are available on the website of ING Group (www.ing.com).
Significant conflicting interests are considered to be absent in case of a relationship that a member of the Supervisory Board may have with ING Group subsidiaries as an ordinary, private individual, with the exception of any loans that may have been granted. For an overview of loans granted to members of the Supervisory Board see page 87.
COMMITTEES OF THE SUPERVISORY BOARD On 31 December 2012, the Supervisory Board had five standing committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee.
SJOERD VAN KEULEN (Born 1946, Dutch nationality, male; appointed in 2011, will resign in 2013) Former chairman of the Executive Board of SNS Reaal N.V. Other business activities: member of the Supervisory Board of Heijmans N.V. (listed company). Member of the Supervisory Board of Vado Beheer B.V. Vice-chairman of the Supervisory Committee of World Wildlife Fund. Chairman of the Board of Investment Fund for Health in Africa. Member of the Board of Health Insurance Fund. Advisory member of the Supervisory Board of Stichting PharmAccess International. Member of the Supervisory Board of Stichting Natuur en Milieu.
PETER A.F.W. ELVERDING (VICE-CHAIRMAN) (Born 1948, Dutch nationality, male; appointed in 2007, term expires in 2015) Former chairman of the Managing Board of Directors of Koninklijke DSM N.V. Former vice-chairman of the Supervisory Board of De Nederlandsche Bank N.V. (Dutch central bank). Other business activities: chairman of the Supervisory Board of Koninklijke BAM Groep N.V. (listed company). Vice-chairman of the Supervisory Board of SHV Holdings N.V. Chairman of the Supervisory Board of Q-Park N.V. Chairman of the Supervisory Board of Camille Oostwegel Holding B.V. Member of the Supervisory Board of Koninklijke FrieslandCampina N.V. Member of the Board of Stichting Instituut GAK.
SEVERANCE PAYMENTS TO MEMBERS OF THE EXECUTIVE BOARD The employment contracts entered into with the members of the Executive Board provide for severance payments, which become due upon termination of the applicable Board member’s contract in connection with a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. For the purposes of calculating the amounts due, it is not relevant whether or not termination of the employment contract is related to a public bid. Severance payments to the members of the Executive Board are limited to a maximum of one year’s fixed salary, in line with the Corporate Governance Code. Dutch legislation (Law on the limitation of liability of supervisors of financial markets and rules on remuneration of persons who determine the day-to-day policy (dagelijks beleidsbepalers) of financial institutions receiving state aid) (Wet aansprakelijkheidsbeperking DNB en AFM en bonusverbod staatsgesteunde ondernemingen) prohibits financial institutions to grant severance payments to members of the Executive Board in case of state aid to such financial institution.
AMENDMENT OF THE ARTICLES OF ASSOCIATION The General Meeting may resolve to amend the Articles of Association, provided that the resolution is adopted on a proposal of the Executive Board, which has been approved by the Supervisory Board. Such a resolution of the General Meeting requires a majority of at least two-thirds of the votes cast at a general meeting, whereby
at least two-thirds of the issued share capital is represented. An amendment of the Articles of Association has to be passed by notarial deed.
After a maximum period of five years of performing the financial audit of ING Group or ING Verzekeringen N.V. or ING Bank N.V., the lead audit partners of the external audit firm and the audit partners responsible for reviewing the audits, have to be replaced by other partners of the external audit firm. The Audit Committee provides recommendations to the Supervisory Board regarding these replacements based, on among other things, an annual evaluation of the provided services. In line with this requirement, the lead audit partner of Ernst & Young was succeeded after the year-end audit 2011. The rotation of other partners involved with the audit of the financial statements of ING is subject to applicable independence legislation.
The Board currently consists of Jan Veraart, chairman, Mick den Boogert, Paul Frentrop, Herman Hazewinkel and Harrie Noy.
– Several items on the agenda of the AGM. – The progress in the restructuring of ING Group.
CONFORMITY STATEMENT PURSUANT TO SECTION 5:25C PARAGRAPH 2(C) OF THE DUTCH FINANCIAL SUPERVISION ACT (Wet op het financieel toezicht)
Remuneration at ING is appropriately set against a variety of factors, such as the complexity of functions, the scope of responsibilities, market practice and competitiveness, the alignment of risks and rewards, and the long-term objectives of the company and its stakeholders, which is all the more important given the continuously changing regulation and international standards for responsible remuneration. These factors differ for each role, line of business and country. This is especially the case for ING with its operations in more than 40 countries and 84,718 employees of whom around 58,200 are based outside the Netherlands (over 58% of senior management is non-Dutch). As much as possible for a global financial institution of this size, ING aims to take account of all these differences and also of the standards applied within similar financial institutions in the various countries in which it operates.
The performance assessment of Identified Staff or ING Group as a whole extends beyond the date that variable remuneration awards are made and continues as part of a multi-year framework. In this way a longer-term horizon is established that ensures that variable remuneration continues to remain ‘at risk’ due to any issues or staff behaviours (including former staff) that were not apparent (or foreseen) at the time variable remuneration was awarded. In doing so, we have extended the performance assessment of all Identified Staff of ING Group beyond the date that variable awards are made.
The primary objective of the remuneration policy is to enable ING to retain and recruit qualified and expert leaders, senior staff and other highly qualified employees. In accordance with the Dutch Banking Code ING’s remuneration policy for the Executive Board aims for total direct compensation levels slightly below market median levels for comparable positions in the relevant markets. In 2012 the Executive Board did not receive a salary increase and no variable compensation was paid as ING had not completely repaid all outstanding core Tier 1 securities that were issued to the Dutch State. The remuneration policy put in place by the Supervisory Board and adopted by the 2010 AGM has been superseded by legal requirements put in place by the Dutch Legislator that no variable compensation can be paid to the Executive Management as long as financial support from the Dutch State is still outstanding.
Continued focus on risk Variable remuneration is directly linked to risk and takes into consideration both individual and company performance criteria. Performance measurement accounts for estimated risks and costs of capital.
Tenure The contract of employment for Executive Board members provides for an appointment for a period of four years and allows for reappointment by the General Meeting. In the case of an involuntary exit, Executive Board members are eligible to an exit arrangement limited to one year base salary.
sUPERVIsORY BOARD DIsCRETION TO REVIEW THE POLICY AND THE REMUNERATION PAID ING is expected to undergo significant changes during the coming years. Moreover, the relevant international employment market is very much in flux. In order to ensure that ING can adapt to these two uncertain factors, the Supervisory Board indicated in 2010 and 2011 that it may re-evaluate in 2012 whether the remuneration policy adopted in 2010 and amended on 9 May 2011 will be in line with the long-term objectives of the company, the relevant international context, as well as society’s perception of ING as a company. However, as the internal restructuring remains to be completed, as the regulatory environment is still in a state of flux, and as ING is subject to the legislation issued in 2012 by the Dutch Legislator related to variable remuneration for Executive Board members of financial institutions that receive financial government support, the Supervisory Board has decided to re-evaluate the remuneration policy at a later stage.
2012 REMUNERATION EXECUTIVE BOARD The Executive Board remuneration for 2012 is based on the remuneration policy approved by the 2010 AGM, amended by the 2011 AGM and the legislation of the Dutch Legislator for financial institutions that have received state support for reasons of financial stability such as ING. The legislation prevents these financial institutions from granting variable remuneration (in cash or otherwise) to their Executive Board members. In addition, the legislation contains certain restrictions with respect to the possibility to increase the fixed salary of Executive Board members. It is in accordance with the Dutch Corporate Governance Code, Sound Remuneration Policy (‘Regeling Beheerst Beloningsbeleid’) and the CEBS guidelines.
2012 Executive Board variable remuneration In 2011 the Executive Board decided that it will not accept variable remuneration. The Dutch legislation for financial institutions with Government support, which came into force in 2012, prohibits variable remuneration to the Executive Board. As such the Executive Board did not receive any variable remuneration in relation to performance year 2012.
Pension costs of the individual members of the Executive Board amounts in thousands of euros 2012 2011 2010
Base salary 469 Variable remuneration in cash 0 0 Variable remuneration in stock 0 0
Performance shares are shares conditionally granted, with the final shares awarded in three years (tiered) based on ING’s performance. The ultimate value of each performance share will be based on ING Group’s stock price at the end of each performance cycle. Each one-third of the award will vest in accordance with its own performance measurement and cycle. Deferred shares are shares of which the ultimate value of each deferred share will be based on ING Group’s stock price at the vesting date. For the Executive Board members no performance or deferred shares have vested in the period they were a member of the Executive Board ING Group.
Patrick Flynn received a conditional grant of restricted stock in 2009 to a maximum of 130,230 shares. The cumulative value of the conditional share award is capped at EUR 1.3 million. The first vesting in the amount of 39,069 shares occurred at the 2010 AGM. The value at vesting amounted to EUR 288,329. A second vesting of 39,069 shares occurred at the 2011 AGM, the value at vesting amounted to EUR 347,323. The remaining shares in the amount of 52,092 shares vested at the 2012 AGM. The value at vesting amounted
Wilfred Nagel 15,246 to EUR 263,325. The number of shares reflects the number adjusted for the effects of the rights issue of December 2009.
TOTAL DIRECT COMPENsATION Total direct compensation levels will be based on benchmark data in the international context in which ING operates. ING aims for compensation levels to be set at market median levels. Total compensation levels will be determined in line with the relevant market.
values, responsibility for risk management and fair evaluation. However, the approach will significantly enhance the role of risk and strengthen the execution of the One Bank strategy. For the members of the Board of ING Bank and its senior management, variable remuneration will be determined by the One Bank Result, personal targets and Business Line Result.
It should be noted that as the execution of our strategy progresses, the banking and insurance businesses may have different financial and non-financial performance drivers.
Furthermore, ING and the Dutch labour unions agreed on a new CLA for ING Bank in the Netherlands. Under the new CLA, employees will no longer receive part of their compensation in the form of variable remuneration. In a number of cases and only if justified by market practice staff may still receive a discretionary variable award.
REMUNERATION sUPERVIsORY BOARD The annual remuneration of the Supervisory Board members as adopted by the General Meetings in 2006 and 2008 amounts to: chairman EUR 75,000, vice-chairman EUR 65,000, other members EUR 45,000. In addition to the remuneration each member receives an expense allowance. For the chairman and vice-chairman the annual amount is EUR 6,810. For the other members the amount is EUR 2,270. The remuneration for the membership of committees is as follows: chairman of the Audit Committee EUR 8,000, members of the Audit Committee EUR 6,000, chairmen of other Supervisory Board committees EUR 7,500 and members of other Supervisory Board committees EUR 5,000. In addition to the fixed remuneration, committee members receive a fee for each meeting they attend. For the Audit Committee chairman this fee is EUR 2,000 per meeting and for its members EUR 1,500. For the chairman and members of other committees the attendance fee amounts to EUR 450 per meeting.
2012 REMUNERATION sUPERVIsORY BOARD Jeroen van der Veer and Peter Elverding have voluntarily requested a lower level of compensation than their annual remuneration as adopted by the AGM and to cap their annual remuneration relating to 2011 inclusive attendance fees at EUR 100,000 and EUR 90,000 respectively. At their request, their compensation was also capped in 2012 at the aforementioned levels.
Compensation of the members of the supervisory Board amounts in thousands of euros 2012 (1) 2011 (1) 2010 (1)
(3) In 2012 compensation was capped at EUR 100,000 and EUR 90,000 for the chairman and vice-chairman respectively. Please see the paragraph above the table.
(5) The amounts in excess of the aforementioned cap of 2011 amounting to EUR 13,000 for Peter Elverding and EUR 14,000 for Jeroen van der Veer are deducted from their remuneration relating to 2012.
Jean Pierre Lambert, chairman Bank, Belgium Mihai Alincai, secretary Bank, Germany
Otmar Haneder, Austria Franck Goethals, René de Meij, Dirk Verstrepen, Belgium Nikolay Mladenski, Biliana Petrova, Bulgaria Martina Jezkova, Petr Ullmann, Czech Republic Mourad Benzaaza, France Ulrich Probst, Germany Nikolaos Ploumis, Greece Géza Bodor, Csilla Dobos, Hungary Antonio Talamo, Davide Bosseletti, Italy Christophe Guissart, Denis Richard, Luxembourg Hans de Boer, Jeffrey Dinsbach, Jelte Wiersinga, Gerard Veldman, the Netherlands Anna Potajallo, Mieczyslaw Bielawski, Krystov Burnat, Mariusz Cieslik, Poland Valerica Chirila, Andrei Ciuchilan, Romania Marcel Forisek, Lukas Motovsky, Slovakia Raul Lopez, Miguel Hernandez, Nadia Belaradj Moya, Spain Sam Chaudhuri, Rina Goldenberg, UK.
Risk factors 323 Additional Pillar 3 information 344 Financial glossary 370 General information 377 89ING Group Annual Report 2012 1 W h o w e are 2 R
Continuing operations Interest income banking operations 60,002 64,649 68,334 Interest expense banking operations –48,119 –51,200 –55,011 Interest result banking operations 36 11,883 13,449 13,323
Result on disposals of group companies 39 1,604 801 310 Gross commission income 5,116 5,830 5,682 Commission expense –1,578 –1,913 –1,664
. Earnings per share from continuing operations 50 Basic earnings per ordinary share from continuing operations 0.62 0.68 0.52 Diluted earnings per ordinary share from continuing operations 0.62 0.68 0.52
Comprehensive income attributable to: Equityholders of the parent 7,807 6,594 7,203
(1) Reference is made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’ for a breakdown of the individual components.
Investments and advances: – associates –26 –140 –165 – available-for-sale investments –143,681 –223,544 –163,038 – held-to-maturity investments –141 – real estate investments –60 –32 –73 – property and equipment –423 –499 –527 – assets subject to operating leases –1,188 –1,284 – investments for risk of policyholders –67,986 –57,130 –52,370 – other investments –369 –340 –372
– available-for-sale investments 137,418 219,442 154,640 – held-to-maturity investments 2,308 2,370 2,620 – real estate investments 290 118 295 – property and equipment 71 67 96 – assets subject to operating leases 43 53 – investments for risk of policyholders 72,201 61,898 54,817
References relate to the notes starting on page 118. These form an integral part of the consolidated annual accounts.
Net result from continuing and discontinued operations 5,766 5,766 87 5,853
Net result from continuing and discontinued operations 3,894 3,894 109 4,003
Employee stock option and share plans 7 7 1 8 Repayment of non-voting equity securities –750 –750 Repurchase premium –375 –375 –375 Changes in the composition of the group 118 118 Dividend –6 –6 Purchase/sale of treasury shares 255 255 255
UPCOMING CHANGES IN IFRS-EU IN 2013 The following new and/or amended IFRS-EU standards will be implemented by ING Group as of 1 January 2013: • Amendments to IAS 19 ‘Employee Benefits’; • Amendments to IAS 1 ‘Presentation of Financial Statements’; • Amendments to IFRS 7 ‘Financial instruments: Disclosures’; and • IFRS 13 ‘Fair Value Measurement’.
Amendments to IAS 19 ‘Employee Benefits’ The most significant change of the revised IAS 19 ‘Employee Benefits’ relates to the accounting for defined benefit pension obligations and the corresponding plan assets. The amendments require immediate recognition in Other comprehensive income (i.e. in equity) of changes in the defined benefit obligation and in the fair value of plan assets due to actuarial gains and losses. The deferral of actuarial gains and losses through the ‘corridor approach’, which was applied under the previous version of IAS 19 until the end of 2012, is no longer allowed. As a related consequence, deferred actuarial gains and losses are no longer released to the profit and loss account upon curtailment. Furthermore, the amendments require the expected return on plan assets to be determined using a high-quality corporate bond rate, equal to the discount rate of the defined benefit obligation; currently management’s best estimate is applied. The amendments also introduce a number of other changes and extended disclosure requirements. The implementation of the amendments to IAS 19 results in the recognition of accumulated actuarial gains and losses in equity as at 1 January 2013; more information is provided in Note 21 ‘Other liabilities’. As a result, Shareholders’ equity will decrease with EUR 2.6 billion (after tax) at 1 January 2013. The recognition of actuarial gains and losses in equity will create volatility in equity going forward. In the 2013 consolidated annual accounts, the comparative figures for previous years will be restated to reflect the impact of the amendments to IAS 19.
The following new or revised standards were issued by the International Accounting Standards Board (IASB) and will become effective for ING Group in 2014 if and when endorsed by the EU: • Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27); and • Amendments to IAS 32 ‘Presentation – Offsetting Financial Assets and Financial Liabilities’.
Market conditions in recent years have led to a reduced level of real estate transactions. Transaction values were significantly impacted by low volumes of actual transactions. As a result comparable market transactions have been used less in valuing ING’s real estate investments by independent qualified valuers. More emphasis has been placed on discounted cash flow analysis and capitalisation of income method.
Accounting policies for the consolidated annual accounts of ING Group continued 101ING Group Annual Report 2012 1 W h o w e are 2 R
Valuation techniques are subjective in nature and significant judgement is involved in establishing fair values for certain financial assets and liabilities. Valuation techniques involve various assumptions regarding pricing factors. The use of different valuation techniques and assumptions could produce significantly different estimates of fair value.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The fair values of financial instruments are based on quoted market prices at the balance sheet date where available. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
Available-for-sale financial assets Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are subsequently measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income banking operations and Investment income in the profit and loss account. Dividend income from equity instruments classified as availablefor -sale is generally recognised in Investment income in the profit and loss account when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as Investment income. For impairments of available-for-sale financial assets reference is made to the section ‘Impairments of other financial assets’. Investments in prepayment sensitive securities such as InterestOnly and Principal-Only strips are generally classified as available-for-sale.
Accounting policies for the consolidated annual accounts of ING Group continued 109ING Group Annual Report 2012 1 W h o w e are 2 R
Property development Property developed and under development for which ING Group has the intention to sell the property after its completion is included in Other assets - Property development and obtained from foreclosures.
Accounting policies for the consolidated annual accounts of ING Group continued 111ING Group Annual Report 2012 1 W h o w e are 2 R
INSURANCE, INVESTMENT AND REINSURANCE CONTRACTS Provisions for liabilities under insurance contracts are established in accordance with IFRS 4 ‘Insurance Contracts’. Under IFRS 4, an insurer may continue its existing pre-IFRS accounting policies for insurance contracts, provided that certain minimum requirements are met. Upon adoption of IFRS in 2005, ING Group decided to continue the then existing accounting principles for insurance contracts under IFRS. ING Group operates in many different countries and the accounting principles for insurance contracts follow local practice in these countries. ING’s businesses in the Netherlands apply accounting standards generally accepted in the Netherlands (Dutch GAAP) for its provisions for liabilities under insurance contracts; similarly, ING’s businesses in the United States apply accounting standards generally accepted in the United States (US GAAP).
Accounting policies for the consolidated annual accounts of ING Group continued 115ING Group Annual Report 2012 1 W h o w e are 2 R
FIDUCIARY ACTIVITIES The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group.
Amounts held at central banks reflect on demand balances. In the last quarter of 2012, excess cash in the banking operations was used to redeem short-term professional funding.
Available-for-sale investments 185,877 199,234 Held-to-maturity investments 6,545 8,868 Loans and advances to customers 26,945 29,117 Amounts due from banks 3,386 7,321 Available-for-sale investments and Assets at amortised cost 222,753 244,540
ING Group’s total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 222,753 million (2011: EUR 244,540 million) is specified as follows by type of exposure and by banking and insurance operations: Debt securities by type and balance sheet lines – Available-for-sale investments and Assets at amortised cost (banking operations)
Greece Government bonds available-for-sale 76 31 45 Italy Government bonds available-for-sale 2,337 –63 2,400 Government bonds at amortised cost (loans) 104 –1 104 Financial institutions available-for-sale 498 –7 505 Financial institutions at amortised cost (held-to-maturity) 30 30 31 Ireland Government bonds available-for-sale 55 1 54 Financial institutions available-for-sale 30 30 Financial institutions at amortised cost (held-to-maturity) 34 34 34 Portugal Government bonds available-for-sale 627 –17 644 Financial institutions available-for-sale 77 1 76 Spain Government bonds available-for-sale 1,151 –201 1,352 Government bonds at amortised cost (held-to-maturity) 50 50 52 Financial institutions available-for-sale 99 –11 110 Cyprus Government bonds available-for-sale 13 –5 18
Changes in the ‘Balance sheet value’ are a result of sales and maturity of bonds and the PSI as explained below, which is offset by an increase in the Pre-tax revaluation reserve.
(1) Exposures are included based on the country of residence. (2) Pre-tax impairments relate to bonds held at 31 December 2011. In addition, EUR 38 million and EUR 189 million impairments were recognised in 2011 on
On 21 July 2011 a Private Sector Involvement to support Greece was announced. This initiative involves a voluntary exchange of existing Greek government bonds together with a Buyback Facility. Based on this initiative, ING Group impaired its Greek government bonds maturing up to 2020 in the second quarter of 2011 (Bank: EUR 187 million, Insurance: EUR 123 million). The decrease in market value in the third quarter of 2011 of these impaired bonds was recognised as re-impairment (Bank: EUR 91 million, Insurance: EUR 70 million). Due to the outcome of the EC meeting on 26 October 2011, the Greek government bonds maturing from 2020 were impaired in the third quarter of 2011 (Bank: EUR 177 million, Insurance: EUR 130 million). ING Group impaired all its Greek Government bonds to market value at 31 December 2011. This resulted in a re-impairment in the fourth quarter of 2011 of EUR 200 million (Bank: EUR 133 million, Insurance: Notes to the consolidated annual accounts of ING Group continued 123ING Group Annual Report 2012 1 W h o w e are 2 R
In 2011, ING Insurance recognised a total impairment of EUR 189 million on subordinated debt from Irish banks.
Disposals and redemptions –4,737 –2,023 –132,681 –219,023 –2,308 –2,370 –139,726 –223,416
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008) Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the second and first quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-forsale to Loans and advances to customers and Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had the intention to hold for the foreseeable future. The table below provides information on the three reclassifications made in the fourth quarter of 2008 and the first and second quarter of 2009. Information is provided for each of the three reclassifications (see columns) as at the date of reclassification and as at the end of the subsequent reporting periods (see rows). This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet. Certain information on prior financial years was amended to reflect more detailed information that became available compared to previous years.
Investments in connection with the insurance operations with a combined carrying value of nil (2011: nil) did not produce any income for the year ended 31 December 2012.
Loans guaranteed by credit institutions 114 379 6,049 8,260 6,163 8,639
The decrease in Loans and advances to customers, for the banking operations reflect the disposal of ING Direct Canada and the announced disposal of ING Direct UK (classified as held for sale).
Decrease in subordinated Loans and advances is due to the sale of ING Direct Canada.
– more than 1 year but less than 5 years 8,926 9,407 – more than 5 years 5,497 5,875
Changes in the composition of the group –40 16 Transfers to and from Investments –1,288 Revaluations –10 –19 Share of results 55 241 Dividends received –82 –174 Disposals –92 –383 Impairments –1 –20 Exchange rate differences –23 –68 Closing balance 2,203 2,370
In 2012, share of results of EUR 55 million (2011: EUR 241 million) and impairments of EUR 1 million (2011 EUR 20 million) are presented in the profit and loss account in Share of result from associates for EUR 54 million (2011 EUR 221 million).
Changes in the composition of the group –92 –88 Transfers to and from Property in own use –31 Transfers to and from Other assets –2 Fair value gains/(losses) –59 –19 Disposals –290 –118 Exchange rate differences 1 –6 Closing balance 1,288 1,670
Real estate investments 1,288 1,670 Investments in associates 1,053 1,193 Other assets – property development and obtained from foreclosures 1,220 1,584 Property and equipment – property in own use 1,423 1,535 Investments – available-for-sale 1,649 1,773
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 8.7 billion (2011: EUR 10.0 billion) of which EUR 3.3 billion (2011: EUR 4.1 billion) relates to banking operations and EUR 5.4 billion (2011: EUR 5.9 billion) relates to insurance operations. Reference is made to the section ‘Risk management’.
Revaluation surplus Opening balance 498 528 Revaluation in year –27 –28 Released in year –1 –2 Closing balance 470 498
Property in own use by year of most recent appraisal by independent qualified valuers in percentages 2012 2011
Notes to the consolidated annual accounts of ING Group continued 131ING Group Annual Report 2012 1 W h o w e are 2 R
Gross carrying amount as at 31 December 1,623 1,659 2,579 2,620 4,202 4,279 Accumulated depreciation as at 31 December –1,284 –1,295 –1,671 –1,638 –2,955 –2,933 Accumulated impairments as at 31 December –1 –1 –1 –1 Net carrying value as at 31 December 338 363 908 982 1,246 1,345
Gross carrying amount as at 31 December 1,977 2,244 1,966 2,436 2,144 2,597 493 570 6,580 7,847 Accumulated amortisation as at 31 December –1,464 –1,373 –1,476 –1,926 –256 –242 –3,196 –3,541 Accumulated impairments as at 31 December –662 –642 –35 –60 –48 –46 –745 –748 Net carrying value as at 31 December 513 871 1,304 1,794 633 611 189 282 2,639 3,558
Notes to the consolidated annual accounts of ING Group continued 133ING Group Annual Report 2012 1 W h o w e are 2 R
The allocation of goodwill to reporting units was changed in 2012 as a consequence of the changes in segments as disclosed in Note 52 ‘Segments’. Comparatives for 2011 have been adjusted. This change did not impact the results of the impairment test.
Such additional analyses were performed for the goodwill that was concluded to be impaired as set out above. For other reporting units, the goodwill allocated to these reporting units was fully supported in the first step. For Retail Banking Central Europe, a second analysis was necessary in 2011. Although in 2012 the goodwill allocated to Retail Banking Central Europe was fully supported in the first step, the second test was performed in 2012 and confirmed the continued recognition of the related goodwill. In this second test for Retail Banking Central Europe, the recoverable amount is determined as the sum of the recoverable amounts of the most important components. For certain components, a market price is available based on listed equity securities. In such case, the listed market price is used to determine the recoverable amount. For certain other components, the recoverable amount is determined by a cash flow model taking into account recent market related developments. The most important assumptions in the model are the estimated expected profit based on internal financial budgets/forecasts (4 years medium term plan plus additional 6 years longer term forecast), the terminal growth rate thereafter (approximately 3.5%), the required capital level (ultimately migrating to approximately 12%) and the discount rate (between approximately 10% and 13%). It was concluded that the goodwill allocated to Retail Banking Central Europe is not impaired.
As at 31 December 2011 this related to ING Direct USA. The sale of ING Direct USA to Capital One was closed in February 2012. Reference is made to Note 31 ‘Companies acquired and companies disposed’.
Insurance and investments contracts 51,198 Customer deposits and other funds on deposit 14,207 64,103 Financial liabilities at fair value through profit and loss 2,081 Other liabilities 2,409 162
Included in Shareholders’ equity is cumulative other comprehensive income of EUR 372 million (2011: EUR 244 million) related to Assets and liabilities held for sale.
Remaining goodwill in Assets held for sale amounts to EUR 75 million and relates mainly to Investment Management Taiwan and ING Vysya Life Insurance. This goodwill is expected to be recovered through divestments at or above IFRS book value.
Assets Trading assets 18 18 Investments for risk of policyholders 22,452 116 22,568 Non-trading derivatives 1,447 1,447 Financial assets designated as at fair value through profit and loss 2,640 15 2,655 Available-for-sale investments 16,180 8,386 239 24,805
Notes to the consolidated annual accounts of ING Group continued 137ING Group Annual Report 2012 1 W h o w e are 2 R
Depositary receipts for ordinary shares More than 99.9% of the ordinary shares issued by ING Groep N.V. is held by Stichting ING Aandelen (ING Trust Office). In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares. The depositary receipts are listed on various stock exchanges. Depositary receipts can 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 EUR 0.01 per depositary receipt with a minimum of EUR 25 per exchange transaction.
Notes to the consolidated annual accounts of ING Group continued 139ING Group Annual Report 2012 1 W h o w e are 2 R
Moreover, ING Groep N.V.’s ability to pay dividends is dependent on the dividend payment ability of its subsidiaries and associates. ING Groep N.V. is legally required to create a non-distributable reserve insofar profits of its subsidiaries and associates are subject to dividend payment restrictions which apply to those subsidiaries and associates themselves. Such restrictions may among others be of a similar nature as the restrictions which apply to ING Groep N.V.
Minimum capital requirements for ING Group’s subsidiaries and associates are as follows: 2012 iNG Bank iNG insurance Other total
Property revaluation reserve Available- for-sale reserve Cash flow hedge reserve Total
Opening balance 93 79 –2,011 Unrealised revaluations after taxation –142 167 –777 Realised gains/losses transferred to profit and loss –68 Exchange rate differences –724 –153 2,867 Closing balance –841 93 79
Notes to the consolidated annual accounts of ING Group continued 141ING Group Annual Report 2012 1 W h o w e are 2 R
Purchased/sold –86 –17 48 –14,554,460 –625,803 6,393,739 Share-based payments –67 –19 –23 –4,638,786 –1,368,381 –2,140,863 Other –102 –14 –47
Notes to the consolidated annual accounts of ING Group continued 143ING Group Annual Report 2012 1 W h o w e are 2 R
Interest rate Year of issue First call date Step-up Total Lent on to ING Bank
As at 31 December 2012, ING Group has unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 13,129 million (2011: EUR 8,178 million).
ING U.S., Inc. (ING U.S.) announced on 16 July 2012 that it completed a private debt offering of USD 850 million principal amount of its 5.5% Senior Notes due in 2022.
Provision for non-participating life policy liabilities 62,797 88,492 5,065 5,534 67,862 94,026 Provision for participating life policy liabilities 47,801 52,753 87 102 47,888 52,855 Provision for (deferred) profit sharing and rebates 7,236 5,623 3 2 7,239 5,625 Life insurance provisions excluding provisions for risk of policyholders 117,834 146,868 5,155 5,638 122,989 152,506
Total provisions for insurance contracts 212,032 259,765 5,290 5,870 217,322 265,635
Insurance provisions include a provision for the estimated cost of the agreement with regard to unit-linked policies. For more information reference is made to Note 32 ‘Legal proceedings’.
In 2012, ‘Changes in the composition of the group and other changes’ relates mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Notes to the consolidated annual accounts of ING Group continued 147ING Group Annual Report 2012 1 W h o w e are 2 R
Prior year provisions – payments to contract holders –9,471 –7,709 – interest accrual 30 39 – valuation changes investments 129 –55
Notes to the consolidated annual accounts of ING Group continued 149ING Group Annual Report 2012 1 W h o w e are 2 R
18 AMOUNTS DUE TO BANKS Amounts due to banks includes non-subordinated debt due to banks, other than amounts in the form of debt securities.
Notes to the consolidated annual accounts of ING Group continued 151ING Group Annual Report 2012 1 W h o w e are 2 R
Pension and post-employment benefits 552 160 24 8 15 759 Other provisions –256 346 –108 21 –22 –19 Receivables –74 –8 –6 –88 Loans and advances to customers 885 –82 155 2 2 962 Unused tax losses carried forward –1,298 –228 93 –6 4 –1,435
Receivables –51 –8 –12 –1 –2 –74 Loans and advances to customers 473 97 213 97 6 –1 885 Unused tax losses carried forward –1,851 –1 305 258 20 –29 –1,298
In 2011, the amounts presented in the column ´Changes in the composition of the group´ relate mainly to the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Interest 5 Releases –23 –14 Charges –485 –358 Exchange rate differences 1 1 Other changes –11 1 Closing balance 919 599
A reorganisation provision of EUR 172 million is recognised in the segment Insurance Benelux and EUR 27 million is recognised in the Corporate line Insurance following the initiative to accelerate the transformation program in preparation for the stand-alone future of Insurance Eurasia. In response to changing customer preferences and market dynamics, Insurance Eurasia is undertaking actions to increase its agility in the current operating environment by delayering the support staff structure in the Netherlands and sharpen the strategic focus of its business units, in particular Nationale-Nederlanden (NN). These measures are expected to result in a reduction of the workforce of around 1,350 FTE’s over a period of two years.
Each of these initiatives will be implemented over a period of several year and the estimate of the reorganisation provisions is inherently uncertain. However, the provision at balance sheet date represent the best estimate of the expected redundancy costs and are expected to be sufficient to cover these costs.
Unrecognised past service costs –2 –3 –3 –5 Unrecognised actuarial gains/(losses) –3,474 483 –1,731 –1,450 –2,072 Restrictions on pension asset recognised Net liability (asset) recognised in the balance sheet –4,264 –3,384 –2,915 –2,554 –1,172
The Group maintains defined benefit retirement plans in some of the countries of operation. These plans provide benefits that are related to the remuneration and service of employees upon retirement. The benefits in some of these plans are subject to various forms of indexation. The indexation is, in some cases, at the discretion of management; in other cases it is dependent upon the sufficiency of plan assets.
Certain group companies sponsor defined contribution pension plans. The assets of all ING Group’s defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in current liabilities.
Actuarial gains and losses related to pensions and post-employment benefits for the year ended 31 December 2012 include EUR 1,743 million (2011: EUR 1,760 million; 2010: EUR 1,085 million; 2009: EUR 387 million; 2008: EUR –2,647 million) experience gain adjustments for assets and EUR –85 million (2011: EUR 10 million; 2010: EUR 154 million; 2009: EUR 172 million; 2008: EUR –70 million) experience gain adjustments for liabilities.
Notes to the consolidated annual accounts of ING Group continued 155ING Group Annual Report 2012 1 W h o w e are 2 R
Actuarial gains and losses in 2012 include mainly the impact of the change in the discount rate from 5.3% to 3.7% as explained below.
Determination of expected return on assets An important aspect of financial reporting is the assumption used for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plans’ asset allocations, historical returns on the types of assets held in the Funds, and the current economic environment. Based on these factors, it is expected that the Funds’ assets will earn an average annual percentage in the long-term. This estimate takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Funds. For estimation purposes, it is assumed that the long-term asset mixes will be consistent with the current mixes. Changes in the asset mixes could have an impact on the amount of recognised pension income or expense, the funded status of the Plans, and the need for future cash contributions.
Expected rates of salary increases (excluding promotion increases) 2.30 2.20 2.00 2.70 Medical cost trend rates 5.00 6.10
Expected cash flows For 2013 the expected contributions to pension plans are EUR 679 million.
Remaining assets (for which maturities are not applicable) (4) 6,165 6,165
Remaining assets (for which maturities are not applicable) (4) 6,926 6,926
(3) Assets held for sale consist of the assets of the disposal groups classified as held for sale as disclosed in Note 11 ‘Assets and liabilities held for sale’. For these assets and liabilities, the underlying contractual maturities are no longer relevant to ING. For businesses for which a binding sale agreement exists, all related assets and liabilities held for sale are classified in accordance with the agreed or expected closing date. For other businesses, for which no sale agreement exists, assets and liabilities held for sale are included in ‘maturity not applicable’.
23 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.
(3) Liabilities held for sale consist of the liabilities of the disposal groups classified as held for sale as disclosed in Note 11 ‘Assets and liabilities held for sale’. For these assets and liabilities, the underlying contractual maturities are no longer relevant to ING. For businesses for which a binding sale agreement exists, all related assets and liabilities held for sale are classified in accordance with the agreed or expected closing date. For other businesses, for which no sale agreement exists, assets and liabilities held for sale are included in ‘maturity not applicable’.
For these assets and liabilities, the underlying contractual maturities are no longer relevant to ING. For businesses for which a binding sale agreement exists, all related assets and liabilities held for sale are classified in accordance with the agreed or expected closing date. For other businesses, for which no sale agreement exists, assets and liabilities held for sale are included in ‘maturity not applicable’.
designated under fair value hedge accounting was EUR –6,111 million (2011: EUR –6,286 million), presented in the balance sheet as EUR 2,926 million (2011: EUR 3,192 million) positive fair values under assets and EUR 9,037 million (2011: EUR 9,478 million) negative fair values under liabilities.
For the year ended 31 December 2012, ING Group recognised EUR 716 million (2011: EUR 1,124 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2012 was EUR 3,558 million (2011: EUR 2,611 million) gross and EUR 2,689 million (2011: EUR 1,971 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 45 years for insurance operations and 29 years for banking operations, with the largest concentrations in the range of 1 to 9 years for insurance operations and 1 to 5 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a gain of EUR 6 million (2011: EUR 11 million loss) which was recognised in the profit and loss account.
As at 31 December 2012, the fair value of outstanding non-derivatives designated under net investment hedge accounting was EUR –1,133 million (2011: EUR –335 million).
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2012 on derivatives and non-derivatives designated under net investment hedge accounting was nil (2011: EUR 8 million).
27 ASSETS NOT FREELY DISPOSABLE The assets not freely disposable consist primarily of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch central bank) and other banks and serve to secure margin accounts or are used for other purposes required by law. The assets not freely disposable are as follows: Assets not freely disposable
In addition, ING Bank has originated various securitisations with approximately EUR 90 billion of AAA rated notes and subordinated notes, of which approximately EUR 3.5 billion is held by third parties. The underlying exposures are residential mortgages and SME loans. These securitisations are consolidated by ING Bank. Apart from the third party funding, these securitisations did not impact ING Bank’s consolidated balance sheet and profit and loss.
Insurance in Hong Kong, Macau, Thailand In October 2012, ING announced that it has reached an agreement to sell its life insurance, general insurance, pension and financial planning units in Hong Kong and Macau, and its life insurance operation in Thailand to Pacific Century Group for a combined consideration of USD 2.1 billion (approximately EUR 1.6 billion) in cash. The transaction closed on 28 February 2013. A net gain of approximately EUR 950 million will be recognised in 2013. ING Investment Management’s funds management businesses in Hong Kong and Thailand are outside the scope of this transaction.
ING Direct UK In October 2012, ING announced that it has reached an agreement to sell ING Direct UK to Barclays. Under the terms of the agreement, the GBP 11.6 billion (approximately EUR 13.4 billion) of savings deposits and GBP 5.5 billion of mortgages (approximately EUR 6.4 billion) of ING Direct UK will be transferred to Barclays. The transfer resulted in an after tax loss of EUR 260 million which was recognised in 2012. In 2012, ING Direct UK is classified as held for sale. ING Direct UK is included in the segment Retail Rest of World. On 6 March 2013, ING announced that the transaction closed.
Acquisitions effective in 2011 There were no significant acquisitions in 2011.
Acquisitions effective in 2010 There were no significant acquisitions in 2010.
In August 2010 ING announced that it has agreed to sell its 50% stake in ING Summit Industrial Fund LP (‘Summit’), a Canadian light industrial property portfolio to a joint venture between KingSett Capital and Alberta Investment Management Corporation (AIMCo). The sale was completed in November 2010. The transaction value for 100% of Summit is CAD 2.0 billion (EUR 1.4 billion) and includes assumed debt. In addition to its direct investment in Summit, ING has an indirect participation through its 7.8% unit holding of ING Industrial Fund (IIF), an ING-managed listed property fund in Australia which owns the remaining 50% in Summit. As part of the transaction, IIF has agreed to simultaneously sell its stake in Summit to KingSett/AIMCo. Consequently, ING’s indirect participation in Summit will end as well. Separately, ING sold ING Real Estate Canada, the manager of Summit, to KingSett/AIMCo for an undisclosed amount. The transaction had no material impact on ING Group’s 2010 results and capital ratios. The transaction resulted in a net loss of EUR 26 million in 2010. Summit was previously included in the segment Commercial banking (ING Real Estate).
Furthermore there were some disposals that did not have a significant impact on ING’s balance sheet and profit and loss account. In November 2009 ING reached an agreement to sell three of its United States independent retail broker-dealer units to Lightyear Capital LLC for a total consideration of EUR 96 million. The transaction concerns Financial Network Investment Corporation, based in El Segundo, California, Multi-Financial Securities Corporation, based in Denver, Colorado, PrimeVest Financial Services, Inc., based in St. Cloud, Minnesota, and ING Brokers Network LLC, the holding company and back-office supporting those broker dealers, which collectively do business as ING Advisors Network. The sale was completed in February 2010. The three United States independent retail broker-dealer units were previously included in the segment Insurance US.
32 LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Company’s management is of the opinion that neither it nor any of its subsidiaries is aware of any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have or have in the recent past had a significant effect on the financial position or profitability of the Company.
In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission’s decision regarding ING’s restructuring plan. In its appeal, ING contested the way the Commission has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disproportionality of restructuring requirements in general. In July 2011, the appeal case was heard orally by the General Court of the European Union. On 2 March 2012, the General Court handed down its judgment in relation to ING Group’s appeal and annulled part of the EC’s state aid decision. Subsequently, the EC filed an appeal against the General Court’s judgment before the Court of Justice of the European Union. In parallel, the EC adopted a decision on 11 May 2012 that re-approved the state aid granted to ING Group as compatible with the internal market on the basis of ING Group’s 2009 Restructuring Plan. On the same date, the EC adopted an interim decision which opened an investigation concerning certain amendments and elements of the 2009 Restructuring Plan.
On 19 November 2012, ING Group and the EC announced that the EC had approved amendments to the 2009 Restructuring Plan (the ‘2012 Amended Restructuring Plan’). With the approval, the Commission has closed its Investigation as announced on 11 May 2012 and ING has withdrawn its appeal at the General Court of the European Union that it filed in July 2012. For principal legal reasons the European Commission will continue with its appeal against the General Court ruling of March 2012. However, the outcome of this Appeal will not affect the EC approval of the 2012 Amended Restructuring plan.
In April 2012, Stichting Pensioenfonds ING (the Dutch ING Pension Fund) formally announced to institute arbitration against ING’s decision not to provide funding for indexing pensions insured with the Dutch ING Pension Fund per 1 January 2012. Arbitrators awarded 40% of this claim. As a result ING Group agreed to pay EUR 68 million plus interest to the pension fund. The outcome of the arbitration is reflected in the 2012 Annual Accounts.
In 2012, the Dutch Government imposed an additional tax charge of 16% on the income in excess of EUR 150,000 of each employee who is subject to Dutch income tax. The tax is charged to the company and does not affect the remuneration of involved staff. The tax imposed on ING for relevant members of the Executive Board and Management Boards amounts to EUR 1.4 million, which is not included in the figures in the table above.
The total number of stock options on ING Groep N.V. shares held by the Executive Board members of ING Groep N.V. amounted to 77,447 as at 31 December 2012 (2011: 164,689) and total number of stock options on ING Groep N.V. shares held by Management Board members of ING Bank N.V., ING Verzekeringen N.V., ING Insurance Eurasia N.V. and members of the Board of ING U.S., Inc. amounted to 1,967,465 as at 31 December 2012 (2011: 1,913,631). As at 31 December 2012, members of the Executive Board held 176,756 ING Groep N.V. shares (2011: 149,400) and members of the Management Boards of ING Bank N.V., ING Verzekeringen N.V., ING Insurance Eurasia N.V. and members of the Board of ING U.S., Inc. held 247,265 ING Groep N.V. shares (2011: 84,173). As at 31 December 2012, members of the Supervisory Board held 324,956 ING Groep N.V. shares (2011: 244,968).
Repayment non-voting equity shares In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted to EUR 3 billion and included a 50% repurchase premium. ING funded this repayment from retained earnings. In November 2012 ING reached an agreement with the European Commission on an amended Restructuring Plan. As part of the amended Restructuring Plan, ING submitted a repayment schedule for the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) at a total cost of EUR 4.5 billion in four equal tranches in the next three years, translating into an overall internal rate of return (IRR) for the Dutch State on the core Tier 1 securities of exactly 12.5%. In accordance with this agreement ING repaid EUR 0.75 billion of the remaining non-voting equity securities (Core Tier 1 securities) in November 2012. The total payment in November 2012 amounted to EUR 1,125 billion including premiums and interest. On the basis of the repayment schedule, ING aims to repay a second tranche by November 2013, a third by March 2014 and a final tranche ultimately by May 2015. While ING has committed to redeem these securities per the defined schedule, ING has the ability to defer a repayment in full or in part, in which case the subsequent tranche will be increased with a corresponding amount. In the event that ING does not repay in full 2 consecutive repayment tranches or does not pay in total EUR 4.5 billion by 15 May 2015, the Dutch State will re-notify to the Commission who may in principle require compensatory measures. All repayments are conditional upon the approval of the Dutch central bank (DNB).
European Commission Restructuring Plan In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. By decision of 18 November 2009, the European Commission, formally approved the Restructuring Plan. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows: • elimination of double leverage and significant reduction of ING’s balance sheet; • divestment of all Insurance and Investment Management activities; • divestment of ING Direct USA; • creation of a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, needs to be divested; • restriction to be a price leader in any EU country for certain retail and SME banking products and restriction to acquire financial institutions or other businesses that would delay the repayment of the non-voting equity securities. These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State; • an agreement with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities; • repayment of EUR 5 billion of the non-voting equity securities issued in November 2008 to the Dutch State; • additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission will have to be made to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING of EUR 1.3 billion in the fourth quarter of 2009; • launch of a EUR 7.5 billion rights issue, in order to finance the repayment of 50% of the non-voting equity securities and a mitigation of the capital impact of the additional Illiquid Assets Back-up Facility payment as part of the overall agreement with the European Commission to the Dutch State of EUR 1.3 billion; • execution of the Restructuring Plan before the end of 2013; • if the overall return on the (remaining) non-voting equity securities (core Tier 1 securities) issued to the Dutch State is expected to be lower than 10% p.a., the European Commission may consider the imposition of additional behavioural constraints; and • The calling of Tier 2 capital and Tier 1 hybrids will in the future be proposed case by case to the Commission for authorisation, for the shorter period of three years starting from the date of the Commission decision or up to the date on which ING has fully repaid the non-voting equity securities (core Tier 1 securities) to the Dutch State (including the relevant accrued interest of core Tier 1 coupons and exit premium fees).
ING announced in November 2012 that, together with the Dutch State, it had submitted significant amendments to the 2009 Restructuring Plan to the European Commission. The European Commission approved these amendments by Decision of 16 November 2012.
Amendments to the Restructuring Plan The amendments to the 2009 Restructuring Plan as announced in November 2012 extend the time horizon and increase the flexibility for the completion of divestments and have adjusted other commitments in light of the market circumstances, economic climate and more stringent regulatory requirements.
Under the amendments announced, the ultimate dates for divesting the insurance and investment management businesses have been extended as follows: • The divestment of more than 50% of ING’s interest in its Asian Insurance/IM operations has to be completed by year-end 2013, with the remaining interest divested by year-end 2016; • The divestment of at least 25% of ING’s interest in ING Insurance/IM US has to be completed by year-end 2013, more than 50% has to be divested by year-end 2014, with the remaining interest divested by year-end 2016; • The divestment of more than 50% of ING’s interest in Insurance/IM Europe has to be completed by year-end 2015, with the remaining interest divested by year-end 2018; and • As ING has committed to eliminate double leverage, proceeds from the divestments will be used to that end, while ensuring adequate leverage ratios of the insurance holding companies.
ING has committed to ensure that Nationale-Nederlanden Bank would reach certain targets for mortgage production and consumer credit until 31 December 2015 or until the date on which more than 50% of the Insurance/IM Europe operations has been divested, whichever date comes first. Furthermore, ING has agreed to a maximum ratio for mortgage production at ING Retail Banking Netherlands in relation to mortgage production of Nationale-Nederlanden Bank until year-end 2015.
Finally, the amended Restructuring Plan includes a repayment schedule for the remaining core Tier 1 securities to the Dutch State as described in the above-mentioned section ‘Repayment non-voting equity shares’.
CVA/DVA adjustments in 2012 for the banking operations of EUR 513 million negative mainly reflect a tightening of ING Bank’s credit spread, compared with EUR 133 million of positive CVA/DVA adjustments in 2011. CVA/DVA adjustments are mainly included in Valuation results on non-trading derivatives and Net trading income.
Debt securities Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an exchange, dealer, broker, industry group, pricing service or regulatory service. If quoted prices in an active market are not available, fair value is based on an analysis of available market inputs, which may include values obtained from one or more pricing services or by a valuation technique that discounts expected future cash flows using a market interest rate curves, referenced credit spreads, maturity of the investment and estimated prepayment rates where applicable.
The fair values of mortgage loans are estimated by taking into account prepayment behaviour and discounting future cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fixed rate policy loans are estimated by discounting cash flows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for calculations purposes. The carrying values of variable rate policy loans approximate their fair value.
The fair values of the financial instruments carried at fair value were determined as follows: Methods applied in determining fair values of financial assets and liabilities 2012 Level 1 Level 2 Level 3 Total
Financial assets designated as at fair value through profit and loss 220 2,419 2,121 4,760 Available-for-sale investments 115,882 73,514 4,188 193,584
Methods applied in determining fair values of financial assets and liabilities 2011 Level 1 Level 2 Level 3 Total
Sale of assets –330 –15 –195 –1,022 –660 –2,222 Maturity/settlement –313 –2 –378 –1,096 –1,789
Transfers out of Level 3 –202 –6 –21 –2 –462 –693 Exchange rate differences –6 –1 –17 –22 –46 Changes in the composition of the group and other changes 3 –116 84 –254 –283
Financial assets designated as at fair value through profit and loss
Amounts recognised in the profit and loss account during the year –361 311 10 –229 –269 Revaluation recognised in equity during the year –72 –72
Financial liabilities designated as at fair value through profit and loss
Interest expense on deposits by banks 623 902 652 Interest expense on customer deposits and other funds on deposit 9,140 9,383 8,324 Interest expense on debt securities 3,822 3,435 2,761 Interest expense on subordinated loans 1,422 1,625 1,856 Interest expense on trading liabilities 24,047 27,209 32,847 Interest expense on non-trading derivatives 1,528 1,658 2,166 Other interest expense 7,537 6,988 6,405 Interest expense banking operations 48,119 51,200 55,011
Gross premium income from life insurance policies 18,544 18,584 19,566 Gross premium income from non-life insurance policies 1,733 1,695 1,713
In 2012, ING sold all of its shares in Capital One Financial Corporation. The transaction resulted in a gain of EUR 323 million (before and after tax), and is recognised in Realised gains/losses on disposal of equity securities. Reference is made to Note 31 ‘Companies acquired and companies disposed’.
Retail Belgium –1 –22 Retail Germany –136 Retail Rest of World –328 –107 30 Commercial Banking –26 –301 –70 44 Insurance Benelux –155 –410 –53 Insurance CRE –338 –18 Insurance US –31 –166 –553 8 5 Corporate Line Banking –11 –13 –1 Corporate Line Insurance –2 –9 192 ING Group Annual Report 2012
Clarion Real Estate Securities 182 ING REIM Asia and Europe 245 ING Car Lease 347 Clarion Partners 39 Other –12
Included in the Valuation results on non-trading derivatives are the fair value movements on derivatives used to economically hedge exposures, but for which no hedge accounting is applied. For insurance operations, these derivatives hedge exposures in Insurance contract liabilities. The fair value movements on the derivatives are influenced by changes in the market conditions, such as stock prices, interest rates and currency exchange rates. The change in fair value of the derivatives is largely offset by changes in Insurance contract liabilities, which are included in Underwriting expenditure. Reference is made to Note 44 ‘Underwriting expenditure’.
In 2012, Other income - Other includes losses on disposal of Loans and advances to customers of EUR 618 million.
The portion of trading gains and losses relating to trading securities still held as at 31 December 2012 amounts to EUR 118 million (2011: EUR –66 million; 2010: EUR 19 million).
Expenditure from life underwriting Reinsurance and retrocession premiums 1,642 1,664 1,822
Expenditure from investment contracts Costs of acquiring investment contracts 2 3 5 Other changes in investment contract liabilities –80 57 91
In 2011, ING has conducted a comprehensive review of its assumptions for the Insurance US Closed Block Variable Annuity (VA) business. The review showed that current US policyholder behaviour for Closed Block VA policies sold predominantly between 2003 and 2009 diverges from earlier assumptions made by ING, particularly given the ongoing volatility and challenging market circumstances. The assumptions for the US Closed Block VA were updated for lapses, mortality, annuitisation, and utilisation rates, with the most significant revision coming from the adjustments of lapse assumptions. The revisions bring the assumptions more in line with US policyholder experience and reflect to a much greater degree the market volatility of recent years. In conjunction, hedging is adjusted to reflect the revised assumptions. The assumption changes resulted in a charge of EUR 1,099 million, which is reflected in Underwriting expenditure and in the segment Insurance US Closed Block VA. This charge affects the deferred acquisition costs (amortisation and unlocking) for EUR 488 million and the insurance provision (effect of changes in other assumptions) for EUR 611 million. Reference is made to Note 10 ‘Deferred acquisition costs’ and Note 17 ‘Insurance and Investment contracts, reinsurance contracts’. The impact of the assumption adjustments includes a charge to restore the reserve adequacy to the 50% confidence level for the Insurance US Closed Block VA segment. Reference is made to Note 52 ‘Segments’.
Other underwriting expenditure from life underwriting in 2010 includes a EUR 975 million DAC write-off as explained in Note 52 ‘Segments’.
ING Group transferred part of its life insurance business to Scottish Re in 2004 by means of a co-insurance contract. A loss amounting to EUR 160 million was recognised in Underwriting expenditure in 2004 on this transaction. This loss represented the reduction of the related deferred acquisition costs. In addition, an amount of EUR 240 million is being amortised over the life of the underlying business, starting in 2005 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2012 was EUR 13 million (2011: EUR 14 million; 2010: EUR 17 million). The cumulative amortisation as at 31 December 2012 was EUR 161 million (2011: EUR 151 million; 2010: EUR 132 million). On 23 January 2009, Hannover Re and Scottish Re announced that Hannover Re has agreed to assume the ING individual life reinsurance business originally transferred to Scottish Re in 2004.
(1) In 2011, the increase in Share-based compensation arrangements can be explained by ING’s implementation of a global deferral plan as well as regulatory developments which require payment of variable remuneration in stock in lieu of cash.
In 2012, ING granted three types of share awards, deferred shares, performance shares and upfront shares. The entitlement to the share awards was 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 depositary receipts 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 N.V. and ING Insurance Eurasia N.V., as well as Identified staff. ING has the authority to apply an hold back to awarded but unvested shares and a claw-back to vested shares.
ING Group holds its own shares in order to fulfill its obligations with regard to the existing stock option plan. As at 31 December 2012, 26,429,948 own shares (2011: 42,126,329; 2010: 45,213,891) were held in connection with the option plan compared to 85,193,177 options outstanding (2011: 108,138,551; 2010: 124,836,694). In December 2010 ING Groep N.V. announced that it will no longer rebalance its hedge portfolio. This decision is an effort to simplify the management and administration of ING’s various employee share and option programmes. The remaining shares in the portfolio will be used to fund the obligations arising from exercise and vesting. Once all shares in the portfolio are used ING will fund these obligations by issuing new shares (subject to approval by Executive Board and Supervisory Board).
The weighted average share price at the date of exercise for options exercised during 2012 is EUR 6.15 (2011: EUR 8.09; 2010: EUR 7.46).
47 OTHER INTEREST EXPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
Other interest expenses include nil and nil dividends paid on preference shares and trust preferred securities (2011: nil and nil; 2010: nil and nil).
In 2012, total interest income and total interest expense for items not valued at fair value through profit and loss were EUR 40,063 million (2011: EUR 41,740 million; 2010: EUR 39,685 million) and EUR 22,218 million (2011: EUR 22,184 million; 2010: EUR 19,815 million) respectively. Net interest income of EUR 17,812 million is presented in the following lines in the profit and loss account.
Attribution to non-voting equity securities The attribution to non-voting equity securities represents 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 is only included for the purpose of determining earnings per share under IFRS-EU and does not represent a payment (neither actual nor proposed) to the holders of the non-voting equity securities.
As disclosed in Note 26 ‘Discontinued operations’ in 2012 the segment Insurance Asia/Pacific ceased to exist.
In 2011, ING Group identified the following segments for banking operations: Retail Netherlands, Retail Belgium, ING Direct, Retail Central Europe, Retail Asia, Commercial Banking (excluding Real Estate) and ING Real Estate.
Retail Germany Income from retail and private banking activities in Germany. The main products offered are current and savings accounts, mortgages and other customer lending.
Insurance Benelux Income from life insurance, non-life insurance and retirement services in the Benelux. Insurance CRE Income from life insurance, non-life insurance and retirement services in Central and Rest of Europe. Insurance US Income from life insurance and retirement services in the United States.
Special items –4 1,332 –1,060 IFRS-EU (continuing operations) 42,644 38,748 2,986 Total net result from discontinued operations 9,140 8,026 908 IFRS-EU (continuing and discontinued operations) 51,784 46,774 3,894
Segments ING Group total 2011 Total Banking Total Insurance Eliminations Total
Divestments in 2011 reflects the results on the sale of ING Real Estate Investment Management (REIM) and ING Car Lease as well as the operating result of the divested units.
Underlying income – Gross premium income 21,279 21,279 – Net interest result - banking operations 11,958 –93 11,865
Special items –284 –22 –129 –193 –628 * Analysed as a part of operating expenses.
To determine the operating result the following non-operating items are adjusted in the reported underlying result before tax: • Realised capital gains/losses and impairments on debt and equity securities; • Revaluations on assets marked to market through the profit and loss account; and • Other non-operating impacts, e.g. provision for guarantees on separate account pension contracts, equity related and other DAC
DAC amortisation and trail commissions 192 221 732 151 2 1,299
Fees and premium based revenues 584 462 1,064 168 783 3,061
Income non-modelled life business 36 9 45 Life & ING IM operating income 1,601 712 2,033 224 785 5,354
DAC amortisation and trail commissions 213 202 625 123 3 1,167
Market & other impacts –250 –36 –1,295 –1,581 Underlying result before tax 739 –198 618 –1,273 198 –410 –325
Income non-modelled life business 40 16 56 Life & ING IM operating income 1,318 744 2,089 119 740 5,009
DAC amortisation and trail commissions 230 197 620 –7 3 1,043
Insurance Eliminations Total external 213ING Group Annual Report 2012 1 W h o w e are 2 R
Total as included in balance sheet: – amounts due to banks –38,704 –72,233 –72,852 – amounts due from banks 39,053 45,323 51,828 349 –26,910 –21,024
Cash and cash equivalents includes amount due to/from banks with a term of less than three months from the date on which they were acquired.
57 SUBSEQUENT EVENTS On 1 February 2013, the nationalisation of SNS Reaal, a Dutch financial institution, was announced. As a consequence of the arrangements made by the Dutch government, ING Bank and other Dutch banks will be required to pay a one-time levy of EUR 1 billion in 2014. For ING, based on current limited information, this is estimated to result in a charge of EUR 300-350 million. ING will carefully assess further details on form, amount and timing of the levy as they become available.
RISK MANAGEMENT Taking measured risks is the core of ING Group’s business. As a financial services company active in banking, investments, life and non-life insurance and retirement services, ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking throughout the organisation, ING Group operates through a comprehensive risk management framework and integrated risk management in its daily business activities and strategic planning. This ensures the identification, measurement and control of risks at all levels of the organisation so that ING Group’s financial strength is safeguarded.
As a result of the decision to manage ING Bank and ING Insurance separately, ING has implemented two distinct risk appetite frameworks for both Bank and Insurance. The common concept however is that risk appetite is expressed as the tolerance to allow key capital and liquidity ratios to deviate from their target levels under adverse scenarios. These frameworks are discussed in more detail in the specific chapters of this risk management section.
Both ING Bank and ING Insurance need to prepare for significant changes in the regulatory requirements. For ING Bank the most important one is the implementation of Basel III (for European banks as ING implemented via Capital Requirements Directive (CRD) IV), while ING Insurance runs an extensive program to allow the implementation of Solvency II (which is the fundamental reform of European insurance solvency and risk governance legislation; announced to be effective as of 1 January 2014 but delays in legislation imply that it will not be effective before 1 January 2016). Additionally, both in Bank and Insurance, ING continued its stress testing efforts, with stress testing becoming more important and more embedded in the risk culture.
GROUP RISK MANAGEMENT FUNCTION The ING Group CRO is supported by the Risk functions of ING Group and by the Group functions Corporate Legal and the Functional Controller Insurance. As a result of the decision to manage ING Bank and ING Insurance separately, ING Group Chief Risk Officer has delegated day-to-day Risk Management within ING Bank, ING Insurance Eurasia and ING Insurance US to the respective (Deputy) CROs. The remaining Risk functions that are specific for the Group function have been delegated to ING Bank.
Throughout 2012 ING has continued to de-risk its balance sheet, including reducing its positions in especially covered bonds, ABS securities and Real Estate investments for some of the weaker countries as a result of these risk analyses.
Risk management ING Group amounts in millions of euros, unless stated otherwise 218 ING Group Annual Report 2012
Footnote: Total risk exposures to companies registered in Cyprus were approximately EUR 1 billion as per 31 December 2011, which consisted mostly of corporate lending (EUR 0.6 billion) and Financial Markets trades (EUR 0.3 billion). Majority of the corporate lending risk exposures were either deals with country of risk outside of Cyprus, Letter of credits or Trade Commodity Finance with maturity less than 3 months. Therefore, net credit risk linked to Cyprus is not material for ING Bank.
Total exposure to the GIIPS countries was reduced by EUR 13,781 million in 2012. ING Group completed the planned de-risking of its investment portfolio in the fourth quarter of 2012 as part of its balance sheet optimisation programme. ING reduced its exposure in debt securities, with covered bonds going down by EUR 5,045 million and RMBS position diminishing by EUR 2,661 million, and its lending portfolio with a decrease of EUR 2,938 million, driven by Financial Institutions lending by EUR 2,159 million and corporate lending by EUR 1,777 million, and partially offset by an increase in residential mortgages and other consumer lending by EUR 1,011 million.
ING Bank does not have a bank operation in Greece but does serve a limited number of mostly international companies which have their domicile in Greece. Many of these companies are dependent on cash flows that are based outside Greece. ING Insurance Eurasia has direct Greek exposure given the Greek based insurance entity.
In addition to the above exposures on Ireland, ING Insurance has Irish reinsurance exposure of EUR 1,578 million. This mainly includes reinsurance through an Irish subsidiary of a large European Reinsurance group.
Derivatives In these countries, ING Bank has limited derivative exposure and largely enters derivative transactions to help clients reduce exposure to interest and currency movements. Many of these transactions are covered either via CSA agreements or as part of the collateral of the underlying financing. The key credit risk ING Bank faces in these derivative transactions is movements in markets creating an uncollateralised exposure to a counterparty or that the collateral is not sufficient. ING monitors these mark to market movements on a daily basis.
Impact ING Group The impact of the low interest rate environment for Bank and Insurance goes further than earnings and reserves, that are described in the sections above. Low interest rates result in addition to provisions for guarantees that are included in life insurance and variable annuity contracts, as the guarantees become more valuable to policy holders. Thereby the solvency position of the Insurance businesses is negatively impacted, which can also impact the proceeds of the Insurance divestment. The proceeds of the Insurance divestments are to be used to pay back the double-leverage. In case the Insurance proceeds are not sufficient to do so, ING Bank will need to upstream extra dividend to ING Group. EUR 1.0 billion of the November 2012 dividend payment by ING Bank to the Group has been used for this purpose. Note however, that when future Bank earnings and future capital position are negatively impacted such capital up-streams are difficult to establish. And this can be further hampered by the on-going increasing capital requirements for banks in general.
Business model and risk culture Explicit inclusion of a description and how these link to the already disclosed key risks and key model disclosures 228
Credit portfolio per type (per exposure class, per product type and per geography) and Basel II model approach
RISK GOVERNANCE ING Bank’s risk management framework is based on a ‘three lines of defence’ governance model, whereby ownership for risk is taken at three levels in the organisation. This governance framework ensures that risk is managed in line with the risk appetite as defined by the Management Board Bank (and ratified by the Supervisory Board) and is cascaded throughout ING Bank.
The second line of defence consists of the risk management organisation, headed by the chief risk officer (CRO), and the corporate legal function. The membership of the CRO on the MBB 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 bank and regional/local level, which supports the commercial departments in their decision-making, but which also has sufficient countervailing power to prevent risk concentrations and other forms of excessive risks.
• Non-Financial Risk Committee Bank (NFRC Bank): Accountable for the design and maintenance of the Risk Management Framework including the ORM, Compliance and Legal policies, minimum standards, procedures and guidelines; the NFRC structure; development of tools, methods and key parameters (incl. major changes) for risk identification, measurement and monitoring/reporting.
Non-financial risks • Operational risk: the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; and • Compliance risk: the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards as in ING Bank Business Principles.
Step 3. Cascade into Statements per risk type and per business
Step 1. Define ING Bank’s risk ambition Annual MBB approval &
The solvency risk appetite is closely aligned to Capital Management activities and policies. ING Bank has expressed tolerances for its risk weighted solvency position (core tier 1 ratio), for non-risk weighted solvency (leverage ratio) and for more value based solvency (economic capital). The solvency risk appetite statements are not only compared to the actual reported level, but also include the potential impact of a standardised and pre-determined 1 in 10 years stress event (i.e. at the 90% confidence level and a 1 year horizon). Based on this mild stress scenario the impact on ING Bank’s earnings, revaluation reserve and RWA is calculated (which are labelled as earnings-at-risk, revaluation reserve-at-risk and RWA-at-risk). These stressed figures are used as input for a two year simulation which depicts the developments of ING Bank’s solvency level versus its risk appetite.
Determine correlations 231ING Group Annual Report 2012 1 W h o w e are 2 R
Differences between RC and EC are mainly due to: • The EC figures shown reflect all diversification effects within ING Bank, including risk reduction between the risk categories; while for
The above risk metrics and risk appetite framework do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management framework in place to manage this risk, which is described in the Liquidity Risk section of ING Bank.
• Apart from the above mentioned proposals, another aim is to reduce ‘pro-cyclicality’, to avoid that banks would be required to increase their capital in difficult financial times when it is most scarce. Lastly, there is a proposal to introduce additional capital requirements for counterparty credit risk. In addition, the Basel Committee and Financial Stability Board (FSB) are currently considering measures that may have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for ‘systemically important banks’ (SIBs) and so-called ‘Global’ SIBs (G-SIB). ING Bank has been designated as a global SIB by FSB and a domestic SIB by DNB.
• Separate from but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum credit risk bank subsidiaries and branches are allowed to have on their holding companies. In the absence of a supranational harmonisation this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that cannot merely be transferred (unsecured) to a central treasury in another country.
The Basel III proposals and their potential impact are semi-annually monitored via semi-annual monitoring exercises, where ING Bank participates in. Due to such monitoring exercises and on-going discussions within the regulatory environment revisions take place in the original Basel III proposals as for instance has been done for the Liquidity Coverage Ratio in January 2013. For European banks these Basel III requirements will be implemented through the Capital Requirement Directive (CRD) IV, which might deviate in its final state from the original Basel III requirements.
RISK DEVELOPMENTS IN 2012 Liquidity risk In 2012, funding and liquidity risk management continued to be an important topic for senior management and the Asset and Liability Committee (ALCO) Bank, as markets remained volatile in respect of the Eurozone uncertainties. External market and regulatory developments and internal financial developments are closely monitored. Regular stress testing and measurement of early warning indicators are, among others, used to provide additional management information. In 2012 the funding and liquidity risk appetite statements were updated. The appetite statement is set and allocated throughout ING Bank. In addition, funding and liquidity usage is steered by means of funds transfer pricing thus embedding funding and liquidity risk management in the total organisation. This all is part of global project that was started in 2011 on new frameworks for funding and liquidity risk management. The implementation of these frameworks will be finalised in the course of 2013.
Real Estate Finance ING Bank finances commercial real estate via Real Estate Finance (REF) in various countries over the world, although half of this portfolio is based in the Netherlands. Risk costs and non-performing loans in REF were elevated given deteriorating European commercial real estate markets. REF financing policy is based on cash flow generating prime real estate portfolio, senior secured facilities, relatively low starting LTV’s and conservative covenant setting. Construction is less than 0.9% of the total portfolio and at least 70% is pre-sold/pre-rented.
The central risk team is also responsible for setting the ING Bank credit risk policies and standards. The local and central credit risk teams strive to have a consistent risk appetite which is facilitated by a large number of job rotations and a robust credit risk infrastructure that supports the entire credit lifecycle.
Credit Risk Definitions Credit risk is the risk of loss from the default and/or credit rating deterioration of counterparties (including bond issuers). Credit risks arise in ING Bank’s lending, financial market and investment activities. Credit risk exposure is the total amount of outstanding plus the unused portion of commitments. It can be measured on various levels, such as customer, legal or economic one obligor group, product, portfolio, customer type, industry, and country. Each level can in turn be broken down from the consolidated ING Bank NV level to a local branch/ unit level. As the distribution of the exposures is of great importance in correctly managing the credit risk exposure, ING Bank has established the credit risk appetite and concentration framework.
• Lending risk: arises when ING Bank grants a loan to a counterparty, or issues guarantees on behalf of a counterparty. This includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured as the notional amount of the financial obligation that the counterparty has to repay to ING Bank, excluding any accrued and unpaid interest, discount/premium amortisations or impairments.
• Settlement risk: is the risk that a counterparty will fail to deliver on financial markets (PS or MM) transaction/contract at Settlement and ING Bank could lose up to 100% of the value expected to be delivered. Settlement Risk arises when there is an exchange of value (funds or instruments) for the same value date or different value dates and receipt is not verified or expected until after ING has given irrevocable instructions to pay or has paid or delivered its side of the trade. The risk is that ING Bank delivers but does not receive delivery from ING Bank’s counterparty. ING manages Settlement Risk in the same way as other risks including a per borrower risk limit structure. However, because of the short term nature and per definition double count of Settlement Risk, ING Bank does not hold provisions or capital for specific Settlement Risk. Although a relatively low risk, ING increasingly uses DVP (Delivery versus Payment) and FITO (First in Then Out) payment techniques to reduce Settlement Risk.
Governance Credit risk management (CRM) within ING Bank belongs to the second line of defence (the front office being the first) and aligns the credit risk taking with the strategic planning of ING Bank. It is responsible for reviewing and managing credit risk including environmental and social risk for all types of counterparties. CRM consists of line credit risk managers who are responsible for their business lines and manage specific portfolios and experts who support both the line credit risk manager as well as the business with tools like credit risk systems, policies, models and reporting. The CRM General Manager is functionally responsible for the global network of credit risk staff and the heads of the credit risk management functions for the business lines and the corporate staff functions report directly to him.
Credit analysis at portfolio level is a function of different concentration levels and various metrics like Economic Capital, Regulatory Capital, Exposure at Default, Probability of Default and Loss Given Default. The risk/reward is monitored and managed at portfolio level to ensure efficient use of ING Bank’s capital. Credit analysis at facility level is also risk/reward-oriented in that the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. Risk Adjusted Return on Capital (RAROC)-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING Bank’s credit analysts make use of publicly available information in combination with in-house analysis based on information provided by the counterparty, peer group comparisons, industry comparisons and other quantitative techniques and tools.
To manage country risk effectively, ING Bank uses two components, which together form the country risk framework: The first component is to set a maximum economic capital consumption and the second component is to assign country reference benchmarks, which define the maximum appetite for credit risk, that ING Bank has per country to ensure that exposures and potential future losses do not exceed a certain agreed level. The country reference benchmark is based on the country’s GDP and the funds entrusted locally in that country. In countries where ING Bank is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating, which is used to set the country reference benchmark. Based on these two components country limits are set and exposures derived from lending, investment, pre-settlement and money market activities are then measured and reported against these country limits on a daily basis.
The rating grades categories 1 to 17 are in alignment with the risk grades used by S&P and Fitch/IBCA (AAA-CCC) as well as Moody’s (Aaa-Caa1).
Possible ratings 1–19 1–19 15–19 20–22 Typical ratings 1–14 15–17 18–19 20–22 Deterioration in risk Not significant Significant Significant Significant Significant intervention Not required Not required Required Required Impaired No No No Yes Account Ownership Front Office Front Office Front Office Front Office Credit Risk Management Regular Regular Credit Restructuring Credit Restructuring Primary Manager Front Office Front Office Credit Restructuring Credit Restructuring
Management Front Office Front Office Accounting provisioning IBNR IBNR IBNR INSFA/ISFA
2. Practice-based drivers including approaches to risk management and risk measurement. 3. Regulating environment such as supervisory practices, implementing laws and regulations including national discretion and accounting standards.
Basel II Scaling-factor of 1.06 is used No Basel II Scaling-factor is used For most non-FM and non-trade related finance exposures a regulatory minimum tenor of 1 year is used, for all exposures a 12 month PD is used
For short tenor exposures, the actual tenor is used and for exposures shorter than 1 year the effective PD (not 12 months PD) is used
For OTC derivatives and Repo Like transactions, based on Current Exposure Method (CEM), risk weights are laid down in the law
EC for Securitisations is calculated through the Corporate B2 methodology (based on internal PD, EAD, LGD values and remaining maturity)
Standardised Approach Unlike the AIRB approach, the standardised approach applies a fixed risk weight to each asset as dictated by the Financial Supervisory Authorities, and is based on the exposure class to which the exposure is assigned. As such, the Standardised Approach is the least sophisticated of the Basel II methodologies and is not as sensitive as the risk-based approach. Where external rating agency ratings are available, they may be used as a substitute to using the fixed risk weightings assigned by the Financial Supervisory Authorities. Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings.
Advanced Internal Rating Based (AIRB) Approach There are four elements which drive the Basel II ‘risk-based approach’ to the determination of the capital base. Probability of Default (PD): The first is the counterparty’s probability of default, which measures a counterparty’s creditworthiness in terms of likelihood to go into default. The result of this calculation attempts to measure the senior, unsecured standalone creditworthiness of an organisation without consideration of structural elements of the underlying transactions, such as collateral, pricing, or maturity. Each borrower should have a rating which translates to a PD.
Securitisations ING Bank has implemented the AIRB approach for credit risk. As a consequence, ING Bank uses the Rating Based Approach (RBA) for investments in tranches of asset-backed securities (ABS) and mortgage-backed securities (MBS) which have been rated by external rating agencies. Rating agencies which are used by ING Bank under the RBA include: Standard & Poor’s, Fitch, Moody’s and DBRS.
ING Bank uses the Internal Assessment Approach (IAA) for the support facilities it provides to Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp., based on externally published rating agency methodologies.
Credit risk model governance All PD, EAD and LGD models are built according to the ING Bank internal credit risk modelling methodology standards and model life cycle. After thorough review of the documentation by the Model Development Committee (MDC) and Model Validation (MV) the Credit Risk Committee (CRC) approves the models. Local model approval is delegated by the CRC to the MDC. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation. The capital impact from the implementation of approved models is reported to the DNB in a quarterly report. In addition, MV validates each model on an annual basis. During such periodical validation the model performance is analysed via amongst others back testing. Most of the credit models reviewed by Model Validation show a conservative observed performance compared to predicted levels.
Risk ratings (PD) for performing loans (1-19) are calculated in ING Bank IT systems with internally developed models based on data either manually or automatically fed. Under certain conditions, the outcome of a manually fed model can be challenged through a clearly defined rating appeal process. Risk ratings for non-performing loans (20-22) are set on the basis of an approved subjective methodology by the global or regional restructuring unit. For securitisation portfolios, the external ratings of the tranche in which ING Bank has invested are leading.
Exposure classes The Basel II Accord has developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a common counterparty type or product type. For the AIRB Approach, most of the exposure classes have subcategories. ING Bank has applied the following definitions to determine Exposure Classes: Governments include Sovereign Government entities, Central Banks and Basel II recognised Local / Regional Authorities as well as Supranational Organisations; Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments; Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other; Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards. Securitisations include securitisation programs for which ING Bank acts as an investor, sponsor or originator.
Credit Risk tools Credit Risk Policies ING credit risk policies provide for generic rules and roles and responsibilities that should always prevail within ING Bank. While allowance is given for discretionary variation to comply with local regulations, such variations must always comply with the content of a global ING Bank wide credit risk policy and approved by (local) credit risk. All credit risk policies are created according to the policy development standards and reviewed on a regular basis. Each policy has a credit risk sponsor and is created in close consultation with the various stakeholders within credit risk, front office and where applicable other corporate departments. All policies require approval by the Credit Risk Committee (CRC) and where applicable (for instance in case of determining delegated authorities) by the Global Credit Committee (GCC).
GRID’s cross-reference functionality is essential. It enables us to link company information from different internal and external databases, with different local identification codes. Additionally, ING Bank automatically uploads credit ratings (from S&P, Fitch, and Moody’s) and any (new) security ID (CUSIP, SEDOL, Bloomberg ID, or ISIN) on a daily basis, based on this cross-reference structure.
Once a rating is approved the rating results are forwarded in real time to GRID. GRID then redistributes the rating (update) to the subscribing systems. The Loan Pricer module is used to price loans and investments. It accesses existing data from within Vantage for existing deals and uses this data in the loan pricing component, a tool which assists the user in structuring and optimising a deal, while determining if the transaction meets ING Bank’s internal risk/reward requirements. Functionality includes the ability to create and compare different scenarios, and to search for break-even values. The Approval Package module supports the credit approval process by automating the creation and management of credit application documents and routing them to reviewers and approvers. Approval Package is the tool that collects the data from all of the other modules (including data received from other STARpro modules and all exposure data from Vortex), in order to put together the credit application package. For annual reviews, the user is required to check the existing data (sourced from their local tools via Vortex), and make any requested changes. For new deals, the user (usually an account manager) inputs the entire deal structure (using local source system codes) directly into Approval Package. The tool then has a workflow function to guide the credit application through the credit approval process. The Problem Loans module is used to create provisions for organisations where the rating is set to 20, 21 or 22 and the outstanding is equal or bigger than the threshold (in general 1 million Euro, in individual cases or for certain units, the threshold could be lower). It also records detailed information on organisations in default. In addition the Problem Loan tool supports the problem loan provisioning process by automating the creation of problem loan applications and routing provisioning proposals to designated reviewers and approvers. It also provides a centralised ING Bank-wide repository for problem loan applications. All relevant policies, regulations and methodologies are as much incorporated in the systems as possible, providing an integrated approach.
Credit Risk Mitigation As with all financial institutions and banks in particular, ING Bank is in the business of taking credit risks in an informed, controlled and measured fashion. As such, the creditworthiness of our customers, trading partners and investments is continually evaluated for their ability to meet their financial obligations to ING Bank. ING Bank uses different credit risk mitigation techniques, of which entering into Master Agreements, Collateral Agreements and CDS contracts are the main techniques used.
In the table below the residential mortgage portfolio, the mortgage collateral amounts and the commercial banking related exposures and its attached collaterals are shown. Please note that the figures shown for the AIRB portfolio are based on official regulatory settings, amongst others resulting in collateral values before haircuts, as, if and when applicable. The exposure classes shown are based on Basel II Accord exposure classes. ING Bank records collateral values per facility: for the AIRB portfolio, these figures are based on original cover values, although some business units attempt to update to actual market values. This is inherently difficult in volatile markets. Some facilities have various levels of collateral; others have no collateral at all. Looking at the total figures may not reflect the collateral value per facility.
Promises Promises are defined as a legally binding declaration by persons or organisations that give ING Bank the right to expect and claim from those persons or organisations if ING Bank’s customer fails on its obligations to ING Bank. Common examples are guarantees received and letters of credit.
For each product or category, the cover amounts are then reported for the most relevant collateral categories being Mortgages and Eligible Financial Collateral (including cash and securities), and for the most relevant Promises category being Guarantees. The remaining collaterals and promises are included in the category Other.
** Excluding intercompany positions. *** Guarantees received can be additional to pledges and not necessarily replace covers. **** The used valuations methods for the underlying covers may vary per cover. ***** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers.
In the cover table below the performing and nonperforming Residential Mortgages in the Retail SA portfolio are shown, together with the original cover values.
Credit quality Since the beginning of the crisis, increases in past due obligations, impaired loans, provisions and problem loans in general have occurred in the ING credit risk portfolio. Due to the continued economic pressure and low investor appetite, the restructuring of files is getting more complicated and as a result, the average turnaround time of the files at Global Credit Restructuring has increased. In the work out practice, ING faces an increasing number of situations where the traditional Plan A is not a realistic possibility. Plan A generally consists of an amicable restructuring agreement with the present owner and, sometimes, the executive management, based on debt reduction, additional collateral or external equity versus improved conditions and risk / reward profile for the bank. Other cases demand another arrangement or a Plan B – a lender led solution where the bank(s) temporarily take ownership or take the company through, prepackaged, insolvency to find a new strategic partner, which can add value in terms of liquidity, synergies and management. Successful restructuring outcomes are more difficult to achieve.
Past due for 1–30 days 5,350 5,455 Past due for 31–60 days 1,142 1,111 Past due for 61–90 days 87 83
(1) Based on lending (consumer loans and residential mortgages only). The amount of past due but not impaired financial assets in respect of non-lending activities was not material.
In all three cases, ING has incurred, or will incur a financial loss, which was accepted for non-commercial reasons. In the TDR case, the (loan loss) provision will be at least equal to the financial loss incurred.
MRM is responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with these guidelines. An important element of the market risk management function is the assessment of market risk in new products and businesses. Furthermore MRM maintains an adequate limit framework in line with ING Bank’s risk appetite. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit breaches are reported to senior management on a timely basis and the business is required to take the appropriate actions to reduce the risk position.
Real estate price risk includes the market risks in both the investment portfolio and the development portfolio of ING Commercial banking. The real estate price risk for the investment portfolio is calculated by stressing the underlying market variables.
Market Risk in Trading Books Within the trading portfolios, positions are maintained in the professional financial markets. These positions are often the result of transactions with clients and may serve to benefit from short-term price movements. Market risk arises in the trading portfolios through the exposure to various market risk factors, including interest rates, equity prices, foreign exchange rates and credit spreads.
To include credit risk in the fair valuation, ING applies both credit and debit valuation adjustments. Own issued debt and structured notes that are valued at fair value are adjusted for credit risk by means of a debit valuation adjustment. Additionally, derivatives valued at fair value are adjusted for credit risk by a credit valuation adjustment. This credit valuation adjustment is of a bilateral nature; both the credit risk on the counterparty as well as the credit risk on ING are included in the adjustment. All market data that is used in the determination of the CVA is based on market implied data. Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty decreases) and right way risk (when exposure to a counterparty is decreasing and the credit quality of that counterparty increases) are included in the adjustment. ING applies CVA also to for pricing credit risk into new external trades with counterparties. All credit and debit valuation adjustments and their exposures are managed centrally on a global level.
Risk Profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily trading profits and losses. The overnight VaR is presented for the ING Commercial Banking trading portfolio for 2011 and 2012.
VaR decreased during the year due to position changes and more volatile scenarios dropping out of the VaR calculation.
The ES is mainly influenced by the sensitivity of savings to interest rate movements. The investment of own funds only impacts the ES marginally, as only a relative small part has to be (re)invested within the 1-year horizon.
(1) Please note that 2011 figures are restated for ING Direct Canada, ING Direct USA, and banking books that were included in trading risk Section h in 2011.
In 2012 short-term interest rates remained at low levels in both the Eurozone and the US. The earnings sensitivity for an upward shock has changed from a negative to a positive impact. A positive earnings sensitivity implies that when rates increase, the positive impact on interest received on assets is larger than the negative impact of interest paid on liabilities. Earnings are per 2012 year end relatively insensitive to rate changes.
By currency Euro –2,092 –1,885 US Dollar –75 –78 Pound Sterling 12 –28 Other 15 –45 Total –2,140 –2,036
The US dollar Foreign Investments decreased significantly in 2012 as a result of the sale of ING Direct US and the corresponding Capital One Financial shares.
Total capital requirement for equity price risk under the Simple Risk Weight Approach at 31 December 2012 results in EUR 201 million (2011: EUR 207 million).
In total, real estate market risk exposure in the banking books decreased by EUR 0.8 billion mainly as a result of divestments (EUR –0.6 billion) and negative fair value changes and impairments (EUR –0.2 billion). A split on the real estate exposures per continent and sector based on the risk management view is seen below.
LIQUIDITY RISK Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
Liquidity position management ING Bank manages its liquidity position by: • Funding lending activities by longer term liabilities (including funds entrusted); • Maintaining sufficient liquid investments and short term deposits; • Maintaining capacity to generate additional cash, amongst others by means of securitisations.
Next steps were made to prepare the organisation for the upcoming implementation and following observation requirements of Basel III / CRD IV. In 2012, ING Bank established a dedicated Bank Treasury function which is responsible for the first line execution of liquidity management.
Risk profile ING Bank has the following funding and liquidity risk management objectives: • The structural mismatch in expected liquidity tenors of ING Bank’s assets and liabilities per significant currency is capped; • A pro-active compliance with home/host regulatory liquidity limits; • The time-to-survive in a funding stress situation should extend multiple quarters; • Funding of all longer-term assets and investments by stable and longer-term liabilities; • Eliminate geographical dependencies with respect to intra-group funding; • Diversification of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies.
The funding mix remained well diversified and according to targets set. Deposits accounted for 67% of the total funding mix, improved from 62% per 2011 year end. Ultimo 2012 the Loan-to-Deposit ratio (excluding securities at amortised costs and IABF receivable) equals 1.13.
Stress Testing Stress testing is a valuable risk management tool. Stress testing evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, ING Bank produces on a regular basis several stress test reports with respect to our funding and liquidity position. Some of these stress tests are regulatory driven, and others which are based on internal stress scenarios: • On a weekly basis ING reports an internal liquidity stress scenario. This report shows the development of the liquidity buffer during a 3-month-stress period, on a consolidated level and for the main entities, and split in EUR and USD.
• On a monthly basis ING reports a number of stress scenarios, based on regulatory requirements: – 1-month DNB liquidity buffer, according to DNB regulation.
The Non-Financial Risk Department uses a layered functional approach within business lines to ensure systematic and consistent implementation of the Bank framework, policies and minimum standards. To avoid potential conflicts of interests, it is imperative that the staff working in the department is impartial 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 NFR is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new staff.
Framework ING Bank has a comprehensive framework for Operational and Compliance risks. This supports and govern the process of identifying, mitigating, measuring and monitoring non-financial risks thus reflecting the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
Transition to a new Operational Risk capital model In 2011, ING built a new Operational Risk Capital model in which, the risk profile is more closely tailored to the internal profile of ING Bank and its divisions by using scenario data for capturing severe risks and internal loss and Risk & Control Self-Assessment data for capturing day-to-day risks. The business has a strong role in assessing scenario severities and the Operational Risk Management function in validating the results. This model will be applied from 2013 onwards.
Confidence level of 99.90% Confidence level of 99.95% No interrisk diversification applied Interrisk diversification applied Operational Risk scenarios used for validation Operational Risk scenarios included in calculation Assessment of severe risks mainly driven by External Loss Data Assessment of severe risks driven by a mix of scenarios and
External Loss Data Internal loss data used for capturing day-to-day risks Internal loss and Risk & Control Self-Assessment data use for capturing day-to-day risks Scorecard approach to assess the level of control Key Control Testing to assess the level of control Confidence level of 99.90% Confidence level of 99.95%
ING continuously enhances its compliance risk management programme to ensure that ING complies with international standards and laws.
Columbia and the District Attorney of the County of New York (together the “U.S. Authorities”) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until 2007. Under the terms of the Deferred Prosecution Agreements, no further action will be taken against ING Bank if it meets the conditions set forth in the agreements during an 18 months period. As part of the settlement, ING Bank has paid a total penalty of EUR 473 million. As announced on 9 May 2012, ING Bank recognised a provision in the first quarter of 2012 by which this issue has been sufficiently covered. ING Bank has cooperated closely and constructively with regulators and other authorities throughout this process. The U.S. Authorities have recognised ING’s substantial cooperation in the resolution and ING’s efforts and commitment to continuously enhance compliance within the organisation.
(ii) Customer behaviour risk relates to clients behaving differently than expected and the effect that this behaviour can have on customer deposits and mortgage pre-payments. The customer behaviour risk is calculated by stressing the underlying assumptions in the models for behavioural assets and liabilities.
Governance Risk governance ensures a robust and responsive governance structure that adequately manages the risks ING is exposed to and effectively responds to adversity so as to preserve ING’s financial position as determined by the risk appetite.
Ongoing changes in the regulatory environment Amidst the current and on-going crisis, it is inevitable that regulation will seek more certainty from undertakings. Regulation will impact insurers in many ways which will require adaptation and alignment with internal views. Inter alia, regulation will seek to ensure undertakings maintain capital adequacy. Regulation will also provide impediments to risk-based pricing in the form of anti-discrimination restrictions whereby certain risk factors will not be allowed for risk-based pricing and provisioning.
• The most important regulatory focus for the insurance industry is the continued development by the European Union of the Solvency II capital adequacy framework. Solvency II is intended to be the European, economic, risk-based and market-consistent regime whereby capital requirements are directly dependent on an insurer’s assets and liabilities. However, some of the proposed measures currently under discussion are considered unduly conservative and deviate from economic principles. It is therefore very important that the Solvency II framework, as originally envisaged, will become market-based, avoid pro-cyclicality and adequately reflect the position of insurance undertakings during market volatility. The EU politicians and regulators drafting the framework should therefore ensure that the measures to be implemented are robust enough throughout the cycle. ING Insurance EurAsia is working actively with relevant stakeholder in the insurance industry to advise EU politicians and regulators to come up with concrete proposals that realise these objectives; • The insurance business is affected by regulatory action, for instance regulations affecting taxes, pension regulation and customer protection. In the first quarter, the European Court of Justice ruled that price differentiation based on gender for any insurance products sold in the European Union is not allowed from 21 December 2012 onwards. This will only impact new business and exclude repricing and extensions. ING Insurance EurAsia will adapt to these impediments such that ING Insurance EurAsia will continue to provide protection offerings to the current, prospective and future policyholders; • State insurance regulators in the United States and the National Association of Insurance Commissioners (NAIC) regularly re-examine existing US laws and regulations applicable to insurance companies and their products. The NAIC adopted the Valuation Manual for Principles Based Reserving of Life Insurance and Annuity products at their December 2012 meeting. The Manual now must be adopted by 42 states prior to becoming effective. The NAIC also adopted the Risk Management and Own Risk and Solvency Assessment Model Act (the ‘ORSA Model Act’) in 2012. This Act requires companies to do an ORSA by 1 January 2015.
New mortality tables in The Netherlands The Dutch Bureau of Statistics (CBS) published their bi-annual update of mortality projections in the Netherlands, which are used by the Dutch insurance businesses. The update had no impact on the IFRS P&L, but is reflected in the IFRS reserve adequacy test and the capital ratio (IGD ratio) for ING Insurance. The impact on the IGD ratio was approximately 4 percentage points. Nationale-Nederlanden established an additional provision for longevity more than 15 years ago to cover the risk related to increasing life expectancy in the group pension business. Upon renewal, group pension contracts are recalculated and, to date, any required increase in the provision for insurance contracts due to mortality has been offset against the longevity provision.
ING INSURANCE EURASIA MISSION AND OBJECTIVES Risk is at the heart of the insurance business model. Adding value to clients and shareholders by appropriately pooling and diversifying risks is the core function. Insurance risks are borne by accepting premiums from policyholders which in turn are invested, thereby generating return potential and market risks. Risk Management is the basis for creating value for policyholders and shareholders. The willingness to take risks and ability to appropriately manage the risks we accept and those we do not accept is of paramount importance.
Executive level The MBE is supported by two committees with regards to risk: • Finance and Risk Committee
The primary responsibility of the committee is to align finance and risk decisions that have an impact on internal and/or external reporting of ING Insurance EurAsia. This includes advising on, (pre-) approving, reviewing and taking actions on issues that impact the financial condition of ING Insurance EurAsia. The Finance and Risk committee has two sub-committees dealing with different risk areas: – EurAsia Model Committee – The authority that approves methodologies, models and parameters used for measuring Risk, Economic
The Risk Committee MBE includes all MBE members and heads of finance & risk staff departments. It discusses and decides on risk related items, approves limits and tolerance levels per risk category and approves and mandates action plans for specific financial, product and operational risk issues. The Risk Committee MBE has three sub-committees dealing with different risk areas: – Financial Risk Committee – Oversees all financial risks within the ING Insurance EurAsia entities; – Product Risk Committee – Oversees all insurance product risks within the ING Insurance EurAsia entities; – Non-Financial Risk Committee – Oversees all non-financial risks within ING Insurance EurAsia.
New Investment class and investment mandate process Complementing the PARP for insurance products, ING Insurance EurAsia maintains a New Investment Class Approval and Review Process (NICARP) for approving new investment classes. Each asset ING Insurance EurAsia invests in should be on the Global Asset List; the list of all approved investment classes. Each Business Unit maintains a Local Asset List that is a subset of the Global List. For a limited number of investment classes, a Group Investment Transaction Approval (GITA) is required for each new transaction. This requirement only applies when the level of complexity or diversity warrants Group approval for individual (programmes of) transaction(s). Actual investments are made based on Investment Mandates, a formal agreement between the owner of the investments and its asset manager. Business Units can only include investment classes in their Investment Mandates that are on their Local Asset List. Next to setting the allowed investment classes, the mandate also serves to agree the strategic asset allocation and asset, industry, regional, and credit concentration limits.
Policies ING Insurance EurAsia has a comprehensive set of risk management policies in place, which are regularly updated to align with best practices, regulations and change in business profile. Starting in 2011, ING Insurance EurAsia reviews all policies for compliance with emerging Solvency II and other regulations, for example Capital Requirements Directive III (CRD III).
Risk Limits Limit setting to a granular level for business units throughout the organisation to constrain risk taking at the operational level within the business.