> ING posted 2012 underlying net profit of EUR 2,603 million in a challenging environment > Capital, funding and liquidity positions improved > ING continued to de-risk, streamline its portfolio and strengthen its businesses > Agreement reached with European Commission on amended Restructuring Plan > Further progress made towards State repayment and reduction in double leverage 2 ING Group Annual Report 2012
Dear reader, Thanks to loyal customers, prudent balance sheet management and the determination of our staff to provide the best possible service to our customers, ING strengthened its position. 2012 was a year marked by major change. In challenging times, ING has become a financially stronger company. Through divestments, ING has sharpened its focus and became smaller. The foundations for further changes are in place.
The drive towards that future began four years ago, in 2009, when I became chairman of the Executive Board and was faced with the challenge of steering ING through the financial crisis. This required robust measures. We needed to change course. It was evident that we had to restructure our organisation drastically, not only because of the crisis and the lessons we drew from it, but because of the increasing call for sustainable financial services, for a change of culture. In brief, we needed to find a different way of working and so we rolled up our sleeves and we set changes in motion.
I would like to thank our staff for their resilience. We have asked a lot of them and they have continued to step up to the plate.
Jan Hommen Chairman of the Executive Board 5ING Group Annual Report 2012
ING Group’s strategic priorities are: strengthening our financial position, restructuring, streamlining the portfolio, repaying state aid and building both stronger banking and insurance/investment management businesses, all based on sound business ethics and good corporate citizenship.
Amendments to the Restructuring Plan In November 2012, ING and the Dutch State reached an agreement with the European Commission on amendments to its 2009 Restructuring Plan.
Life & ING IM administrative expenses / Life & ING IM operating income (%)
Addition to loan loss provision Banking operations 2,125 1,670 1,751 2,973 1,280
Figures per ordinary share (in EUR) Basic earnings (2) 0.86 1.12 0.63 –0.60 –0.33
(1) The results of Insurance/IM Asia and Insurance Latin America are shown in ‘net result from discontinued operations’. (2) See note 50 in the Annual Accounts.
(1) ING Group evaluates its debt/equity ratio on the basis of ‘core debt’ and ‘adjusted equity’. Further information is provided in the section ‘Capital management’ in the consolidated annual accounts.
ING Group evaluates the results of its businesses using a non-GAAP financial performance measure called underlying result. Underlying result is derived from the result in accordance with IFRS-EU by excluding the impact of divestments, discontinued operations and special items. Historic underlying results have been restated for divestments in order to create a comparable sequence (i.e. 2012, 2011 and 2010 underlying results exclude the results of a divestment which was completed in 2012). See note 52 in the consolidated annual accounts for a reconciliation between IFRS and underlying result.
Better customer experience % of business units that offer services or products for groups of people with special needs (1) 29.4% n.a. n.a.
Jeroen van der Veer (65), chairman Peter A.F.W. Elverding (64), vice-chairman J.P. (Tineke) Bahlmann (62) Henk W. Breukink (62) Jan H. Holsboer (66) Sjoerd van Keulen (1) (66) Piet C. Klaver (67) Joost Ch.L. Kuiper (65) Robert W.P. Reibestein (2) (56) Yvonne C.M.T. van Rooy (61) Luc A.C.P. Vandewalle (68) Lodewijk J. de Waal (62)
(1) Resignation as of the annual General Meeting on 13 May 2013.
United States 34 United Kingdom 20 France 11 Netherlands 6 Germany 6 Switzerland 4 Belgium 2 Luxembourg 1 Other 16 Total 100
It remains ING’s ambition to repay the remaining support as quickly as possible and ING intends to accelerate repayments if possible and prudent under the prevailing economic circumstances. Given the ongoing crisis in the eurozone and increasing regulatory capital requirements, ING needs to take a cautious approach and to maintain strong capital ratios in the Bank as it builds towards the implementation of Basel III. Each subsequent repayment to the Dutch State requires prior approval from DNB, at the time ING decides to propose such repayment.
INvESTORS AND FINANCIAL ANALYSTS MAY CONTACT: ING Group Investor Relations (AMP C.03.049) P.O. Box 1800 1000 BV Amsterdam The Netherlands
– short term A-1 Prime-1 F1+ – long term A+ A2 A+ ING vERZEKERINGEN N.v. – short term A-2 Prime-2 F2 – long term A- Baa2 A-
(1) Still valid on 18 March 2013, the date of this Annual Report. (2) Standard & Poor’s and Fitch long-term ratings for ING Groep N.V., ING Bank
IMPORTANT DATES IN 2013* Publication results 1Q 2013 Wednesday, 8 May 2013, 7:00 a.m.
The current regulatory reforms taking place in the financial sector are aimed at making it more resilient to external shocks, and they have an impact on ING. We support the need to make financial institutions more resilient and the system as a whole more stable. We support the overall majority of international, European and national measures being undertaken, such as the required strengthening of banks’ core capital base. However, ING is concerned about the cumulative impact of the many different measures, the uncertainty when and in what form they will be implemented, and how they will affect our role in financing the real economy.
EUROZONE SOVEREIGN DEBT CRISIS AFFECTED THE CREDIT AND EQUITY MARKETS IN 2012 The uncertainty about the future of the euro, combined with austerity measures taken in certain European Union member states, are among the reasons why the eurozone has been pushed back into recession. A modest recovery is only slowly taking hold in the US, while Chinese growth came off the boil in 2012. Globally, central banks have been providing additional support. Although this support probably has not been effective in curing the world’s economic ills, it did stabilise financial markets.
Net gains on divestments, including net result on disposal and classification of discontinued operations, were EUR 1,714 million in 2012, compared with EUR 1,812 million in 2011. The 2012 results on divestments include gains on the sales of ING Direct USA (EUR 489 million), ING Direct Canada (EUR 1,135 million), and Insurance Malaysia (EUR 745 million), as well as a EUR 260 million loss on the announced sale of ING Direct UK and EUR 380 million in goodwill write-offs for Insurance/IM Korea. The 2011 gains on divestments of EUR 1,812 million were attributable to the sales of the Latin America business, ING Car Lease, and Real Estate Investment Management.
ING’s capital position remained strong, despite the EUR 1,125 million repayment to the Dutch State in November 2012. ING Bank’s core Tier 1 ratio increased from 9.6% in 2011 to 11.9% at the end of 2012, supported by the gain on the sale of ING Direct USA and ING Direct Canada. These transactions helped ING Bank to fund a dividend upstream of EUR 2,125 million to ING Group, which was used to repay part of the core Tier 1 securities and reduce Group leverage. ING Bank’s risk-weighted assets were reduced by EUR 52 billion in 2012, primarily reflecting the sale of ING Direct USA, ING Direct Canada, lower lending volumes and de-risking of the investment portfolio. The Insurance Group Directive Solvency I ratio increased to 245% at the end of 2012, from 225% at the end of 2011, mainly due to the sale of Insurance Malaysia, market developments and the introduction of the Ultimate Forward Rate (UFR) curve for the Dutch insurance entities. The Group debt/equity ratio improved to 11.1% from 12.7% a year earlier.
The SSM, which will give strong powers to the ECB for the supervision of all banks in the euro area, with a mechanism for non-eurozone countries to join voluntarily, is an important first step in achieving a banking union. It is crucial that the ECB has exclusive responsibility to carry out specific prudential tasks. Furthermore, a consistent application of the single rulebook, a single set of rules for all banks in the euro area, is key as it will diminish discrepancies between national supervisory practices. Important tasks like the authorisation of credit institutions, assessment of acquisitions and disposals, the authority to ensure compliance for capital, liquidity regime and leverage ratios, and the imposition of additional capital buffers for prudential and countercyclical reasons should be the exclusive responsibility of the ECB for all banks in the participating member states.
In the Netherlands, the Wijffels Committee, named after the Dutch representative in the Liikanen Committee, was established in October 2012. The task of the Wijffels Committee is to advise the Dutch government on a number of topics, including applying the recommendations of the Liikanen Committee to Dutch banks, or whether additional measures are needed. The Wijffels Committee has been asked to submit its report by 15 June 2013.
SOLVENCY II During 2012, ING Insurance/Investment Management devoted much attention to preparing to meet the Solvency II capital adequacy requirements. Both in the head office and in the business units, many measures have been taken to upgrade our existing risk measurement and risk reporting to the required levels.
During the course of 2012 it became increasingly likely that the Solvency II framework would not be transposed into national law by the official deadline 1 January 2014, giving the insurance industry more time. Although ING Insurance/Investment Management sees many potential advantages of Solvency II over the existing Solvency I
REGULATORY MEASURES THAT IMPACT LIQUIDITY The liquidity position of European banks, including ING, is being shaped by CRD IV, and, in the case of ING, by regulations from DNB. The observation period of the Liquidity Coverage Ratio (LCR) was intended to start in the EU in January 2013, but this has not happened because CRD IV has been delayed. Based on input from various parties, the European Banking Authority (EBA) will incorporate reporting on a broader range of assets and will decide by 2015 on the final eligibility criteria for liquid assets. In January 2013, the Basel Committee on Banking Supervision (BCBS) announced a number of changes – both in content and planning of implementation – for the LCR. The proposed widening of the list of eligible assets for the LCR by the BCBS will be included in CRD IV.
ING Bank submitted its recovery planning package to DNB in November 2012. These included detailed tasks and responsibilities for (i) recovery in case of financial crisis, (ii) monitoring of metrics, (iii) maintenance of the recovery planning package, and (iv) implementation of certain recovery planning activities. Except for responsibilities related to recovery these tasks and responsibilities are embedded in the regular, going-concern organisation and processes. ING has defined a crisis operational framework – with several specific governance arrangements – that will be initiated in case of recovery. Similarly, ING has set up a procedure to monitor the metrics and a decision-making process to determine whether or not the recovery plan should be activated.
In parallel with these preparations, further development of Solvency II continued. Some progress was made on the Omnibus II Directive – the Directive that will amend the already-agreed level one Solvency II Directive – yet the legislative process was delayed when the trilogue partners (European Commission, European Parliament and the Council) failed to come to an agreement. The main area of disagreement is the treatment of long-term guarantees under Solvency II. Ultimately, the deadlock was broken with their agreement on an impact assessment, to be executed early 2013. During the trilogue discussions, ING stressed the importance of appropriate long-term guarantee measures. A failure to put in place appropriate measures would diminish insurers’ ability to provide such long-term guarantees, and undermine the role of insurers as long-term investors and stabilisers of the economy. Together with other insurance companies ING proposed an appropriate balance, which will be tested in a forthcoming impact assessment.
EU UNISEx RULE In March 2011, the European Court of Justice ruled that insurers in Europe cannot differentiate in price or benefits for the same insurance products, based on gender. This gender-neutral pricing, commonly called the unisex rule, states that as of 21 December 2012 life insurers must offer products that are identical for men and women. To comply with this new regulation, all product portfolios across the insurance business units were reviewed. More than 90 products were re-priced in ING Insurance Central and Rest of Europe. In the Benelux, all products available for sale were reviewed in the past two years to ensure they were compliant with the EU unisex rule. From 21 December 2012, all ING Insurance’s products available for sale throughout the European Union have been compliant with the rule.
DUTCH REGULATORY DEVELOPMENTS Dutch Coalition Agreement On 29 October 2012, the Dutch coalition government agreement was presented. It contained some far-reaching policy intentions for the banking sector which have still to be translated into legislation and pass through the Dutch parliament and senate. They include: • The implementation of the capital requirements for SIFIs (SIFIs buffer) to be brought forward in a responsible way, based on a risk assessment and taking into account the need for an international level playing field.
• Stricter screening of bank employees to reduce risks. • Enshrining banks’ duty of care in law. • Introducing proposals to better protect citizens’ savings against high-risk banking, to be based on the advice of the Wijffels Committee.
Moreover, the Dutch government has introduced a mandatory oath for Executive and Supervisory Board members of financial institutions licensed in the Netherlands, effective per 1 January 2013. In this oath, the Executive and Supervisory Board members of the relevant ING entities licensed in the Netherlands, declare that they (i) will perform their duties with integrity and care (ii) will carefully consider all the interests involved in the company, i.e. those of the customers, the shareholders, the employees and the society in which the company operates, (iii) in that consideration, will give paramount importance to the customer’s interests and inform the customer to the best of their ability, (iv) will comply with the laws, regulations and codes of conduct applicable to them, (v) will observe secrecy in respect of matters entrusted to them, (vi) will not abuse their knowledge, (vii) will act in an open and assessable manner and know their responsibility towards society and (viii) will endeavour to maintain and promote confidence in the financial sector. If they break the oath, the supervisory authority (DNB/AFM) can decide to reassess their suitability.
The policy intentions for the insurance sector include: • Measures to be taken in the area of second pillar pensions basically focus on reducing the tax-favoured treatment of second pillar pensions per 1 January 2015.
The levy on short-term funding liabilities (less than one year) is twice as high as the levy on long-term funding liabilities (more than one year). Of the total yearly tax proceeds of EUR 600 million, EUR 175 million is borne by ING. If a bank violates the 1:1 fixed remunerationto -variable remuneration ratio for board members set out in the Dutch Banking Code, the levy percentage will be increased. For ING, the levy increase will not be triggered as long as no bonuses are paid to the Executive Board of ING Group. Moreover, banking taxes paid by ING in other countries amounts to EUR 55 million in 2012. We believe the timing and motivation for such a bank levy to be inopportune given the economic climate and conditions in financial markets. There is also a risk that banks such as ING will face double taxation, i.e. taxation by more than one country per bank activity.
The Insurance/Investment Management operating profit decreased in 2012, mainly because of a lower technical margin, higher expenses and higher deferred acquisition costs in the life business and lower non-life results during the year. The underlying result was heavily affected by losses on hedges, as ING Insurance focused on protecting regulatory capital amid volatile financial markets.
During the past few years the following important milestones have been reached: • The operational separation of the insurance and banking activities, completed at the end of 2010. • The sale of almost all of the Latin-American 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 U.S. has to be completed by year-end 2013, more than 50% has to be divested by year-end 2014, with the remaining interest divested by year-end 2016.
• As ING has committed to eliminate double leverage, proceeds from the divestments will be used to that end, while ensuring adequate leverage ratios for the insurance holding companies.
In February 2012, the sale of ING Direct USA to Capital One Financial Corporation was closed. The transaction resulted in a positive result after tax of EUR 0.5 billion. The sale had a positive impact on ING Bank’s core Tier 1 ratio of approximately 80 basis points at closing. As part of the sale of ING Direct USA to Capital One, ING obtained shares in Capital One, all 54 million of which we sold in September 2012 for a total value of USD 3.0 billion (EUR 2.4 billion at the then current exchange rate).
The 2009 Restructuring Plan included restrictions on acquisitions and restrictions on price leadership for certain products in EU markets. These restrictions will continue to apply until 18 November 2015 or until more than 50% of each of the Insurance/IM operations has been divested, whichever date comes first.
(more conservative requirements for funding, liquidity and leverage), societal drivers (e.g. households and governments need to reduce debt), and a weaker economic environment.
A longer-term ambition is to develop a mature banking model in each country where ING operates. ING Bank has a good starting position and a competitive edge, with leading banking positions in its home markets of the Netherlands, Belgium, Luxembourg, Germany and Poland. Furthermore, ING has key positions in other Western, Central and Eastern European countries and Turkey, along with growth potential outside of Europe.
ING Bank has strong deposit gathering capabilities and a good funding mix. It has a well-known brand and it uses the Net Promoter Score (NPS) methodology to increase customer loyalty. The Bank is used to operating in lean, competitive markets which has helped it become a leader in innovative distribution. It has a prominent position in internet banking with a ‘direct first, advice when needed’ model and a relationship-driven commercial bank offering competitive products in terms of price, efficiency and effectiveness.
In 2012, ING Insurance/IM as a whole further refined its sales processes and the process for the development of new products to ensure they continue to be fully compliant in terms of customer suitability. A five point gauge was developed in monitoring compliance. The five points include NPS, customer complaints, welcome call analysis, policy persistency rate and agent turnover rate. ING Insurance/IM continued to use insights from its Net Promoter Score (NPS) programme in 17 countries to make process improvements in 2012. Businesses in Europe and Asia revised written customer communications to ensure the language used was clear and free of jargon. ING’s tied agency transformation programme reviewed agents in many countries, which improved agent productivity. ING Insurance/IM’s strategy of being a customer-driven business providing first-class products and services through multi-distribution channels was recognised in several awards and special mentions received during the year. Awards were won by the Insurance businesses in Romania, the Czech Republic, Slovakia, Hungary, Greece and at ING Investment Management.
The Insurance/IM businesses have made progress towards independent futures. The sale of a large part of the Asian insurance and asset management business was announced and ING U.S. took another step towards its planned IPO by filing an initial registration statement on Form S-1 with the SEC in connection with its proposed IPO. It also made progress towards a stand-alone capital structure by successfully raising USD 5 billion in a credit facility and a further USD 850 million in debt issuance.
ING believes that customers, employees, shareholders and the rest of society no longer live in separate worlds that meet intermittently, but have become more integrated. This mutual interdependence of business and society means that organisations must follow the principle of shared value. It is our conviction that, to be a successful company, our business decisions must be in line with the expectations and interests of those to whom we owe our licence to operate – our stakeholders. Therefore, we do not engage in activities that seriously damage the environment or violate human rights. We strive to achieve our business goals while making a positive and responsible contribution to society everywhere we do business.
CONCLUSIONS AND AMBITIONS In a challenging environment ING’s capital and funding improved, our liquidity position remained strong and earnings remained resilient. This enabled us to continue to support our customers. Beside strengthening our financial position, we were also able to make good progress on our other strategic priorities for ING Group: restructuring, streamlining the portfolio, repaying state aid and building stronger banking and insurance and investment management businesses. We continued to build our banking and our insurance businesses based on sound business ethics and good corporate citizenship. The Bank will continue to focus on restoring trust and customer centricity, on operational excellence and on optimising its balance sheet to meet its strategic goals.
21ING Group Annual Report 2012 1 W h o w e are 2 R
Most significant divestments closed in full year 2012 in EUR billion IFRS-EU
ING Group has made a commitment to repay the Dutch State the remaining EUR 3 billion core Tier 1 Securities at a total cost of EUR 4.5 billion, consisting of principal, premiums, accrued interest and coupon payments should they be triggered by potential future dividend payments. The repayment is scheduled in four equal tranches of EUR 1.125 billion each. After approval by the Dutch Central Bank (DNB), the first tranche of EUR 1.125 billion was paid on 26 November 2012. The other tranches are due to be paid in November 2013, March 2014 and May 2015.
Preparations have been stepped up for the base case scenario of an IPO for the European insurance and investment management business. However, several challenges and uncertainties remain, including the developing market environment for IPOs of European financial institutions, the lack of clarity with regard to the regulatory capital framework under Solvency I and the lack of clarity of the Solvency II capital adequacy framework, including its methodologies and timing of implementation. Nevertheless, several important initiatives are under way to improve the operational performance of the European businesses and to establish a prudent set of capital targets for the stand-alone entity leading to the IPO. Progress on divesting the remaining units in Asia is continuing.
• Economic capital requirements: although not a constraining factor at the moment, economic capital is used to manage the Bank’s risk profile and to set limits.
With respect to developments in financial regulation and accounting standards, ING is following these closely and is taking action to ensure the bank and insurance units can cope with the changes. ING Bank has taken further steps to prepare for the improved regulatory capital and liquidity framework for banks – Basel III – and is well positioned to operate under this new framework. During 2012, ING Insurance/IM worked strenuously towards meeting the Solvency II directive requirements. Internal preparations by head office and the business units continued, in particular to adapt ING’s risk measurement, management and reporting to levels required under the framework.
In addition, ING Bank continued its balance sheet integration programme as it worked towards optimising local balance sheets and risk-weighted assets were reduced following the restructuring of Financial Markets’ activities. Weak economic and business fundamentals continued to contribute to elevated levels of risk costs in 2012, while the percentage of non-performing loans increased to 2.5% which represents EUR 14.9 billion. The underlying addition to the provision for loan losses rose by 59% to EUR 2,122 million. Moreover, several other mitigating actions were taken such as additional collateral requirements.
On the Insurance side, the ongoing de-risking activities were also applied to the general account of Insurance Europe. Reflecting the impact of different de-risking measures taken, the investment margin declined over 2012. Furthermore, there was a continued focus on protecting regulatory capital, both in Europe and in the US, and measures were taken to decrease the vulnerability of the Insurance capital position especially against falling equity markets.
For ING U.S. specifically, both estimated IFRS earnings sensitivities and regulatory capital sensitivities decreased in 2012 over a wide range of risk types, thereby leading to an improvement of the risk-based capital ratio from 488% in 2011 to 526% in 2012. This enabled ING U.S. not only to make progress on its stand-alone capital structure, but also to raise EUR 850 million external debt and a EUR 5.0 billion credit facility, and to reduce dependency on internal funding.
Total underlying income 14,241 14,289 Underlying operating expenses 8,900 8,824 Underlying additions to loan loss provisions 2,122 1,336 Underlying result before tax 3,219 4,128 Underlying interest margin 1.32% 1.38% Underlying cost/income ratio 62.5% 61.8% Underlying cost/income ratio (excl. market impacts and CVA/DVA) 57.6% 57.9% Client balances: net production funds entrusted (EUR billion) 23 19 Client balances: net production lending (EUR billion) 0 26 Underlying risk costs in bp of average RWA 73 48 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 279 294 Underlying return on equity based on IFRS-EU Equity 5.9% 8.8% Underlying return on equity based on 10% core Tier 1** 7.7% 10.9% Employees (FTEs, year-end, adjusted for divestments) 65,827 67,205 * Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items.
BUSineSS deVeLoPMentS World economic growth remained subdued in 2012 with the eurozone sovereign debt crisis weighing heavily on consumer and business sentiment. Interest rates reduced further. However, equity and credit market sentiment rose as the year progressed, largely boosted by European Central Bank efforts to underpin the euro and the quantitative easing by the Federal Reserve in the US. Weak economic activity and business fundamentals, particularly in the Netherlands, resulted in rising risk costs (loan loss provisions) during the year.
Despite the economic uncertainty, ING Bank achieved much in terms of meeting its strategic priorities. These include sharpening its business focus, de-risking, reducing costs, making capital, funding and liquidity more robust and providing superior products and services to customers.
ING Bank continued to generate capital by making a net profit of EUR 2.97 billion. Capital generation is needed to repay the Dutch State and to improve capital ratios while enabling investment in infrastructure to improve services to our clients.
ING Bank continued to manage costs carefully. An important objective is to reduce expenses to adapt to the leaner environment, to absorb additional taxes and to maintain our competitive position.
oPerationaL exCeLLenCe ING Bank is committed to continually improving its products, processes and systems to increase efficiency. This makes ING a more flexible and simple organisation, which frees up resources to focus on further improving the customer experience.
toP eMPLoyer Remaining a top employer is a key priority at ING. Having engaged and motivated employees is essential to achieving success, because they build lasting relationships with our customers.
ING Bank Belgium is also accelerating strategic projects aimed at further aligning its products and services with the new mobile banking environment. Customers in Belgium have been embracing new technologies faster than anticipated, leading to greater use of digital services and prompting further process automation. The shift to the digital banking channel is expected to reduce employment by approximately 1,000 FTEs by the end of 2015, through natural attrition, leading to EUR 150 million in annual cost savings by 2015.
ING Netherlands, for example, introduced a mobile banking application for small to medium-sized enterprises, in addition to its mobile app for private customers. In Belgium, the bank also launched an Android version of MyING.be, the mobile banking app for smartphone and tablet users. 85% of smartphone users in Belgium can now manage their ING accounts from these devices. ING Direct Italy started a process to open and activate a checking account in only 12 minutes in bank shops.
In the past year, we further strengthened our commitment to minimising any potential unethical, illegal or harmful consequence of our business activities, investments or transactions by applying the strictest of policies and principles. We reviewed our ESR (Environmental and Social Risk) sector policies and integrated our environmental and social risk screening, as defined by our ESR framework into all of our customer assessment and customer due diligence systems.
We want to selectively evolve our ING Direct businesses into mature banks.
Commercial Banking will concentrate on its key franchises and will maintain a leadership position in its key markets and product areas. ING sees its Commercial Banking business continuing to play a leading role in the Benelux and Central and Eastern Europe in the areas of Specialised Finance and Financial Markets.
29ING Group Annual Report 2012 1 W h o w e are 2 R
Responding to customer needs in an uncertain economic and social climate > Good progress made on balance sheet optimisation > Building a sustainable and resilient business a key long-term ambition > Responding to customer needs with easy and fair products at low costs > Mobile banking and social media increasingly important > Ten business units achieve high Net Promoter Scores
The underlying return on equity, based on a 10% core Tier 1 ratio, declined to 7.6% from 12.0% in 2011 due to the decline in results, combined with higher average risk-weighted assets. In 2012, total risk-weighted assets rose by 2.7% to EUR 146 billion at year-end, due to risk migration and volume growth, partly offset by the sale of European debt securities.
Retail Netherlands 3,897 4,145 Retail Belgium 2,194 2,031 Retail Germany 1,193 1,134 Retail Rest of World 1,735 1,975 Total Retail Banking 9,019 9,286
The Retail Banking strategy is driven by the Retail Standards Board (RSB), which consists of the most senior leaders in the Retail organisation. Its objective is to set standards in Retail Banking through continuous improvement, innovation and the international exchange of best practices, and in so doing create a sustainable knowledge-sharing culture throughout the Bank.
In each of the business unit sections in this chapter, we will go into more detail about the local situations.
Sustainability We believe long-term success can only be achieved if we contribute to economic development, a healthy environment and a stable society. We also want to meet the increasing demand for products and services that not only generate good financial returns, but also serve clear social and environmental objectives. Below you will find a few examples of the progress we made in this area in 2012.
The ING Sustainable Investments strategy focuses on the economic implications of sustainable development from the perspectives of risk reduction and emerging opportunities. It also tried to identify investment opportunities that relate to important sustainability issues, such as scarcity of raw materials and water, talent retention and renewable energy. ING offers the widest range of sustainable investment funds to private investors in the Netherlands and a more limited range in Belgium and Luxembourg. The sustainable portfolios managed by Private Banking increased to EUR 696 million (2011: EUR 528 million).
The German charity fund, ‘DiBaDu und Dein Verein’, donated EUR 1,000,000 to 1,000 local organisations. This programme was established in 2011 to support volunteering. It also sponsors 1,000 non-profit associations with EUR 1,000 each.
Retail Banking continued off by ING employees, generating more than EUR 115,000 for the ING Chances for Children project in partnership with UNICEF.
ING Direct Spain’s Christmas campaign invited people to download an app from a dedicated website. The technology enables a smartphone to synchronise with a computer screen, showing a child entering a school by jumping from the computer screen to a mobile phone. The EUR 0.79 app fee was donated to UNICEF’s children’s education programmes, supported by ING Chances for Children. By early 2012, the campaign site had received 35,736 visits and raised EUR 305,947 in donations.
Operating expenses decreased by 3.1% to EUR 2,353 million in 2012, mainly reflecting the implementation of the cost-reduction programme announced in November 2011. Risk costs increased to EUR 665 million, or 133 basis points of average risk-weighted assets, mainly due to higher net additions in the mid-corporate and SME segments, and higher risk costs on mortgages reflecting lower house prices.
ING continually adapts its organisation to the current economic climate, including its cost level. To this end, we announced cost containment measures in November 2011 and February 2013, which combined are expected to result in a structural cost reduction of EUR 430 million by year-end 2015. So far, headcount has been reduced by 1,838 FTEs out of an expected 4,100 (of which 1,100 external FTEs) by year-end 2015.
In 2011 the concept of ‘customer service through delivery guarantees’ was introduced at ING NL and fully implemented in 2012. During the second half, the transfer was made to the ‘Less = More’ programme, including a full redesign of all the daily banking processes. Less = More is about fewer processes to create more customer satisfaction. The programme contains 10 simple core principles and all customer processes have been measured against these principles and redesigned to make them more customerfriendly, uniform and straight forward. The redesigned processes will be put into effect in 2013.
ING NL continued its Customer Suitability Programme, whereby products and services are assessed to see whether they still meet customer needs. Many service improvements were made, such as the provision of an early alert on the expiry of the fixed-interest rate term of a mortgage and improved communication on the price of business lending products.
ING NL continued to broaden its Duurzaam Spaarbeleid (sustainable savings policy), which provides consumers with simplified, transparent savings products. It has been integrated in our broader Customer Suitability Programme.
Social media use is increasing rapidly and has become an important way of entering into a dialogue with customers, potential employees and other stakeholders. At year-end, ING had close to 20,600 followers on Twitter and more than 78,000 on Facebook, 20% more than any of the other major Dutch banks.
Furthermore, ING puts a lot of effort into the continuing development and education of employees to enhance their long-term employability, something that is particularly important in view of the ageing Dutch labour force.
WestlandUtrecht Bank In November 2012, ING and the European Commission agreed that the commercial operations of WestlandUtrecht Bank (WUB) would be combined with the retail banking activities of NationaleNederlanden, which is to be divested as part of Insurance/IM Europe. This is to result in a competitive retail bank in the Dutch market with its own funding capabilities and a broad distribution network.
d d itio n al in fo rm atio n but we have redoubled our efforts to provide them with a broader online offer as well.
The growth of Retail BE has been driven by all product categories. Funds entrusted were up by EUR 3.3 billion, totalling EUR 74.6 billion at year-end, driven by current accounts and the launch of a new regulated savings account, ING Lion Premium.
The online banking platform, Home’Bank, became more userfriendly. Customers can, for example, ask to receive their statements in digital format for all accounts. They can also validate transfers with a single signature via the payment basket. Over 1.4 million people use Home’Bank.
In the area of investment funds, we reported continued success with our ‘guided open architecture’, in which the best investment funds of five different investment-management companies (ING Investment Management, Blackrock, Amundi, Franklin Templeton and Axa) are also distributed to our retail customers, aiming to give them the most objective advice.
This new website has been designed in alignment with ING BE’s strategy to not only improve and expand its online service range, but also to strengthen its position as a universal direct bank.
The business established two mortgage call centres to simplify the steps for taking out a mortgage loan and to provide personalised advice to private banking customers.
It also launched a new internet site in line with the new communications strategy focusing on customers’ needs. Customer testimonials have also been added to the site showing an approach based on trust and the ability to listen to customers.
The focal point in 2012 was on encouraging and promoting the corporate culture and fostering employee pride.
Record Bank has reconfirmed its strategy towards retail customers, with safe, simple and transparent products. The bank will continue to invest in online possibilities to support its different distribution channels.
ING Luxembourg’s IT organisation was awarded ICT Department of the Year at the Luxembourg ICT Awards 2012.
Operating expenses increased by 3.2% compared to 2011, reflecting higher personnel expenses due to increased staff numbers and higher IT costs to support business growth. The additions to the provision for loan losses decreased to EUR 83 million, or 38 basis points of average risk-weighted assets, from EUR 91 million in 2011 (or 46 basis points of average risk-weighted assets).
Germany is one of the countries where ING has implemented a full bank model, the implementation of which began in 2011 with the integration of the German commercial banking activities in ING-DiBa. In 2012, this process was completed, showing clear benefits in managing the balance sheet more efficiently. Synergies were achieved by Retail Banking providing funding at a competitive level, while Commercial Banking is generating an additional source of high quality assets.
ING-DiBa Austria, which is reported under Retail Germany, reached the milestone of 500,000 customers in March. At year-end, total funds entrusted amounted to EUR 7.2 billion.
Operating expenses increased by 4.8% compared with 2011, mainly as a result of business growth and inflation in the emerging markets India, Turkey and Poland. Risk costs rose to EUR 251 million, or 47 basis points of average risk-weighted assets, compared with EUR 167 million, or 32 basis points of average risk-weighted assets, in 2011. The increase in risk costs was mainly caused by EUR 75 million of specific provisions taken for an impaired CMBS position in the UK.
BUSINESS DEVELOPMENTS Retail Rest of World (RoW) comprises of the ING Direct business units in Australia, France, Italy and Spain. It also includes the ING banks in Turkey and India, and the retail activities of ING Bank Slaski (Poland) and ING Bank Romania, as well as the minority stakes in TMB Bank (Thailand) and Bank of Beijing (China).
Growth remains the key objective of the businesses and they will therefore focus on the number of active customers holding a current account and a savings account.
In Italy the number of current accounts increased by 99,717 to a total of 303,200 and in France by 47,132 to 126,961. The deposit offering in Romania was significantly upgraded and well received by customers.
Customer centricity The businesses continued to put their customers first by introducing products and services that best meet their needs.
Awards The businesses received more than 50 awards, including ‘Best Bank’ award for ING Bank Slaski by Gazeta Bankowa; ‘Most Recommended Bank’ award for ING Direct Spain by TNS and ING Direct Australia was the most awarded bank at the Mozo People’s Choice Awards. ING Vysya Bank received the ‘Safest Banker’ award from Indian newspaper, The New Indian Express; Bank of Beijing won the accolade ‘China’s Best City Commercial Retail Bank’, and TMB Bank won the Innovation in Business Rules Management award.
Top Employer In 2012, Top Employer initiatives included ING Bank Slaski starting the second edition of the Students Ambassadors programme, a one-year academic programme aimed at first-year students, to position ING as a desired employer among students and graduates. ING Bank Turkey again organised the Practica Business Life Competition, aimed at positioning the Bank as top employer among young graduates.
Several of our business units – Spain, Poland, France, UK – were recognised and awarded as best employer or great places to work.
Retail Banking continued to combine the two retail models into one, providing easy and fair banking products at low costs. It will continue its efforts in 2013.
The major objective of ING-DiBa for 2013 is to strengthen its position as ‘Germany’s most preferred bank’.
Retail Rest of World will continue to position itself for seizing future opportunities. ING Direct will work towards becoming a more complete bank, offering a full range of products and services, while our business units in Poland and Turkey will build on their successful commercial performance.
FINANCIAL DEVELOPMENTS Commercial Banking’s underlying result before tax decreased by 22.1% to EUR 1,572 million in 2012 compared with EUR 2,019 million in 2011. Credit and debt valuation adjustments (CVA/DVA), fully recorded in Financial Markets, were made up of EUR 457 million of negative adjustments in 2012 versus EUR 130 million of positive adjustments in 2011. Furthermore, 2012 included EUR 17 million of de-risking losses in the debt securities portfolio, while 2011 included EUR 225 million of impairments on Greek government bonds. Excluding these impacts, underlying result before tax of Commercial Banking in 2012 was 3.2% lower than in 2011, entirely caused by higher risk costs.
Industry Lending posted an underlying result before tax of EUR 832 million in 2012, down from EUR 1,374 million in 2011, primarily due to higher risk costs and lower commission income. Risk costs in Industry Lending almost tripled to EUR 674 million, compared with EUR 234 million in 2011, due to material increases in both Real Estate Finance and Structured Finance. General Lending & Transaction Services showed a solid underlying result before tax of EUR 606 million in 2012, up from EUR 559 million in 2011. This increase was mainly attributable to higher interest results, due to increased margins, partly offset by lower volumes, and higher commission income. Financial Markets’ underlying result dropped to nil from EUR 363 million last year, reflecting the aforementioned negative impact of CVA/DVA. The decrease was partly offset by higher income in the developed markets rates and credits business. Underlying result of Bank Treasury, Real Estate & Other improved to EUR 135 million in 2012, from a loss of EUR 276 million in 2011, mainly due to the prior year impact of the Greek impairments and lower losses from the Real Estate run-off business in 2012.
The Specialised Financing Group (SFG) comprises of a number of teams largely engaged in lending against business cash flows, for instance in the telecommunications, media and technology sector. It includes a local industry lending business in the US mid-market and similar local activities in other regions where Commercial Banking is active. Companies, particularly in Europe, have been affected by the economic slowdown and ING has been cautious about extending new lending in this area, which therefore slowed down in 2012.
BUSINESS DEVELOPMENTS Commercial Banking contributes to a substantial part of ING Bank’s overall strategy of being the preferred bank for its customers.
ING offers a range of basic commercial banking services, such as lending, payments and cash management, leasing, factoring, treasury and foreign exchange products. It also provides more tailored solutions, including specialised and trade finance, structured financial markets products, corporate finance, mergers and acquisitions, and debt and equity capital markets advice.
In 2012, Commercial Banking remained firmly focused on servicing its clients. ING closed many high profile transactions for core clients and won several industry awards, confirming its leading positions in the Benelux home markets, Central and Eastern Europe and key functional product lines such as Industry Lending. It continued to invest in and streamline its operations and services to clients. Where necessary, business model adaptations were made in 2012 and more are planned in 2013, to ensure that the business remains competitive and that customer centricity remains paramount.
This review resulted in ING exiting from a number of activities which, under the new economic and regulatory environment, are no longer of strategic relevance for the business and its core clients. Commercial Banking operating platforms and models are also being streamlined, through a programme of system decommissioning and system and process standardisation. A number of measures were announced in 2012 in order to achieve structurally lower expenses and a reduction of approximately 1,000 jobs over the next three years.
ING has revised its Trade Finance Services strategy, leading to several essential investments. These include the introduction of a standard IT platform and the centralisation of processing via hubs, the aim being to streamline and expedite transaction and approvals processes, improve data quality and client service.
FINANCIAL MARKETS Financial Markets (FM) is the global business unit that manages ING’s financial markets trading and sales businesses. Through 2012 FM was managed as two business lines: Clients and Products as the primary customer facilitation business line and the discontinued Strategic Trading Platform (STP). In line with other de-risking activities, the STP business has been wound down over the last few years and was formally closed at the end of 2012. The remaining Clients and Products business will revert to the title of Financial Markets.
In 2012, FM withdrew from Mexico but retained its offshore Latin American derivative business in London. It also announced the closure of the international cash equities business outside the Benelux, including the closure (excluding Poland) of the Central and Eastern European business which unfortunately became no longer viable in the current market, economic and regulatory conditions. The foreign exchange rates and credit trading activities in four CEE countries have been centralised or re-aligned. In addition, FM is employing a number of de-risking strategies within the derivative portfolios to reduce capital and balance sheet usage.
The main feature of 2012 was a sharp increase in risk costs as real estate markets in many countries continued to deteriorate. New loan finance for real estate in many places in Europe is scarce, although in the US there is strong competition from both banks and institutional investors for the top quality business. The loan book overall remains of good quality, but several outlying transactions have required provisioning. ING has extensively reviewed its loan provisioning and monitoring activity.
ING constantly strives to improve its corporate lending products to ensure they remain in alignment with changes in client behaviour, market developments and regulation. Further standardisation of our product offering and streamlining of lending processes across countries is required to deal with these challenges in an effective way.
Similarly in Central and Eastern Europe, ING maintained its strong market position, supporting its key client base. ING’s commitment to the region was continued and many important transactions were closed. Again, Commercial Banking was ranked as number one in league tables in Russia, the Commonwealth of Independent States (CIS) and CEE-wide.
2012 was the second year in which FM incorporated the mark-tomarket of ING’s own default risk in derivatives-linked issued notes and in ‘over the counter’ derivatives portfolios. It was also the second year of marking-to-market counterparty credit risk embedded within the derivatives portfolios, generally referred to as debt valuation adjustment (DVA) and credit valuation adjustment (CVA). ING’s credit spreads narrowed in 2012, which resulted in a material impact in the financial results through the DVA adjustment.
SUSTAINABILITY Commercial Banking takes a considered position and a leading role in the debate on sustainability issues, engaging with public and policy makers on financing sustainable development and becoming increasingly prominent, speaking at important conferences and seminars. It is also an active participant in working groups at national, EU and UN levels. Examples of being an active participant are ING’s membership of the United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between UNEP and the global financial sector, and the United Nations Framework Convention on Climate Change’s (UNFCCC) Green Climate Fund.
2020 ambitions for a low carbon economy. One of these projects was the financing of one of the largest onshore wind parks in Italy, ERG Eolica Fossa del Lupo. ING acted as MLA and Documentation Bank for the EUR 126 million transaction, which required a flexible and innovative financing structure. ING was able to provide financing due to its in-depth industry knowledge and strong local presence. As part of the transaction, ING agreed to donate part of its working fees to UNICEF and ING’s Chances for Children programme. The donation will be used to provide a community school in Zambia with clean water and sanitation facilities and will educate 100 children for a year.
In May 2012, in recognition of Commercial Banking’s influence in environmental and social risk management, ING was elected as the new Chair of the Equator Principles Association Steering Committee.
However, even in these difficult conditions, Commercial Banking was able to take many positive steps to reinforce its competitive position across its core products and countries of operation. ING initiated a review of its business portfolio while continuing to build on its strengths. Commercial Banking complied with new regulations and prepared for future regulatory change. It maintained leadership positions in the Benelux and in Central and Eastern Europe, and in its core product areas within Industry Lending and Financial Markets and it further developed its Transaction Services operations.
FInanCIaL deVeLoPMentS The operating environment remained challenging throughout 2012, with volatile markets and an uncertain macroeconomic environment. The underlying result before tax of Insurance/IM amounted to EUR 311 million in 2012, up from a loss of EUR 325 million in 2011. Capital gains and impairments improved from EUR –609 million in 2011 to EUR 119 million in 2012 as a result of improved financial market sentiment in comparison to the previous year. Revaluations decreased from EUR 206 million in 2011 to EUR –126 million in 2012 and were mainly driven by negative revaluations of equity hedges and real estate in the Benelux.
The results of the Asia/Pacific insurance and investment management businesses (and the Corporate Line results attributable to them) are classified as ‘net results from discontinued operations’, pending the planned sale of ING’s insurance and investment management business in the region.
ING U.S. took another step towards its planned initial public offering (IPO) by filing an initial registration statement on Form S-1 with the US Securities and Exchange Commission (SEC) in connection with its proposed IPO. It also made progress towards a standalone capital structure by successfully raising USD 5 billion in a credit facility and a further USD 850 million in debt issuance.
Towards the end of the year, ING announced a restructuring plan for its European insurance/investment management operations. This involves the acceleration of a transformation programme at Nationale-Nederlanden to sharpen its strategic focus and improve processes and systems. These measures, together with the delayering of support functions, are expected to further improve the efficiency of the businesses and to result in a reduction of the workforce by an estimated 1,350 FTEs over the period of 2013-2014 and annual savings of approximately EUR 200 million by the end of 2014.
* ING completed the divestment of Insurance Malaysia on 17 December 2012
Where We oPerate* ING Insurance/IM has a strong position as a provider of life insurance, retirement and asset management services and is well positioned to capitalise on socio-economic trends.
SUStaInaBILItY Embedding sustainability in ING Insurance/Investment Management core processes is a key priority. The businesses strive – in their daily actions and decision-making – to strike a balance between financial interest and their impact on society and the environment.
For ING Insurance/IM this entails offering suitable products and services that are transparent, fair and easily understood. Furthermore, the business strives to be a responsible investor of both our proprietary assets and the assets we manage on behalf of our customers. Responsible investing (RI) at Insurance/IM includes active ownership of the assets we manage, integrating environmental, social and governance aspects in our investment processes and includes providing Socially Responsible Investment (SRI) funds and tailor-made RI solutions.
SoLVenCY II During 2012, ING Insurance/IM continued to work towards meeting the European Union’s Solvency II directive’s requirements, particularly with respect to adapting ING’s risk measurement, risk management and reporting to levels required under the framework.
United States The US insurance and investment management operations continue to be part of a separate legal entity ING U.S., Inc. (formerly America Insurance Holdings), which is responsible to the Management Board Insurance.
CUStoMer eXPerIenCe Insurance continued to use insights from its Net Promoter Score (NPS) programme in 17 countries that ING Insurance/IM operates in to make process improvements in 2012. Businesses in Europe and Asia revised written customer communications to ensure the language used was clear and free of jargon.
US Closed Block VA focused on protecting regulatory reserves and rating agency capital from equity market movements.
BUSINESS DEVELOPMENTS 2012 was a year of economic turbulence marked by low interest rates and further volatility in financial markets. The tax-favourable bank products for pension savings (banksparen) compensated for the decreasing business in individual life insurance. For Group pensions, the low interest rate environment and increased longevity risk drove the need for redesign of pension plans and accelerated the move from Defined Benefits (DB) to Defined Contribution (DC) programmes. Nationale-Nederlanden responded to these market developments by instituting plans to simplify its structure which will enable the company to respond effectively to ongoing changes in the Dutch market place.
Multi-channel distribution In 2012, Insurance Benelux continued to optimise its distribution channels to provide customers with more choice on how and where they can buy products. This involved creating more touch points for customers. Within the Netherlands, a selected range 48 ING Group Annual Report 2012
Sustainability Insurance Benelux has taken important steps to regain customer trust. Nationale-Nederlanden has started multiple initiatives to contribute to the financial awareness of our customers and other stakeholders, including information meetings on pensions.
As for community action, Nationale-Nederlanden partnered with Make a Wish Foundation where around 500 employees helped make wishes come true for very ill children in the Netherlands. Under the programme ‘Wij & de Maatschappij’ (We and Society), in which employees can apply for a donation from NationaleNederlanden to support local charities or projects, EUR 450,000 was donated to 263 projects.
CONCLUSION AND AMBITIONS In 2012, Insurance Benelux made important steps to become a more customer-driven company. Many customer-focused initiatives combined with our responsible business strategy have contributed to simpler and easier-to-understand products distributed through the customer’s channels of preference.
The operating result declined by 10.7% to EUR 184 million in 2012, from EUR 206 million the previous year. This decline was mainly driven by lower fees and premium-based revenues and a lower investment margin.
BUSINESS DEVELOPMENTS In 2012, Europe continued to battle difficult economic conditions as the European sovereign debt crisis dragged on. The pace of economic activity varied across countries in the region.
Given the subdued economic conditions, cost control remained important and resulted in expenses being lower than in 2011. In the Czech Republic, because of fierce competition in the broker channel and unfavourable pension reforms, 15% of local head office staff were made redundant. Recurring costs in the region’s hub for managing infrastructure systems for regional IT applications were reduced significantly.
CONCLUSIONS AND AMBITIONS Despite a challenging year in 2012, constrained growth is projected for most economies in Central Europe in 2013, with economic growth forecast to improve further in 2014. Insurance CRE businesses will continue to work to improve the customer experience and lift NPS as well as strengthen their multi-channel distribution strategies. Although sales growth has been good, for the full benefits to be reaped, cost containment remains paramount.
Insurance US maintained steady progress in 2012 towards a standalone future by focusing on its four key priorities: delivering strong operating performance, focusing steadfastly on its customers and distribution partners, maintaining an unwavering focus on separation efforts from ING Group and ensuring all business practices comply with the highest standards.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance US increased by 50% to EUR 928 million in 2012, from EUR 618 million in 2011. The increase was driven by higher operating results, lower impairments/ credit losses, gains on the sale of securities, and favourable Deferred Acquisition Cost (DAC) unlocking.
Administrative expenses were 18.9% higher than in 2011, primarily due to a non-recurring reduction in pension plan liabilities in the prior year.
ING U.S. also completed an USD 850 million private placement debt offering. This debt offering, like the credit facility, was based on the standalone credit of ING U.S. More than 90 institutional investors participated in the offering and demand for the company’s debt exceeded the amount issued.
As part of an amended EU Restructuring Plan as approved by the European Commission, ING Group must divest at least 25% of ING U.S. by the end of 2013; more than 50% by the end of 2014; and any remaining interest by the end of 2016.
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In the US, it is one of the few providers of retirement services with major presence and scale in the 401(k), 403(b) and 457 market segments.
ING U.S. offers fixed and indexed annuities, tax-qualified mutual fund custodial products and payout annuities for pre-retirement wealth accumulation and post-retirement income management, sold through multiple channels.
In 2012, ING U.S. launched several initiatives in the retirement space. One example was the introduction of a new guaranteed retirement income solution, developed for 401(k) employer sponsored workplace retirement savings plans in the small corporate market. Another initiative was the launch of a new mobile game app (STRUCT), aimed at improving retirement literacy. Mobile games and applications are becoming increasingly effective ways to reach consumers.
CONCLUSIONS AND AMBITIONS In 2012, ING U.S. reached all its important milestones, maintained its focus on improving its return on equity (ROE), increasing distributable earnings, and generated sales at or above the internal rate of return, thus setting the stage for executing the next phase of its separation plan in 2013.
In 2013, ING U.S. will focus on execution to continue momentum towards a standalone future and improved operating results. Preparing customers for retirement readiness will remain central to the strategy.
FINANCIAL DEVELOPMENTS The underlying result before tax of the US Closed Block VA improved to EUR –379 million, from EUR –1,273 million in 2011. The underlying result before tax in 2011 was impacted by the completion of a comprehensive policyholder behaviour assumption review for the US Closed Block VA, leading to a charge of EUR 1.1 billion in the fourth quarter of 2011.
BUSINESS DEVELOPMENTS In 2010, Insurance US separated its Closed Block Variable Annuity from its other operations, placing it in a run-off portfolio. Accordingly, this segment has been classified as a closed block and is managed separately from the rest of the business.
In 2009, Insurance US decided to cease sales of retail variable annuity products with substantial guarantee features (the last policies were issued in early 2010). Subsequently, Insurance US refined its hedging programme to dynamically protect regulatory reserves and rating agency capital of the variable annuities block from adverse equity market movements. In addition, since 2010, Insurance US has increased regulatory reserves considerably, added significant interest rate risk protection and has aligned its policyholder behaviour assumptions with emerging experience.
In 2012, Insurance US’s focus in managing its Closed Block Variable Annuity segment was on protecting regulatory reserves and rating agency capital from equity market movements through hedging. It continues to look for opportunities to accelerate the run-off of the block, where possible. The hedging programme combined with regulatory reserves related to the variable annuity block, provides adequate resources to fund a wide range of, but not all, possible market scenarios as well as a margin for adverse policyholder behaviour.
FINANCIAL DEVELOPMENTS The results of the Asian Investment Management business, with the exception of IM Japan and IM Singapore, have been transferred to ‘net results from discontinued operations’, pending the planned sale of ING’s Insurance and Investment Management business in the region. All financials for the years 2010, 2011 and 2012 have been restated.
Assets under management (AuM) at ING Investment Management (ING IM) increased by 9.5% to EUR 321.5 billion at year-end 2012, from EUR 293.5 billion at year-end 2011. This increase was the result of EUR 10.8 billion inflows, realised in all segments, and market appreciation of EUR 21.7 billion, partly offset by EUR –4.6 billion of currency and other impacts.
In 2012, the underlying result before tax increased by 1.0% to EUR 200 million, while the operating result decreased by 15.0% to EUR 159 million. The decline in operating result was caused by higher administrative expenses, due in part to non-recurring items, 53ING Group Annual Report 2012 1 W h o w e are 2 R
In addition, ING IM US was ranked in first place among defined contribution investment managers for client loyalty and favourability by market researcher Cogent Research. ING IM US was also awarded the 2012 Dalbar Seal of Excellence for its mutual fund call centre and for the quality of its client statements.
In terms of investment performance, ING IM in 2012 again delivered some significant results for clients. At ING IM International, 63% of AuM outperformed the benchmark in 2012, and the figure was higher at 73% on a three-year basis. In addition, 44% of ING IM International mutual funds had a 4 or 5 Morningstar rating against an industry average of 32%. At ING IM US, 77% of mutual funds achieved performance above their peer Morningstar average and 85% had less risk than the Morningstar competitor average on a five-year basis.
BUSINESS DEVELOPMENTS ING IM is the principal investment manager of ING Group with activities in Europe, Americas, Asia Pacific and the Middle East.
After launching a new sustainable credit fund in 2012, ING IM International achieved a notable highlight with its long-standing flagship sustainable equity strategy. The AuM in the SRI funds and mandates passed the USD 1 billion mark after winning a large institutional mandate from Luxembourg investor FDC. This mandate was won in a mainstream global equity contest on its attractive risk-return characteristics and strong qualitative features. The strategy compares favourably on SRI metrics compared with mainstream global equity peers and benchmarks. The fund highlights ING IM International’s success in combining sustainable thinking and good financial performance for its clients.
In January 2012 the Supervisory Board met to discuss a proposal for a divestment of Insurance/IM Asia apart from Insurance Europe, given the current market circumstances and outlook beyond 2012, the regulatory capital requirements, the necessary elimination of double leverage, as well as the Restructuring Plan requirement to divest Insurance by the end of 2013. At every Supervisory Board meeting the Supervisory Board was updated on the progress of the divestment programme, including the divestment of Insurance/IM Asia.
At the annual Supervisory Board Knowledge Day in January 2012, presentations were given on cybercrime and technology trends, sustainability, crisis management and a workshop on future economic scenarios was held. Several other educational sessions on specific topics were organised for the Supervisory Board during the year.
The Supervisory Board also supported the decision that ING would make use of its discretion not to provide funds for indexation of pensions of retired Dutch employees.
During the internal meetings of the Supervisory Board – which the CEO joined, except when the annual evaluation of the Supervisory Board was tabled or matters concerning the CEO were discussed – the Executive Board 2011 performance assessments and the CEO performance objectives for 2012 were approved. In the first half of 2012 an important topic was the approval of the remuneration frameworks for Banking, Insurance EurAsia and Insurance US as required by DNB, based on the Capital Requirements Directive III (CRD III) and the DNB regulation on controlled remuneration policy. The suitability test, based on a new joint rule of the AFM (the Netherlands Authority for the Financial Markets) and DNB on expertise requirements for Supervisory Board members, was executed by the AFM and DNB in the first half of 2012. The execution of the suitability test was reviewed in the internal Supervisory Board meetings. An alternative remuneration structure for Dutch general managers was discussed in several meetings.
In August the Supervisory Board approved the candidacy of Delfin Rueda as member and CFO Insurance/IM EurAsia and Dorothee van Vredenburch as a member Management Board Insurance/IM EurAsia. In November the nomination of Doug Caldwell as CRO Insurance/IM EurAsia was approved. The remuneration proposals for these candidates were also approved by the Supervisory Board.
The action points resulting from the 2011 self-assessment were acted upon during the year. For the 2012 self-assessment of the Supervisory Board, its Committees and its members, which was conducted in December, an external consultant drafted the questionnaires as well as the report based on the outcome of the questionnaires. Furthermore, bilateral meetings were held between the chairman and each Supervisory Board member (concerning the chairman: a bilateral meeting between the vice-chairman and the chairman). The self-assessment resulted in action points concerning the meeting documents, the structure and organisation of the Supervisory Board meetings, as well as the Audit Committee and Risk Committee meetings.
The Supervisory Board has requested Jan Hommen to stay on as CEO after his reappointment until 1 October 2013 in order to ensure a smooth CEO transition.
Risk Committee meetings The Risk Committee met four times in 2012, with once an absentee. In each Risk Committee meeting the financial risk and the nonfinancial risk reports for banking and insurance were discussed. As of May the financial risk report of Insurance EurAsia and Insurance US was separately discussed. The risk appetite statements for 2012 were discussed and approved in February. The 2013 risk appetite statement for Bank was discussed and approved in August. The exposure on Spain specifically and the possible risks for ING as a result of the sovereign debt crisis in the eurozone were closely monitored by the Risk Committee. As part of the 2012 permanent education programme, the Risk Committee was informed in-depth on risk models used by ING, in August. In that meeting the downgrade for ING Bank by Moody’s and the Libor affair were also a topic of debate. An adjusted country risk framework was presented in November. Each meeting ended with a general discussion on possible future risks.
Jan Holsboer, Yvonne van Rooy and Robert Reibestein were appointed to the Supervisory Board on 14 May 2012 by the annual General Meeting. As Robert Reibestein left McKinsey & Company on 31 December 2011, he started his function as a Supervisory Board member per 1 January 2013.
Sjoerd van Keulen has decided to resign from the Supervisory Board for personal reasons and the desire to rebalance his priorities, with effect from the 2013 AGM. Furthermore, Piet Klaver has decided to resign from the Supervisory Board from the 2013 AGM because other commitments are increasingly demanding his time and attention.
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DIFFERENCES BETWEEN DUTCH AND US CORPORATE GOVERNANCE PRACTICES In conformity with regulations from the US Securities and Exchange Commission, ING Group as a foreign private issuer whose securities are listed on the New York Stock Exchange (‘NYSE’) must disclose in its Annual Report on Form 20-F any significant differences between its corporate governance practices and those applicable to US domestic companies under the NYSE listing standards.
SHAREHOLDER PARTICIPATION AND POSITION OF ING TRUST OFFICE (STICHTING ING AANDELEN) During the years 2009–2012, participation of shareholders, excluding ING Trust Office, and holders of depositary receipts in the decision-making in annual General Meetings consistently increased from 35.6% to 50.8%. Only the extraordinary General Meeting of 25 November 2009 showed a deviation from this trend with a markedly lower participation of 31.1%.
DUTCH BANKING CODE The Dutch Banking Code (‘Banking Code’) is applicable to ING Bank N.V. and not to ING Group. The Banking Code can be downloaded from the website of the Dutch Banking Association (www.nvb.nl). The principles of the Banking Code as a whole are considered as a reference by ING Bank N.V. and their application is described in the publication ‘Application of the Dutch Banking Code by ING Bank N.V.’, available on the website of the Company (www.ing.com).
CAPITAL AND SHARES CAPITAL STRUCTURE, SHARES The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to ING Continuity Foundation (Stichting Continuïteit ING). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issuance of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 10). The purpose of this call option is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). The ordinary shares are not used for protective purposes. The ordinary shares, which are all registered shares, are not listed on a stock exchange.
ING Group publishes a comprehensive quarterly disclosure package which includes extensive and detailed financial figures with relevant explanatory remarks. This information is discussed thoroughly during press, analyst and investor conference calls on the day of the results release, which are broadly accessible to interested parties. The publication dates of quarterly earnings releases are announced in advance on ING Group’s corporate website (www.ing.com).
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation), are shown on page 10. ING Group is not aware of shareholders, potential shareholders or investors with an interest of 5% or more in ING Group other than the ING Trust Office and the ING Continuity Foundation.
Such information includes the notice for the general meeting, the agenda, the place and time of the meeting, the address of the website of ING Group, the verbatim text of the proposals with an explanation and instructions on how to participate in the meeting (either in person or by proxy), as well as the reports of the Executive Board and the Supervisory Board. More complex proposals such as amendments to the Articles of Association are normally not included in the notice but are made available separately on the website of ING Group and at the ING Group head office.
PROPOSALS BY SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS Proposals to include items on the agenda for a general meeting that have been adequately substantiated under applicable Dutch law can be made by shareholders and holders of depositary receipts representing a joint total of at least 0.1% of the issued share capital or representing together, on the basis of the stock prices on Euronext Amsterdam by NYSE Euronext, a share value of at least EUR 50 million. Given the periods of notice required for proxy voting, proposals have to be submitted in writing at least 60 days before the date of the meeting.
DIALOGUE WITH SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS In 2012, shareholders and holders of depositary receipts were allowed to ask questions about items on the agenda for the annual General Meeting and they will similarly be allowed to do so in 2013. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions.
General meetings are webcasted via the Company’s website (www. ing.com), so that shareholders and holders of depositary receipts who do not attend the general meeting in person, may nevertheless follow the course of affairs in the meeting by internet webcast.
In the event that non-public price sensitive information is inadvertently disclosed during any bilateral contacts, ING Group will publicly announce such information as soon as possible.
General meetings are convened by public notice via the website of ING Group (www.ing.com) no later than on the forty-second day before the day of the general meeting. As of the date of convening a general meeting, all information relevant for shareholders and holders of depositary receipts is made available to them on this website and at the ING Group head office.
Proxy voting forms for shareholders and voting instruction forms for holders of depositary receipts who do not participate in the Shareholder Communication Channel are made available on the website of ING Group (www.ing.com). The submission of these forms is subject to additional conditions specified on such forms.
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TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Executive Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that the disclosure could damage the competitive position of ING Group.
Significant conflicting interests are considered to be absent and are not reported if a member of the Executive Board obtains financial products and services, other than loans, which are provided by ING Group subsidiaries in the ordinary course of their business on terms that apply to all employees. In connection with the foregoing, ‘loans’ does not include financial products in which the granting of credit is of a subordinated nature, e.g. credit cards and overdrafts in current account, because of a lack of materiality. For an overview of loans granted to members of the Executive Board see page 84.
Members of the Executive Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Executive Board that has not been proposed by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital.
However, because of the fact that ING Group needs to balance several relevant selection criteria when composing its Executive Board, the composition of the Executive Board did not meet the above-mentioned gender balance in 2012. ING Group will continue to strive for an adequate and balanced composition of its Executive Board in future appointments, by taking into account all relevant selection criteria including but not limited to gender balance, executive experience, experience in corporate governance 66 ING Group Annual Report 2012
Members of the Supervisory Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Supervisory Board that has not been proposed by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital.
In connection with the issuance of the Securities to the Dutch State and the IABF, ING Group and the Dutch State agreed that the Dutch State may recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by the General Meeting, the Supervisory Board would comprise two State Nominees among its members. The Dutch State may recommend a Supervisory Board member already in office.
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As long as the IABF continues, certain resolutions of the Supervisory Board are subject to the condition that no State Nominee shall have voted against the proposal. These rights became effective as from the 2009 annual General Meeting. These resolutions relate to the following matters: a. the issuance or acquisition of its own shares by ING Group, other than related to the Securities issuance (including, for the avoidance of doubt, for the purpose of conversion or financing of a repurchase of Securities), as part of regular hedging operations or in connection with employment schemes; b. the cooperation by ING Group in the issuance of depositary receipts for shares; c. the application for listing on or removal from the price list of any stock exchange of the securities referred to in a. or b.; d. the entry into or termination of a lasting cooperation between ING Group or a dependent company and another legal entity or partnership or a general partner in a limited partnership or general partnership where such cooperation or termination thereof has a material significance for ING Group, i.e. amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; e. the acquisition by ING Group or a dependent company of a participating interest in the capital of another company amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto or a material increase or decrease in the magnitude of such participating interest; f. investments involving an amount equal to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; g. a proposal to wind up ING Group; h. filing of a petition for bankruptcy or moratorium of ING Group; i. a proposal to reduce the issued capital of ING Group (other than related to the Securities issuance); j. a proposal for merger, split-off or dissolution of ING Group; k. a proposal to change ING Group’s remuneration policy; and l. appointment of the chief executive officer of the Executive Board.
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING as a whole as well as the structure and operation of the internal risk management and control systems. On 31 December 2012, the members of the Risk Committee were: Piet Klaver (chairman), Tineke Bahlmann, Joost Kuiper, Luc Vandewalle and Jeroen van der Veer.
The current composition of the Supervisory Board Committees can be found on the Company’s website (www.ing.com), which is updated on a regular basis.
TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Supervisory Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) such disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents such disclosure; and/or (iii) the information is so competition-sensitive that disclosure could damage the competitive position of ING Group.
COMPANY SECRETARY ING Group’s company secretary is Jan-Willem Vink, general counsel of ING Group.
YVONNE C.M.T. VAN ROOY (Born 1951, Dutch nationality, female; appointed in 2012, term expires in 2016) Former Minister of Foreign Trade, member of the Dutch Parliament and member of the European Parliament. Former president of Utrecht University. Other business activities: chairman of Nederlandse Vereniging van Ziekenhuizen (Dutch association of hospitals). Member of the Board of Trust Foundation Koninklijke Brill N.V. Member of the Board of Royal Concertgebouw Orchestra. Member of the Advisory Board of Nexus Institute. Member of the Board of Stichting Instituut GAK. Member of the Advisory Board of Stichting Nationaal Fonds Kunstbezit.
LODEWIJK J. DE WAAL (Born 1950, Dutch nationality, male; appointed in 2009, term expires in 2013) Former general manager of Humanitas. Other business activities: member of the Supervisory Board of PGGM N.V. Member of the Advisory Board of Zorgverzekeraars Nederland. Chairman of the Advisory Board of Stichting Nationaal Fonds Kunstbezit. Member of the Netherlands’ National Contact Point (NCP) of the OECD. Chairman of the Supervisory Council of Museum Volkenkunde. Chairman of the Platform ‘Slim Werken Slim Reizen’. Member of the Toetsingscommissie Beloningen Woningcorporaties.
More information can be found in the convocation for the 2013 annual General Meeting, available on the website of ING Group (www.ing.com) from 28 March 2013.
The Board convened a meeting of holders of depositary receipts, which was held on 21 November 2012. 0.13% of the total number of depositary receipts issued was present or represented during this meeting. During the meeting a report was made on the activities of ING Trust Office. In addition, the Board answered various questions of holders of depositary receipts attending the meeting. The minutes of the aforementioned meeting are published on the website of ING Trust Office (www.ingtrustoffice.com).
COMPOSITION AND REMUNERATION BOARD The members of the Board are appointed by the Board itself for a maximum term of four years and may be reappointed two times. Holders of depositary receipts may make recommendations to the Board on persons to be appointed as members of the Board. The Board informs them for such purpose and in good time when, for what reason and according to which profile a vacancy must be filled and in which manner a recommendation should take place.
Harrie Noy was appointed as a member of the Board as of 14 June 2012 for a term ending per 14 June 2016.
ANNUAL GENERAL MEETING ING GROUP, VOTES CAST AND VOTING BEHAVIOUR ING Trust Office attended the AGM and during this meeting ING Trust Office asked the Executive Board and the Supervisory Board of ING Group various questions and made a statement on how it proposed to vote, where desired.
COSTS In 2012, the costs of the activities of ING Trust Office amounted to EUR 438,502.
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As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge: • the ING Groep N.V. 2012 Annual Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of ING Groep N.V. and the enterprises included in the consolidation taken as a whole; • the ING Groep N.V. 2012 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2012 of ING Groep N.V. and the enterprises included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is being confronted with.
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Due to the listing of ING shares on the New York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX 404. These regulations require that the CEO (the chairman of the Executive Board) and the CFO of ING Group report and certify on an annual basis on the effectiveness of ING Group’s internal controls over financial reporting. Furthermore, the external auditors are required to provide an opinion on the effectiveness of ING Group’s internal controls over financial reporting.
ING Group has long-established Business Principles and a strong internal control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the Company’s internal control over financial reporting is effective as of 31 December 2012. The SOX 404 statement by the Executive Board is included on this page, followed by the report of the external auditor.
REMUNERATION POLICY ING’s remuneration policy is an integral part of ING’s corporate strategy and risk profile and maintains a sustainable balance between short-term and long-term value creation, building on our long-term responsibility towards society, our clients and all other stakeholders.
Performance measurement, ex-ante and post risk adjustment In determining the overall size of ING’s variable remuneration pools, ex-ante measures are applied to adjust for current year and prior year changes in the risk profile, as well as for any known future potential risk profile changes. To determine whether to award any variable remuneration in a given performance year depending on the business activity, the following qualifiers will need to be satisfied: return on equity, core Tier 1 ratio and debt-to-equity ratio.
REMUNERATION POLICY fOR THE EXECUTIVE BOARD The remuneration of Executive Board members consists of a combination of fixed compensation (base salary) and variable remuneration (together, ‘total direct compensation’), pension arrangements and benefits as described below.
Risk adjusted sustainable and responsible performance Executive Board members’ remuneration is directly linked to the achievement of performance criteria critical to the execution of ING Group’s strategy. In 2012, ING took significant steps to further complete the restructuring plans, rebuild customer trust and to deliver strong performance in the Bank and in Insurance. This is reflected in the individual performance criteria set for Executive Board members. The performance of the Executive Board is annually set and measured against different financial and nonfinancial performance drivers.
The financial targets are built around the priorities to strengthen the capital and funding positions for the banking and insurance entities as we execute on the restructuring of the Group and prepare the businesses for standalone futures. The financial targets related to the banking operations are aligned with the priorities presented in ING’s Ambition 2015 priorities, which were communicated to the investor community in January 2012.
financial performance indicators include: Non-financial performance indicators include: 1. Underlying net profit for ING Group 2. Reduce double leverage in ING Group 3. Reduce the loan-to-deposit ratio of ING Bank to strengthen liquidity position ahead of Basel III
Should it become clear, after such re-evaluation, that the new remuneration policy has led to an unintended or inequitable outcome, the Supervisory Board will, in line with the Remuneration Policy agreed for its Executive Board members have the discretion to correct the previously allocated variable remuneration. However, it is understood that any such correction could not lead to a deviation from the requirement that variable remuneration cannot exceed 100% of base salary during any year, as required under the Dutch Banking Code or be in violation of the Capital Requirements Directive III.
2012 REMUNERATION REsPONsIBLE REMUNERATION It is the responsibility of ING’s Remuneration Committee to take into account the interests of all stakeholders, including shareholders and employees, as well as business continuity and sustainable growth, when overseeing the company’s remuneration policy.
It is noted that the total direct compensation levels of the Executive Board, even if any variable remuneration had been allowed, continue to be significantly below the market median. The Executive Board 82 ING Group Annual Report 2012
Compensation of the individual members of the Executive Board amounts in thousands of euros amount number of shares amount number of options/shares amount number of options/shares
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INg depositary receipts for shares held by Executive Board members Executive Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Executive Board.
The payment of variable remuneration to the Executive Board will be suspended for as long as the Legislation for financial institutions that have received state support for reasons of financial stability is in force for ING.
REMUNERATION POLICY fOR sENIOR MANAgEMENT As much as possible for a global financial institution of this size, ING aims to take account of all the differences and standards applied within similar financial institutions in the various countries in which it operates. The remuneration of members of the Management Boards and senior management will be in line with the general principles of the amended remuneration structure for the Executive Board, taking into account international and local practices.
2012 REMUNERATION sTRUCTURE sENIOR MANAgEMENT Given the differences in the regulatory requirements for banking and insurance and the separation of ING’s banking and insurance activities, the remuneration structures for senior management in ING’s banking and insurance operations were determined separately in 2012, based on internal strategy and external regulatory developments.
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(1) In 2010 the remuneration and attendance fees for the membership of a committee have not been paid to the chairman and vice-chairman of the Supervisory Board. Effective 2011 remuneration and attendance fees for the membership of a committee are paid to the chairman and vice-chairman of the Supervisory Board.
Loans and advances to members of the supervisory Board amounts in thousands of euros
INg DEPOsITARY RECEIPTs fOR sHAREs AND OPTIONs HELD BY sUPERVIsORY BOARD MEMBERs Supervisory Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board. Supervisory Board members did not hold ING options at year-end 2012.
(2) Sjoerd van Keulen and Luc Vandewalle were newly appointed in May 2011. (3) The ING depositary receipts for shares held by Luc Vandewalle are currently being held in usufruct. (4) Jan Holsboer was newly appointed in May 2012.
Rob Eijt, chairman Hans de Boer, secretary Alex Hoogendoorn, secretary Goof Bode, deputy chairman Rudie van Doorn, deputy secretary Jaap van Amsterdam, Arno Daams, Jeffrey Dinsbach, Erik Hoijtink, Aad Kant, Jan Krutzen, Job van Luyken, Sjaak Muller, Hennie Post, Koos Rodenburg, Bram van Tent, Henk Timmer, Cindy Uit de Bulten, Gerard Veldman, Katja Vermeulen, Michel Vonk, Bernard Wolters.
Aad Kant, chairman Insurance, the Netherlands Reinoud Rijpkema, secretary Insurance, the Netherlands
Parent company balance sheet 312 Parent company profit and loss account 313 Parent company statement of changes in equity 314 Accounting policies for the parent company annual accounts 315 Notes to the parent company annual accounts 316 6 Other information
Debt securities in issue 15 143,436 139,861 Other borrowed funds 16 16,723 19,684 Insurance and investment contracts 17 229,950 278,833 Amounts due to banks 18 38,704 72,233 Customer deposits and other funds on deposit 19 455,003 467,547 Financial liabilities at fair value through profit and loss 20 – trading liabilities 83,652 107,682 – non-trading derivatives 18,752 22,165 – designated as at fair value through profit and loss 13,399 13,021 Liabilities held for sale 11 69,895 64,265
Consolidated balance sheet of ING Group as at 31 December 90 ING Group Annual Report 2012
Net result from continuing and discontinued operations (before minority interests) 4,003 5,853 2,916 91ING Group Annual Report 2012 1 W h o w e are 2 R
for the years ended 31 December amounts in euros 2012 2011 2010
Earnings per share from discontinued operations 50 Basic earnings per ordinary share from discontinued operations 0.24 0.44 0.11 Diluted earnings per ordinary share from discontinued operations 0.24 0.44 0.11
Consolidated statement of cash flows of ING Group for the years ended 31 December amounts in millions of euros 2012 2011 2010
Result before tax 5,010 7,248 4,196 Adjusted for: – depreciation 777 1,514 1,723
Unrealised revaluations after taxation 2,607 2,607 –4 2,603 Realised gains/losses transferred to profit and loss 86 86 86 Changes in cash flow hedge reserve 475 475 475 Transfer to insurance liabilities/DAC –1,644 –1,644 –1,644 Exchange rate differences 2,867 2,867 –8 2,859 Other revaluations 2 2 –3 –1 Total amount recognised directly in equity (other comprehensive income) 4,393 4,393 –15 4,378
Unrealised revaluations after taxation 6,940 6,940 9 6,949 Realised gains/losses transferred to profit and loss –840 –840 –840 Changes in cash flow hedge reserve 718 718 19 737 Transfer to insurance liabilities/DAC –2,181 –2,181 –2,181 Exchange rate differences –724 –724 15 –709 Other revaluations 39 39 Total amount recognised directly in equity (other comprehensive income) 3,913 3,913 82 3,995
IFRS-EU provides a number of options in accounting policies. The key areas in which IFRS-EU allows accounting policy choices, and the related ING accounting policy, are summarised as follows: • As explained in the section ‘Principles of valuation and determination of results’ and in Note 25 ‘Derivatives and hedge accounting’ ING
Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU; • Under IFRS 4, an insurer may continue its existing pre-IFRS accounting policies for insurance contracts, provided that certain minimum requirements are met. Upon adoption of IFRS in 2005, ING Group decided to continue the then existing accounting principles for insurance contracts under IFRS. ING Group operates in many different countries and the accounting principles for insurance contracts follow local practice in these countries. ING’s businesses in the Netherlands apply accounting standards generally accepted in the Netherlands (Dutch GAAP) for its provisions for liabilities under insurance contracts; similarly, ING’s businesses in the United States apply accounting standards generally accepted in the United States (US GAAP); • ING’s accounting policy for Real estate investments is fair value, with changes in fair value reflected immediately in the profit and loss account; • ING’s accounting policy for Property for own use is fair value, with changes in fair value reflected in the revaluation reserve in equity (‘Other comprehensive income’). A net negative revaluation on individual properties is reflected immediately in the profit and loss account; • For defined benefit pension plans, ING’s accounting policy is to defer actuarial gains and losses through the so-called corridor; and • ING’s accounting policy for joint ventures is proportionate consolidation.
ING Group’s accounting policies under IFRS-EU and its decision on the options available are included in the section ‘Principles of valuation and determination of results’ below. Except for the options included above, the principles in section ‘Principles of valuation and determination of results’ are IFRS-EU and do not include other significant accounting policy choices made by ING. The accounting policies that are most significant to ING are included in section ‘Critical accounting policies’.
CHANGES IN 2012 Amendments to IFRS 7 ‘Disclosures – Transfers of Financial Assets’ and Amendments to IAS 12 ‘Deferred tax – Recovery of Underlying Assets’ became effective for ING Group in 2012. Neither of these has a significant effect on ING Group.
Accounting policies for the consolidated annual accounts of ING Group 98 ING Group Annual Report 2012
The impact of changes in IAS 19 as at 1 January 2013 is as follows: Impact of implementing amendments to IAS 19 as at 1 January 2013 amounts in millions of euros IAS 19 ‘Employee
In 2009, IFRS 9 ‘Financial Instruments’ was issued, which was initially effective as of 2013. However, in December 2011 the International Accounting Standards Board decided to amend this standard and to postpone the mandatory application of IFRS 9 until at least 2015. This standard is not yet endorsed by the EU and, therefore, is not yet part of IFRS-EU. Implementation of IFRS 9, if and when endorsed by the EU, may have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income.
CRITICAL ACCOUNTING POLICIES ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance provisions, deferred acquisition costs and value of business acquired, the loan loss provision, the determination of the fair values of real estate and financial assets and liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce materially different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information below under ‘Principles of valuation and determination of results’.
Accounting policies for the consolidated annual accounts of ING Group continued 100 ING Group Annual Report 2012
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by ING Insurance risk management as described in the ‘Risk management’ section.
When markets are less liquid there may be a range of prices for the same security from different price sources, selecting the most appropriate price requires judgement and could result in different estimates of fair value.
EMPLOYEE BENEFITS Group companies operate various defined benefit retirement plans covering a significant number of ING’s employees.
All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies are eliminated. Where necessary, the accounting policies used by subsidiaries are changed to ensure consistency with group policies. In general, the reporting dates of subsidiaries are the same as the reporting date of ING Groep N.V.
SEGMENT REPORTING A segment is a distinguishable component of the Group, engaged in providing products or services, subject to risks and returns that are different from those of other segments. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
ANALYSIS OF INSURANCE BUSINESS Where amounts in respect of insurance business are analysed into ‘life’ and ‘non-life’, health and disability insurance business which is similar in nature to life insurance business is included in ‘life’.
RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS Recognition of financial assets All purchases and sales of financial assets classified as fair value through profit and loss (excluding investments for risk of policyholders), held-to-maturity and available-for-sale that require delivery within the time frame established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date on which the Group receives and investments for risk of policyholders or delivers the asset.
CLASSIFICATION OF FINANCIAL INSTRUMENTS Financial assets at fair value through profit and loss Financial assets at fair value through profit and loss include equity securities, debt securities, derivatives, loans and receivables and other, and comprise the following sub-categories: trading assets, non-trading derivatives, financial assets designated at fair value through profit and loss by management and investments for risk of policyholders.
• Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
DERIVATIVES AND HEDGE ACCOUNTING Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair values are negative.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge), hedges of highly probable future cash flows attributable to a recognised asset or liability or a forecast transaction (cash flow hedge), or hedges of a net investment in a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
Accounting policies for the consolidated annual accounts of ING Group continued 106 ING Group Annual Report 2012
Securities purchased under agreements to resell (‘reverse repos’) are recognised as Loans and advances to customers or Amounts due from banks, as appropriate. The difference between the sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method.
Accounting policies for the consolidated annual accounts of ING Group continued 108 ING Group Annual Report 2012
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless they provide evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The reporting dates of all material associates are consistent with the reporting date of the Group.
The fair values represent the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’s-length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. Fair values are based on appraisals using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the
Subsequent expenditures are recognised as part of the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to ING Group and the cost can be measured reliably. All other repairs and maintenance costs are recognised in the profit and loss account.
LEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date.
ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS Acquisitions and goodwill ING Group’s acquisitions are accounted for using the acquisition method of accounting. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and loss account from the date control is obtained.
Computer software Computer software that has been purchased or generated internally for own use is stated at cost less amortisation and any impairment losses. Amortisation is calculated on a straight-line basis over its useful life. This period will generally not exceed three years. Amortisation is included in Other operating expenses.
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profits. Amortisation is adjusted when estimates of current or future gross profits, to be realised from a group of products, are revised. The estimates and the assumptions are reassessed at the end of each reporting period. Higher/lower expected profits (e.g. reflecting stock market performance or a change in the level of assets under management) may cause a lower/higher balance of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recognised in the profit and loss account of the period in which the unlocking occurs. Effective as of 2011, the estimate for the short-term equity growth assumption used to calculate the amortisation of DAC in the United States (Insurance US) was changed to a mean reversion assumption.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not
Changes in those local accounting standards (including Dutch GAAP and US GAAP) subsequent to the adoption of IFRS are considered for adoption on a case-by-case basis. If adopted, the impact thereof is accounted for as a change in accounting policy under IFRS.
Accounting policies for the consolidated annual accounts of ING Group continued 114 ING Group Annual Report 2012
Since 2009, the Closed Block Variable Annuity business in the United States is inadequate at the 90% confidence level. As there are offsetting amounts within other Group business units, the Group remains adequate at the 90% confidence level. In line with the above policy, specific measures were defined to mitigate the inadequacy in the Closed Block Variable Annuity business in the United States. These specific measures are effective as of 2010 and result in a limitation of additions to DAC that would otherwise result from negative amortisation and unlocking. This limitation of DAC is applied on a quarterly basis and in any year if and when a reserve inadequacy existed at the start of the year. Net result in 2011 includes a charge to restore the adequacy of the Insurance US Closed Block VA segment to the 50% confidence level. Reference is made to Note 44 ‘Underwriting expenditure’.
Other provisions A provision involves a present obligation arising from past events, the settlement of which is expected to result in an outflow from the company of resources embodying economic benefits, however the timing or the amount is uncertain. Provisions are discounted when the effect of the time value of money is material using a pre-tax discount rate. The determination of provisions is an inherently uncertain process involving estimates regarding amounts and timing of cash flows.
Accounting policies for the consolidated annual accounts of ING Group continued 116 ING Group Annual Report 2012
Reference is made to Note 24 ‘Transfer of financial assets’ for information on securities lending as well as sale and repurchase transactions.
Notes to the consolidated annual accounts of ING Group amounts in millions of euros, unless stated otherwise 118 ING Group Annual Report 2012
As at 31 December 2012, Trading assets includes receivables of EUR 35,575 million (2011: EUR 40,904 million) with regard to reverse repurchase transactions.
Equity securities 89,994 105,580 Debt securities 6,940 9,612 Loans and receivables 1,831 1,246
The notional value of the related credit derivatives is EUR 61 million (2011: EUR 64 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated amounts was EUR –6 million (2011: EUR –1 million) and the change for the current year was EUR –3 million (2011: nil).
Asset backed security portfolio The table below shows certain ABS (US Subprime RMBS, Alt-A RMBS, CMBS and CDO/CLOs). It includes exposures in all relevant balance sheet lines, including not only loans and advances and available-for-sale investments as disclosed above, but also financial assets designated as at fair value through profit and loss.
At 31 December 2012, ING Group’s balance sheet value of ‘Government bonds’ and ‘Unsecured Financial institutions’ bonds to Greece, Italy, Ireland, Portugal, Spain and Cyprus and the related pre-tax revaluation reserve in equity was as follows: Greece, Italy, Ireland, Portugal, Spain and Cyprus – Government bonds and Unsecured Financial institutions’ bonds (1)
In the first quarter of 2012, the agreement under the Private Sector Involvement (‘PSI’) to exchange Greek Government bonds into new instruments was executed. Under this exchange, ING received new listed Greek Government bonds (for a notional amount of 31.5% of the notional of the exchanged bonds, maturities between 2023 and 2042), listed European Financial Stability Facility (‘EFSF’) notes (for a notional amount of 15% of the notional of the exchanged bonds, maturities of one to two years) and listed short-term EFSF notes (maturity of 6 months, in discharge of all unpaid interest accrued on the exchanged bonds). These new securities were recognised as available-for-sale instruments. Furthermore, ING received listed GDP-linked securities issued by Greece (notional equal to notional of the new Greek Government bonds, maturity 2042). The exchange was executed on 12 March 2012. The exchanged bonds were derecognised and the new instruments were recognised at fair value on the exchange date. The exchange resulted in a gain of EUR 15 million (Bank: EUR 22 million; Insurance: EUR –7 million) in the first quarter of 2012, being the difference between amortised cost (net of cumulative impairments) of the exchanged bonds and fair value of the new instruments at the date of exchange. This result is included in ‘Investment income’.
Greek government bonds and Irish unsecured Financial institutions’ bonds that were no longer held at 31 December 2011. The total amount of impairments recognised on Greek Government bonds and Irish unsecured Financial institutions’ bonds in 2011 is therefore EUR 978 million and EUR 189 million as explained below.
Reference is made to Note 35 ‘Fair value of financial assets and liabilities’ for disclosure by fair value hierarchy and Note 38 ‘Investment income’ for impairments on available-for-sale debt securities.
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 and the disposal of ING Direct Canada. Reference is made to Note 11 ‘Assets and liabilities held for sale’ and Note 31 ‘Companies acquired and companies disposed’.
In 2011, Changes in the composition of the group and other changes relates 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’.
Reference is made to Note 38 ‘Investment income’ for details on Impairments.
The decrease in the carrying value of the reclassified Loans and advances in 2012 compared to 2011 is mainly due to disposals as included in Note 38 ‘Other Income’.
Notes to the consolidated annual accounts of ING Group continued 124 ING Group Annual Report 2012
Reclassifications to Loans and advances to customers and Amounts due from banks
Carrying value as at 31 December 3,057 14,419 633 Fair value as at 31 December 2,883 13,250 648 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –307 –446 –8 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –174 –1,169 15 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (mainly interest income) 90 390 28 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Carrying value as at 31 December 1,592 Fair value as at 31 December 1,565 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –79 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –27 Effect on result (before tax) if reclassification had not been made nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) 9 Recognised impairments (before tax) nil Recognised provision for credit losses (before tax) nil
Loans to, or guaranteed by, public authorities 1 2 2 2 3
The closing balance is included in – Amounts due from banks 28 7 28 7 – Loans and advances to customers 2,445 2,002 3,032 2,941 5,477 4,943
Changes in the composition of the group –13 –568 –4 –2 –17 –570 Write-offs –1,682 –1,304 –39 –24 –1,721 –1,328
Other investments in associates represents a large number of associates with an individual balance sheet value of less than EUR 50 million.
The total amount of direct operating expenses (including repairs and maintenance) in relation to Real estate investments that generated rental income for the year ended 31 December 2012 is EUR 77 million (2011: EUR 101 million). The total amount of direct operating expenses (including repairs and maintenance) incurred on Real estate investments that did not generate rental income for the year ended 31 December 2012 is EUR 15 million (2011: EUR 3 million).
Real estate investments by year of most recent appraisal by independent qualified valuers in percentages 2012 2011
Most recent appraisal in the current year 99 93 Most recent appraisal one year ago 7 Most recent appraisal two years ago 1
Gross carrying amount as at 31 December 2,276 2,366 Accumulated depreciation as at 31 December –682 –674 Accumulated impairments as at 31 December –171 –157 Net carrying value as at 31 December 1,423 1,535
Changes in the composition of the group –3,250 –3,250 Disposals –43 –43 Depreciation –1 –594 –2 –1 –596 Exchange rate differences –12 –12 Transfer and other changes –336 –336
In 2011, Changes in the composition of the group comprises the sale of ING Car Lease. Reference is made to Note 31 ‘Companies acquired and companies disposed’.
More than 1 year but less than 5 years 2 4 More than 5 years 2 1
Amortisation and unlocking –207 –244 –274 –391 –59 –87 –540 –722 Impairments –48 –32 –4 –49 –3 –1 –55 –82 Effect of unrealised revaluations in equity –140 –250 –140 –250 Changes in the composition of the group and other changes –89 –43 –485 –727 –65 –24 –33 –139 –672 –933
2010 – Impairment Due to the unfavourable market circumstances for Insurance, including the low interest rate environment, there were indications in the third quarter of 2010 that the recoverable amount of the reporting unit Insurance US had fallen below carrying value. As a result, a full goodwill impairment review was performed for the reporting unit Insurance US in the third quarter of 2010. The reporting unit Insurance US equals the segment Insurance US as disclosed in Note 52 ‘Segments’. The 2009 impairment test for Insurance US showed that the recoverable amount based on fair value (using market multiples for Price/Book and Price/Earnings of listed peer companies) was at least equal to carrying value. The outcome of the impairment test performed in the third quarter of 2010 indicated that the fair value had become less than carrying value by an amount that exceeded the goodwill of Insurance US, indicating that the full amount of goodwill relating to Insurance US was impaired. Further analysis of the recoverable amount confirmed the impairment. As a result, the goodwill of EUR 540 million (pre-tax) was written down. The related charge was included in the profit and loss account in the line ‘Intangibles amortisation and other impairments’. Goodwill is recognised in the Corporate Line and, therefore, this charge was included in the segment reporting in Corporate Line Insurance.
2011 – Changes in composition of the group and other changes In 2011, ‘Changes in composition of the group and other changes’ related mainly to the disposal of ING Car Lease and the disposal of the Latin American operations. Furthermore, it includes EUR 97 million related to the classification of ING Direct USA as a disposal group held for sale.
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2012 is 8.1% gross and 7.3% net of investment management fees (2011: 8.1% gross and 7.4% net of investment management fees). Percentages are based on the portfolios from continuing operations.
The classification in 2012 of ‘Asia’ as held for sale and discontinued operations relates to all of ING’s Insurance and investment management businesses in Asia and the reinsured Japan SPVA businesses in corporate reinsurance. During 2012, the divestment of ING’s insurance business in Malaysia was closed; as a result the insurance business in Malaysia is no longer consolidated as at 31 December 2012. Furthermore, several divestments were agreed that are expected to close or closed in 2013, including ING’s insurance businesses in Hong Kong, Macau and Thailand and ING’s investment management businesses in Thailand and Malaysia; these remain to be classified as held for sale as at 31 December 2012. ‘Reference is made to Note 31 ‘Companies acquired and companies disposed’. In addition, several other businesses remain in held for sale, for which no divestments have yet been concluded; this includes mainly ING’s Japanese, Korean and Taiwanese insurance and investment management businesses.
Goodwill Intangible assets under Assets held for sale includes goodwill that relates to businesses that are classified as held for sale. In 2012, EUR 485 million goodwill was reclassified to Assets held for sale. This relates to Insurance Korea (EUR 200 million), Investment Management Korea (EUR 180 million), Insurance India (EUR 41 million) and Investment Management Taiwan (EUR 48 million) for the insurance operations and ING Direct UK (EUR 16 million) for the banking operations.
Liabilities Non-trading derivatives 287 1,786 2,073 Financial liabilities designated as at fair value through profit and loss 8 8 Investment contracts (for contracts carried at fair value) 95 95
In 2012, there were no significant changes in Level 3 assets and liabilities.
No changes occurred in the issued share capital and share premium in 2012, 2011 and 2010.
Restrictions with respect to dividend and repayment of capital ING Groep N.V. is subject to legal restrictions regarding the amount of dividends it can pay to the holders of its ordinary shares. Pursuant to the Dutch Civil Code, dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital, and reserves required by law.
Unrealised revaluations after taxation –22 7,183 7,161 Realised gains/losses transferred to profit and loss –772 –772 Changes in cash flow hedge reserve 718 718 Transfer to insurance liabilities/DAC –2,181 –2,181
Transfer to insurance liabilities/DAC includes the change in the deferred profit sharing liability (net of deferred tax). Reference is made to Note 17 ‘Insurance and investment contracts, reinsurance contracts’.
The repurchase premium of EUR 375 million is paid in relation to the repayment of the EUR 750 million non-voting equity securities.
These non-voting equity securities are deeply subordinated and rank pari-passu with ordinary shares in a winding up of ING Groep N.V. On these non-voting equity securities a coupon was and is payable of the higher of EUR 0.85 per security and 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
Notes to the consolidated annual accounts of ING Group continued 144 ING Group Annual Report 2012
More than 1 year but less than 2 years 5,766 8,590 More than 2 years but less than 3 years 1,845 3,569 More than 3 years but less than 4 years 1,374 1,207 More than 4 years but less than 5 years 1,548 162 More than 5 years 5,253 6,754 Total floating rate debt securities 35,740 36,153
17 INSURANCE AND INVESTMENT CONTRACTS, REINSURANCE CONTRACTS The Provision for insurance and investment contracts, net of reinsurance (i.e. the provision for ING Group’s own account) is presented gross in the balance sheet as ‘Insurance and investment contracts’. The related reinsurance is presented as ‘Reinsurance contracts’ under Assets in the balance sheet.
Provision for life insurance for risk of policyholders 90,754 109,487 49 136 90,803 109,623
Provision for unearned premiums and unexpired risks 265 297 2 4 267 301
Notes to the consolidated annual accounts of ING Group continued 146 ING Group Annual Report 2012
The deferred profit sharing amount on unrealised revaluation is included in Provision for (deferred) profit sharing and rebates and amounts to EUR 6,304 million as at 31 December 2012 (2011: EUR 3,721 million).
Changes in the composition of the group and other –31,577 –335 –23,852 –1,781 –244 –65 –55,673 –2,181
Premiums earned during the year –1,715 –1,708 –40 –43 –1,755 –1,751 Exchange rate differences 1 1 Other changes 2 –15 2 –15
Changes in the composition of the group –15 –7 –1 –16 –7
Exchange rate differences –1 2 –1 2 Other changes –21 17 –1 –22 17
ING Group has an outstanding balance of EUR 36 million as at 31 December 2012 (2011: EUR 35 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean-up, management of ING Group considers facts currently known including current legislation and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when sufficient information has been obtained to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
Estimate of cumulative claims: At the end of underwriting year 1,040 1,109 1,100 1,020 1,078 1,200 1,169 1,218 1,232 8 years later 751
Effect of discounting –7 –16 –18 –28 –34 –38 –48 –57 –32 –278
Liability relating to underwriting years prior to 2004 837 Total amount recognised in the balance sheet 3,263
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business.
Equity securities 3,262 3,332 Debt securities 7,594 9,607 Funds on deposit 20,661 38,696
Derivatives used in: – fair value hedges 9,037 9,478 – cash flow hedges 6,439 6,462 – hedges of net investments in foreign operations 71 159 Other non-trading derivatives 3,205 6,066
In 2012, the change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in credit risk is EUR –633 million (2011: EUR 377 million) and EUR –38 million (2011: EUR 595 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves).
Real estate investments 381 –23 –8 350 Financial assets and liabilities at fair value through profit and loss –725 –366 1 9 –6 –1,087 Deferred acquisition costs and VOBA 2,731 –147 166 –1,301 –98 1,351
Financial assets and liabilities at fair value through profit and loss –527 –175 –9 6 –20 –725 Deferred acquisition costs and VOBA 3,111 –272 –194 –57 131 12 2,731 Fiscal reserve 1 –1
Notes to the consolidated annual accounts of ING Group continued 152 ING Group Annual Report 2012
Total unused tax losses carried forward 8,806 9,093 Unused tax losses carried forward not recognised as a deferred tax asset –3,303 –4,529 Unused tax losses carried forward recognised as a deferred tax asset 5,503 4,564
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current year or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 409 million (2011: EUR 490 million).
As at 31 December 2012 and 31 December 2011, ING Group had no significant temporary differences associated with the parent company’s investments in subsidiaries, branches and associates and interest in joint ventures as any economic benefit from those investments will not be taxable at parent company level.
A reorganisation provision of EUR 191 million is recognised in the segment Commercial Banking following a strategic review of the business portfolio through right-sizing of the equities business, run-off of certain leasing units and further operational improvements in several businesses. These measures are expected to result in a reduction of the workforce of around 1,000 FTE’s over a period of three years.
An additional reorganisation provision of EUR 55 million is recognised in the segment Insurance Benelux for the strategic initiatives announced in 2011. The main goals of the strategic initiative are to regain customer trust, diversify distribution channels, implement a new product range and increase efficiency. In 2012, the reorganisation measures resulted in a reduction of the workforce of 470 FTE’s.
Notes to the consolidated annual accounts of ING Group continued 154 ING Group Annual Report 2012
Employer’s contribution 4 Participants contributions 2 2 Benefits paid –617 –666 –4 –5 Actuarial gains and losses 5,921 –455 8 –3 Past service cost –2 –8 –4 Changes in the composition of the group and other changes –80 13 –2 Effect of curtailment or settlement –468 –110 –1 Exchange rate differences –19 78 –1 2
In 2011, Effect of curtailment or settlement relates mainly to a curtailment in relation to the restructuring in Retail Netherlands and a curtailment in relation to a change in one of the pension plans in the United States.
The estimated unrecognised past service cost and unrecognised actuarial gains and losses for the defined benefit plans will be deducted from Shareholders’ equity as at 1 January 2013. Reference is made to ‘Amendments to IAS 19 Employee Benefits’ in the section ‘Upcoming changes in IFRS-EU in 2013’ on page 99.
Opening balance 20,077 17,364 Expected return on plan assets 870 877 Employer’s contribution 746 623 Participants contributions 18 15 Benefits paid –613 –627 Actuarial gains and losses 1,790 1,746 Changes in the composition of the group and other changes –32 7 Exchange rate differences 13 72 Closing balance 22,869 20,077
The actual return on the plan assets amounts to EUR 2,660 million (2011: EUR 2,623 million).
No plan assets are expected to be returned to ING Group during 2013.
Equity securities include ING Groep N.V. ordinary shares of nil (0.00% of total plan assets) as at 31 December 2012 (2011: nil, 0.00% of total plan assets). Debt securities include investments in ING Group of EUR 44 million (0.20% of total plan assets) as at 31 December 2012 (2011: EUR 42 million, 0.30% of total plan assets). Other includes mainly real estate. Real estate occupied by ING Group as at 31 December 2012 which is included in Other includes nil (0.00% of total plan assets) (2011: nil, 0.00% of total plan assets).
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 1 million as at 31 December 2012 (2011: EUR 5 million) and no increase in the charge for the year (2011: EUR 1 million). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 1 million as at 31 December 2012 (2011: EUR 5 million) and no decrease in the charge for the year (2011: EUR 2 million).
At 31 December 2012, the actuarial assumption for future indexation for inflation is 1.8% (at 31 December 2011: 1.8%). This percentage is mainly based on the expected inflation and the best estimate assumption for future indexation in the pension plan in the Netherlands. The best estimate assumption for future indexation reflects the uncertain circumstances and the impact thereof on the probability of granting indexation in the short-term future.
159ING Group Annual Report 2012 1 W h o w e are 2 R
Non-financial liabilities are included based on a breakdown of the balance sheet amounts by expected maturity. Reference is made to the liquidity risk paragraph in the ‘Risk Management’ section for a description on how liquidity risk is managed.
Less than months months years years Maturity not applicable Adjustment (2) Total
– designated as at fair value through profit and loss 494 242 938 6,303 5,356 66 13,399
Coupon interest due on financial liabilities 1,748 957 4,226 9,169 42,409 58,509
(1) Includes liabilities on demand. (2) This column reconciles the contractual undiscounted cash flows on financial liabilities to the balance sheet values. The adjustments mainly relate to the impact of discounting and, for derivatives, to the fact that the contractual cash flows are presented on a gross basis (unless the cash flows are actually settled net).
Less than months months years Over 5 years Maturity not applicable Adjustment (2) Total
– designated as at fair value through profit and loss 301 398 2,062 6,007 4,525 –272 13,021
Transfer of financial assets Securities lending Sale and repurchase 2011 Equity Debt Equity Debt
As at 31 December 2012, the fair value of outstanding derivatives designated under cash flow hedge accounting was EUR 1,032 million (2011: EUR 179 million), presented in the balance sheet as EUR 7,471 million (2011: EUR 6,641 million) positive fair values under assets and EUR 6,439 million (2011: EUR 6,462 million) negative fair values under liabilities.
As at 31 December 2012, the fair value of outstanding derivatives designated under net investment hedge accounting was EUR –22 million (2011: EUR –18 million), presented in the balance sheet as EUR 49 million (2011: EUR 141 million) positive fair values under assets and EUR 71 million (2011: EUR 159 million) negative fair values under liabilities.
(1) The tax effect on the result on disposal of discontinued operations is nil.
Loans and advances to customers that have been pledged as collateral for liquidity purposes, amount in the Netherlands to EUR 8 billion (2011: nil), in Germany to EUR 5 billion (2011: EUR 5 billion), in Spain to EUR 1 billion (2011: nil) and in the United States of EUR 0 billion (2011: EUR 9 billion) The amount in 2012 for the Netherlands (2011: United States) includes the loan to the Dutch State in connection with the Illiquid Assets Back-Up Facility agreement as disclosed in Note 34 ‘Related parties’.
28 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is party to activities whose risks are not reflected in whole or in part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
After securitisation of these assets ING Group continues to recognise them on its balance sheet under Loans and advances to customers. These transactions are therefore not off-balance sheet arrangements.
In 2012, two synthetic securitisation have been unwound. The balance sheet and profit and loss account were not impacted by the unwinding.
Investment funds ING Group as fund manager and investor ING Group sets up investment funds for which it acts as a fund manager and sole investor at the inception of the fund. Subsequently, ING Group will seek third-party investors to invest in the fund, thereby reducing the interest of ING Group. In general, ING Group will maintain a small percentage of interest in these funds. These funds are included in the consolidated financial statements of the Group if and when control exists, taking into account both ING Group’s financial interests for own risk and its role as investment manager.
167ING Group Annual Report 2012 1 W h o w e are 2 R
ING Direct Canada In August 2012, ING announced that it reached an agreement to sell ING Direct Canada for a total consideration of CAD 3.1 billion (approximately EUR 2.4 billion) to Scotiabank, a leading Canadian financial services company. ING Direct Canada had approximately CAD 40 billion in assets. The sale of ING Direct Canada lead to a transaction gain of EUR 1.1 billion after tax. Under the terms of the sale agreement, Scotiabank paid CAD 3.1 billion in cash for all of the shares in ING Bank of Canada, which is the formal name of ING Direct Canada. In addition to this, Scotiabank assumed the responsibility to redeem on 5 March 2013 (which is the first eligible call date after closing) a locally issued lower tier 2 bond (ISIN CA 456847AA01) with a total outstanding amount of CAD 321 million, which carries a guarantee from ING Bank. ING Direct Canada was included in the segment Retail Rest of World. In November 2012, ING announced that the transaction closed.
Disposals announced in 2012 but not closed in 2012 ING’s Insurance and investment management businesses in Asia In 2012, ING’s Insurance and investment management businesses in Asia (‘Asia’) were classified as held for sale and discontinued operations. In 2012 various individual divestment transactions were agreed. The specifics of these transactions are included below. The Asian Insurance and Investment Management businesses and the reinsured Japan SPVA businesses in Corporate Reinsurance were previously included respectively in the segments Insurance Asia/Pacific and ING Investment Management and in the Corporate Line Insurance before they were classified as discontinued operations. Reference is made to Note 11 ‘Assets and liabilities held for sale’ and Note 26 ‘Discontinued operations’.
ING’s investment management business in Thailand In November 2012, ING announced that it has reached an agreement to sell its investment management business in Thailand to UOB Asset Management Ltd. Under the terms agreed, ING will receive a total cash consideration of EUR 10 million for the investment management business in Thailand. The transaction is subject to regulatory approvals and is expected to close in the first half of 2013.
ING’s Malaysian investment management business In December 2012, ING announced that it has reached an agreement to sell its 70%-stake in ING Funds Berhad (IFB), ING’s investment management business in Malaysia, to Kenanga Investors Berhad (Kenanga Investors), a wholly owned subsidiary of K & N Kenanga Holdings Berhad (Kenanga). Tab Inter-Asia Services Sdn Berhad has also agreed to sell its 30% stake in IFB to Kenanga Investors. This transaction will not have a material impact on ING’s results and is subject to regulatory approvals. The transaction does not impact ING’s other businesses in the region and is expected to close in the first quarter of 2013.
In October 2011 ING announced that it had completed the sale of REIM’s Asian and European operations to US-based CBRE Group Inc., thereby completing the divestment of ING REIM. The divestment of ING REIM has resulted in an after-tax gain on disposal of approximately EUR 245 million. As a result of the agreement at closing ING continues to have certain contingent income and expenses, however no significant impact on the result on divestment is expected. REIM’s Asian and European operations were previously included in the segment Commercial banking (ING Real Estate).
Clarion Partners In June 2011 ING announced the completion of the sale of the private market real estate investment manager of its US operations, Clarion Partners, to Clarion Partners management in partnership with Lightyear Capital LLC for USD 100 million. The sale resulted in a net gain on divestment of EUR 39 million. Clarion Partners was previously included in the segment Commercial banking (ING Real Estate).
Latin American pensions, life insurance and investment management operations In December 2011 ING completed the sale of its Latin American pensions, life insurance and investment management operations (‘Latin American operations’) for a total consideration of EUR 2,637 million to Grupo de Inversiones Suramericana (‘GRUPOSURA’). The sale was the first major step in the divestment of ING’s insurance and investment management activities. Under the terms of the agreement, ING received EUR 2,572 million in cash and GRUPOSURA assumed EUR 65 million in debt. The sale resulted in a net profit of EUR 995 million. Included in the transaction were the mandatory pension and voluntary savings businesses in Chile, Colombia, Mexico, Uruguay and ING’s 80% stake in AFP Integra S.A. in Peru; the life insurance businesses in Chile and Peru; As part of this transaction ING sold its 33.7% stake in Peruvian InVita Seguros de Vida S.A. to the Wiese Family. The transaction also included the local investment management capabilities in these five countries. Not included in the transaction was ING’s 36% stake in the leading Brazilian insurer Sul America SA. ING’s Commercial Banking activities in Mexico, Brazil and Argentina were not affected by the announcement. ING’s Mortgage and ING’s Leasing businesses in Mexico were also not part of the transaction.
Proceedings in which ING is involved, include complaints and lawsuits concerning the performance of certain interest sensitive products that were sold by a former subsidiary of ING in Mexico. Proceedings also include lawsuits that have been filed by former employees of an Argentinean subsidiary, whose employment was terminated as a result of the Republic of Argentina’s nationalisation of the pension fund system. Litigation has been filed by the purchaser of certain ING Mexican subsidiaries who claims that the financial condition of the subsidiaries was not accurately depicted. Further, purported class litigation has been filed in the United States District Court for the Southern District of New York alleging violations of the federal securities laws with respect to disclosures made in connection with the 2007 and 2008 offerings of ING’s Perpetual Hybrid Capital Securities. The Court has determined that the claims relating to the 2007 offerings were without merit and has dismissed them. The challenged disclosures that survived the Court’s ruling relate solely to the June 2008 offering, and primarily to ING Group’s investments in certain residential mortgage-backed securities. The Court granted an ING motion to dismiss the remaining claims regarding the 2008 offerings. Plaintiffs filed a notice of appeal. An administrator of an ERISA plan has filed a lawsuit seeking to represent a class of ERISA plan administrators claiming that an ING subsidiary has breached certain of its ERISA duties. The District Court has granted the Administrator’s motion for class certification. These matters are being defended vigorously; however, at this time, ING is unable to assess their final outcome. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect. An additional purported class litigation challenges the operation of the ING Americas Savings Plan and ESOP and the ING 401(k) Plan for ILIAC Agents. The District Court dismissed the case and plaintiffs appealed. The parties have reached an agreement on the terms of settlement of all claims in this case on a class-wide basis. The District Court must approve the settlement before it becomes effective. The current expectation is that the outcome will not have a significant impact on the net result.
Since the end of 2006, unit-linked products (commonly referred to in Dutch as ‘beleggingsverzekeringen’) have received negative attention in the Dutch media, from the Dutch Parliament, the AFM and consumer protection organisations. Costs of unit-linked products sold in the past are perceived as too high and insurers are in general being accused of being less transparent in their offering of unit-linked products. The criticism on unit-linked products led to the introduction of compensation schemes by Dutch insurance companies that have offered unit-linked products. In 2008 ING’s Dutch insurance subsidiaries reached an outline agreement with consumer protection organisations to offer compensation to their unit-linked policyholders where individual unit-linked policies have a cost charge in excess of an agreed maximum and to offer similar compensation for certain hybrid insurance products. At 31 December 2008 a provision was recognised for the costs of the settlement. The costs were valued at EUR 365 million. A full agreement on implementation was reached in 2010 with one of the two main consumer protection organisations while in June 2012 also the other main consumer protection organisation signed this agreement. In addition, ING’s Dutch insurance subsidiaries announced additional (so-called ‘flanking’) measures that comply with the ‘Best in Class’ criteria as formulated on 24 November 2011 by the Dutch Minister of Finance. In December 2011 this resulted in an agreement on these measures with the two main consumer protection organisations. In 2012 almost all unit-linked policyholders were informed about compensation. The agreements with the consumer protection organisations are not binding for policyholders. Consequently, neither the implementation of the compensation schemes nor the additional measures prevent individual policyholders from initiating legal proceedings against ING’s Dutch insurance subsidiaries. Policyholders have initiated and may continue to initiate legal proceedings claiming further damages. In early 2013 a new association named ‘Vereniging Woekerpolis.nl’ announced legal proceedings on behalf of policyholders against ING’s Dutch life insurance subsidiaries and other Dutch life insurers. Because of the continuous public and political attention for the unit-linked issue in general and the uncertain outcome of pending and future legal proceedings, it is not feasible to predict or determine the ultimate financial consequences.
33 JOINT VENTURES Joint ventures are included proportionally in the consolidated financial statements as follows: Most significant joint ventures 2012 Interest held (%) Assets Liabilities Income Expenses
Most significant joint ventures 2011 Interest held (%) Assets Liabilities Income Expenses
As part of the exchange offers disclosed in Note 14 ‘Subordinated loans’ EUR 0.9 billion intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid in 2011.
(1) Next to compensation in his capacity as Board member, one of the new Management Board members received a ‘buy-out’ for the loss of compensation that he would have received had he not resigned from his former employer. The buy-out consists of a cash amount and shares with a total value of EUR 500.000 at the grant date, which vests in the years 2012-2015.
(2) Excluding members that are also members of the Executive Board of ING Groep N.V. (3) Amount is determined based on the fair market value of the shares and the related vesting conditions if any.
The 2012 Management Boards compensation includes the full year costs of the Board of ING U.S., Inc., whereas the 2011 Management Boards compensation includes only 2 months reflecting the creation of the Board of ING U.S., Inc. as of 3 November 2011.
(1) Excluding members that are also members of the Executive Board of ING Groep N.V. (2) Amount is determined based on the fair market value of the shares and the related vesting conditions if any.
Base salary 806 857 Total compensation 806 857 177ING Group Annual Report 2012 1 W h o w e are 2 R
Transactions with the Dutch State Illiquid Assets Back-up Facility ING Group and the Dutch State reached an agreement on an Illiquid Assets Back-up Facility (‘IABF’) on 26 January 2009. The transaction closed on 31 March 2009. The IABF covers the Alt-A portfolios of both ING Direct USA and ING Insurance US, with a par value of approximately EUR 30 billion. Under the IABF, ING transferred 80% of the economic ownership of its Alt-A portfolio to the Dutch State. As a result, an undivided 80% interest in the risk and rewards on the portfolio was transferred to the Dutch State. ING retained 100% of the legal ownership of its Alt-A portfolio. The transaction price was 90% of the par value with respect to the 80% proportion of the portfolio of which the Dutch State had become the economic owner. The transaction price remains payable by the Dutch State to ING and will be redeemed over the remaining life. Furthermore, under the IABF ING pays a guarantee fee to the State and receives a funding fee and a management fee. As a result of the transaction ING derecognised 80% of the Alt-A portfolio from its balance sheet and recognised a receivable from the Dutch State. The transferred Alt-A portfolio was previously included in Available-for-sale debt securities. The Dutch State also acquired certain consent rights with respect to the sale or transfer of the 20% proportion of the Alt-A portfolio that is retained by ING.
In order to obtain approval from the European Commission on ING Group’s Restructuring Plan (see below), ING agreed to make additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission to the Dutch State corresponding to an adjustment of the fees for the Illiquid Assets Back-up Facility. In total, these additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission amounted to a net present value of EUR 1.3 billion pre-tax, which was recognised as a one-off charge in the fourth quarter of 2009. The remainder of the IABF as agreed in January 2009, including the transfer price of the securities of 90%, remained unaltered.
These non-voting equity securities are deeply subordinated and rank pari-passu with ordinary shares in a winding up of ING Group. On these non-voting equity securities a coupon is payable of the higher of EUR 0.85 per security and 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
ING Groep N.V. has, as of 12 November 2011, the right to repay all or some of the non-voting equity securities at EUR 15 per security at any time, together with the pro-rata coupon accrued to such date. ING Groep N.V. and the Dutch State have agreed in October 2009 that up to EUR 5 billion of the EUR 10 billion core Tier 1 securities could be repaid at any time until 31 January 2010 at the original issue price of EUR 10 per non-voting equity security, plus a repurchase premium and accrued interest.
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– designated as at fair value through profit and loss 13,399 13,021 13,399 13,021
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Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Trading assets, Non-trading derivatives and Assets designated at fair value through profit and loss and Level 3 Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as valued using significant unobservable inputs if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which the price at which an arm’s length transaction would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
Amounts recognised in the profit and loss account during the year 192 2 –375 –245 –50 –476 Revaluation recognised in equity during the year 14 14
Main changes in fair value hierarchy in 2011 The classification was impacted in 2011 by a transfer of available-for-sale investments of EUR 2.0 billion from Level 3 to Level 2, relating to mortgage backed securities in the United States. Previously these were classified in Level 3 because of the dispersion between prices obtained for the same security from different price sources. In 2011 prices supported by market observable inputs became available and were used in determining the fair value.
Early repayment of liabilities –348 –48 –1,067 –6 –1,469 Maturity/settlement –535 –3 –1,174 –1,712
Transfers out of Level 3 –223 –19 –30 –6 –278 Exchange rate differences –8 –22 –4 –34
Liabilities Trading liabilities 232 232 Non-trading derivatives –854 4 –850 Financial liabilities designated as at fair value through profit and loss 96 96
–526 4 –522 187ING Group Annual Report 2012 1 W h o w e are 2 R
Assets Trading assets –364 3 –361 Non-trading derivatives 308 3 311 Financial assets designated as at fair value through profit and loss 10 10 Available-for-sale investments –160 –69 –229
Sensitivities of fair values in Level 3 Reasonably likely changes in the non-observable assumptions used in the valuation of Level 3 assets and liabilities would not have a significant impact on equity and net result. Level 3 assets include certain positions for which the sensitivities are offset by other positions included in Level 3 liabilities as, from a risk perspective, these instruments are part of risk neutral structures.
Ireland Government bonds 55 55 Financial institutions 30 30 Portugal Government bonds 627 627
Spain Government bonds 1,151 1,151 Financial institutions 99 99 Cyprus Government bonds 13 13
Ireland Government bonds 43 43 Financial institutions 59 59 Portugal Government bonds 533 533
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Interest income on loans 24,798 26,415 24,942 Interest income on impaired loans 41 61 40 Total interest income on loans 24,839 26,476 24,982
In 2010, the decline in average assets led to a decrease of the interest result of EUR 90 million and the increase of the interest margin by 10 basis points led to an increase of the interest result with EUR 915 million.
Reinsurance assumed gross premiums written 24 23 23 1,014 1,031 1,163 1,038 1,054 1,186
Direct gross premiums earned 1,731 1,699 1,718 Reinsurance assumed gross premiums earned 24 23 23 Total gross premiums earned 1,755 1,722 1,741
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Investment income by banking and insurance operations Banking operations Insurance operations Total
Realised gains/losses on disposal of debt securities 209 91 150 22 –11 209 113 139 Impairments of available-for-sale debt securities –16 –735 –146 –45 –750 –587 –61 –1,485 –733 Reversal of impairments of available-for-sale debt securities 74 8 5 8 79 Realised gains/losses and impairments of debt securities 193 –570 4 –37 –723 –598 156 –1,293 –594
In 2011, an impairment of EUR 978 million was recognised on Greek government bonds and an impairment of EUR 189 million was recognised on subordinated debt from Irish banks. Both are included in Impairments of available-for-sale debt securities. Reference is made to the ‘Risk management’ section for further information on these impairments.
Other includes commission fees of EUR 230 million (2011: EUR 183 million; 2010: EUR 171 million) in respect of bank guarantees and commission fees of EUR 17 million (2011: EUR 26 million; 2010: EUR 15 million) in respect of underwriting syndication loans.
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The Valuation results on assets and liabilities designated as at fair value through profit and loss includes fair value changes on private equity funds and certain issued debt securities. Valuation results on assets and liabilities designated as at fair value through profit and loss were mainly due to changes in the fair value of financial liabilities driven by changes in market conditions and changes in own credit risk as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’. In 2012 and 2011 market conditions includes in particular credit spread developments.
Gross underwriting expenditure – before effect of investment result for risk of policyholders 24,465 27,507 27,299 – effect of investment result risk of policyholders 11,246 –186 10,120
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Reinsurance recoveries 65 –9 –8 Change in provision for unearned premiums –22 –27 –27 Change in claims provision 109 5 44 Costs of acquiring insurance business 263 261 274 Other underwriting expenditure –2
In 2012, ‘Change in life insurance provisions’ includes an amount related to variable annuity assumption changes in the United States of approximately EUR –104 million. This charge relates to lapse-rate assumption refinements following an annual review of policyholder behaviour assumptions.
In 2011, ING has completed a separate annual review of the policyholder behaviour assumptions for the VA Japan business, which has not resulted in material adjustments.
In 2010, ´Change in life insurance provisions´ includes an amount related to variable annuity assumption changes in the United States and Japan of approximately EUR 356 million. These assumptions were updated to reflect lower-than-expected surrenders on policies where the value of the benefit guarantees is significant.
ING Group transferred its US group reinsurance business to Reinsurance Group of America Inc. in 2010 by means of a reinsurance agreement. The transaction resulted in EUR 70 million ceding commission which is required to be recorded as a deferred gain and amortised over the life of the underlying business, starting in 2010 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2012 was EUR 1 million (2011: EUR 16 million; 2010: EUR 52 million). The cumulative amortisation as at 31 December 2012 was EUR 70 million (2011: EUR 69 million; 2010: EUR 52 million).
In 2012, a goodwill impairment of EUR 48 million (2011: EUR 32 million; 2010: EUR 540 million) is recognised. Reference is made to Note 9 ‘Intangible assets’.
Every year, the ING Group Executive Board decides whether the option and share schemes are to be continued and, if so, to what extent. In 2010 the Group Executive Board decided not to continue the option scheme as from 2011. The existing option schemes up and until 2010 will be run off in the coming years.
As per 31 December 2012 total options outstanding consists of 70,135,050 options (2011: 90,620,708; 2010: 105,036,931) relating to equity-settled share-based payment arrangements and 15,058,127 options (2011: 17,517,843; 2010: 19,799,763) relating to cash-settled share-based payment arrangements.
Depreciation of property and equipment 361 371 382 55 53 53 416 424 435
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 245 million (2011: EUR 150 million; 2010: EUR 192 million) in which ING Group is the lessee. No individual operating lease has terms and conditions that materially affect the amount, timing and certainty of the consolidated cash flows of the Group.
For Addition/(releases) of provision for reorganisations and relocations reference is made to the disclosure on the reorganisation provision in Note 21 ‘Other liabilities’.
Other operating expenses – Other includes in 2012, amongst other, the settlement with US authorities of EUR 473 million as disclosed in Note 32 ‘Legal proceedings’ and the Netherlands bank tax of EUR 175 million.
The tax charge in the Netherlands decreased with EUR 876 million to EUR -412 million (2011: EUR 464 million), due to lower profits. A significant part of the profit in the Netherlands was non-taxable due to tax exempt divestments.
The weighted average statutory tax rate in 2012 is higher than in 2011. This is mainly a result of differences in the composition of results before tax from continuing operations in 2012 and 2011. In 2012 relative more profits were taxable in countries with high tax rates, while relative more losses were incurred in countries with lower tax rates (as compared to 2011).
The effective tax rate in 2012 was lower than the weighted average statutory tax rate. This is mainly caused by non-taxable income, which is partly offset by non-deductible expenses and write-offs of deferred tax assets.
The effective tax rate in 2010 was higher than the weighted average statutory tax rate. This is caused by an off-setting effect of the write-offs of deferred tax assets (mainly in the United States) and the non-deductible expenses which exceeded tax exempt income and prior year adjustments.
Adjustment to prior periods in 2012 relates mainly to a tax settlement.
Adjustment to prior periods in 2010 relates mainly to a tax settlement.
Effect of dilutive instruments: Stock option and share plans 6.3 5.4 6.6
Basic earnings from discontinued operations 908 1,673 405 3,796.1 3,783.7 3,781.5 0.24 0.44 0.11
Diluted earnings from discontinued operations 908 1,673 405 3,802.4 3,789.1 3,788.1 0.24 0.44 0.11 51 DIVIDEND PER ORDINARY SHARE In 2012, 2011 and 2010 no dividend was declared, therefore the dividend per ordinary share was nil. The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, not to pay a cash dividend for the year 2012.
Retail Netherlands Insurance Benelux Retail Belgium Insurance Central & Rest of Europe (CRE) Retail Germany Insurance United States (US) Retail Rest of World Insurance US Closed Block VA Commercial Banking ING Investment Management (IM)
Insurance US Closed Block VA Consists of ING’s Closed Block Variable Annuity business in the United States, which has been closed to new business since early 2010 and which is now being managed in run-off.
In addition to these segments, ING Group reconciles the total segment results to the total result of ING Banking and ING Insurance using the Corporate Line Banking and Corporate Line Insurance. The Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in. The Corporate Line Insurance contains items related to capital management, run-off portfolios, Corporate Reinsurance and remaining activities in Latin America.
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Reference is made to Note 26 ‘Discontinued operations’ for information on discontinued operations.
– Total investment and other income 84 7,345 –342 7,087 Total underlying income 14,289 29,045 –350 42,983
IFRS-EU (continuing operations) 46,691 41,271 4,093 Total net result from discontinued operations 11,080 9,252 1,673 IFRS-EU (continuing and discontinued operations) 57,771 50,522 5,766
– Total investment and other income 1,078 5,356 –243 6,191 Total underlying income 15,264 28,013 –336 42,941
Special items 1,274 –1,059 IFRS-EU (continuing operations) 45,433 41,785 2,405 Total net result from discontinued operations 9,725 9,178 405 IFRS-EU (continuing and discontinued operations) 55,158 50,964 2,810
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There are several key inputs to the reserve adequacy testing. The liability assumptions are based on management’s best estimate of policyholder behaviour, which is reviewed periodically, but at least annually. Stochastic scenario simulations are incorporated based on management’s long-term view of equity markets and interest rates. The hedging program is based on our current approach to managing the risk of the business. Finally, current market conditions impact the results of the test as both reserves and the present value of cash flows are sensitive to market interest rates. Any changes in the items above may have a potentially material impact to the results of the reserve adequacy test.
Life & ING IM operating result 581 178 702 –122 159 1,498
Divestments –19 13 –6 Special items –279 –24 –65 –4 –60 –432 Net result (continuing operations) –287 96 580 –112 132 –390 18 Net result (discontinued operations) 550 Net result (classification as discontinued operations ) –394 Net result (disposal of discontinued operations) 752 Net result 927 211ING Group Annual Report 2012 1 W h o w e are 2 R
Non-life operating result 156 7 163 Corporate Line operating result –631 –631
Insurance US Closed Block VA 39,476 37,272 41,362 38,771 42,477 40,254 Insurance Latin America (1) 3,162 1,557
Latin America Asia Australia Other Eliminations Total 54 NET CASH FLOW FROM INVESTING ACTIVITIES Information on the impact of companies acquired or disposed is presented in Note 31 ‘Companies acquired and companies disposed’.
Not included in cash and cash equivalents: – amounts due to banks –26,557 –53,111 –59,954 – amounts due from banks 22,273 30,706 35,703
Mission and objectives 218 Group risk management function 218 Risk developments in 2012 218
MISSION AND OBJECTIVES The mission of ING Group’s risk management function is to have a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Group’s business processes. The following principles support this mission: • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines are monitored; • ING’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities; • Delegated authorities are consistent with the overall Group strategy and risk appetite; • Transparent communication to internal and external stakeholders on risk management.
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Residential mortgages and other consumer lending 14 7,531 6 4 9,680 17,235
Residential mortgages and other consumer lending 14 7,027 4 3 9,176 16,224
(2) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate Finance, which is reflected in Total Lending and Total Debt Securities.
(3) Pre-settlement exposure is exposure to dealing room products such as options, swaps, and securities financing transactions. This exposure is based on the replacement value (Marked-To-Market) of each product plus potential future volatility.
Total exposure to Greece declined by EUR 518 million in 2012 mainly due to a reduction of debt securities with EUR 243 million and undrawn committed facilities with EUR 245 million. The decrease in debt securities was mainly in the government bonds (EUR 211 million).
ING Bank uses risk assessment and measurement models to guide decision making. To guard the quality of these risk models there is a governance process for approval of risk models, methods and parameters. This ensures compliance with business and regulatory requirements, via a clear assignment of responsibility and accountability. Nevertheless, users of the disclosed information in the risk management section should bear in mind that the analyses provided are based on forward looking models that rely on assumptions and estimates of future events, some of which are considered extreme and therefore unlikely to occur. In the normal course of business ING Bank continues to develop, recalibrate and refine the various models that support risk metrics, which may result in changes to the risk analyses as disclosed.
Although it is ING Bank’s ambition to disclose all risk related items into one comprehensive section, this is in practice not always possible. For instance, the capital-linked recommendations that have been listed by EDTF are included in the Capital Management section. Further, assets and liabilities per contractual maturity via predefined time-bands are displayed in specific notes of the Consolidated Annual Accounts. The additional Pillar 3 information that stems from the Basel II accords provides detailed tables on ING Bank’s credit portfolio. An overview of all the EDTF recommendations and how they are being followed-up can also be found in the introduction of this same Pillar 3 section. It is ING Bank’s ambition to incorporate most of the information into the risk management section such that all disclosed risk information is present in one section of the Annual Report. This contributes to the EDTF recommendations that strive towards transparent and comparative risk disclosures by global banks.
Many elements of the EDTF recommendations were already reflected in last year’s risk disclosure, although not all in the form that can be directly linked to the EDTF set-up. Given the limited time between publication of the EDTF recommendations and publishing date of this report, ING Bank has decided to incorporate the most feasible elements of the EDTF recommendations into this year’s risk disclosure. The remaining others will be disclosed in future reports.
Better alignment to the EDTF recommendations of our disclosures, More aligned Information on the bank’s credit quality via nonperforming loan disclosures, provisions and past due loans 247
Inclusion of a quantitative and qualitative disclosure in line with EDTF, also in the light of the recent European Securities and Markets Authority (ESMA) proposals 253
Appetite Framework at bank level and how it’s translated throughout the organisation. • Quantitative risk disclosure on Bank level, where the most common metrics over all different risk types are displayed: RWA via regulatory capital and economic capital, followed by an overview of the key risk developments in 2012. • Detailed disclosure of the most significant financial and non-financial risk types, where per risk type the organisation, governance, risk metrics and risk profile is elaborated.
MISSION The mission of ING Bank’s risk management function is to have a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Bank’s business processes. The following principles support this mission: • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; • ING Bank’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities; • Delegated authorities are consistent with the overall Bank strategy and risk appetite; • Transparent communication to internal and external stakeholders on risk management and value creation.
The commercial departments form the first line of defence. They originate loans, deposits, insurance and wealth management products and other products, they know our customers well and are best placed to act in both the customers’ and ING’s best interest.
Board level risk oversight ING Bank has a two-tier board structure consisting of the Management Board Bank and the Supervisory Board; both tiers play an important role in managing and monitoring the risk management framework.
• The Supervisory Board is responsible for supervising the policy of the Management Board Bank, the general course of affairs of the Company and its business (including its financial policies and corporate structure). For risk management purposes the Supervisory Board is assisted by two sub-committees: – The Audit Committee, which assists the Supervisory Board in reviewing and assessing ING Bank’s major risk exposures and the operation of internal risk management and control systems, as well as policies and procedures regarding compliance with applicable laws and regulations; and
– The Risk Committee, which assists the Supervisory Board on matters related to risk governance, risk policies and risk appetite setting. • The Management Board Bank (MBB) is responsible for managing risks associated with the activities of ING Bank. The MBB’s responsibilities include ensuring that internal risk management and control systems are effective and that ING Bank complies with relevant legislation and regulations. On a regular basis, the MBB reports on these issues and discusses the internal risk management and control systems with the Supervisory Board. On a quarterly basis, the MBB reports on the Bank’s risk profile versus its risk appetite to the Risk Committee, explaining changes in the risk profile.
The organisation chart below illustrates the functional reporting lines within ING Bank risk organisation.
Risk model governance and model validation All risk models are built according to the internal risk modelling methodology standards and model life cycle, in line with regulatory requirements. After thorough review of the documentation by model development departments and Model Validation (MV), specific model risk committees for each risk type approve the models. After approval by the dedicated risk committee, a risk model is implemented and entitled for usage. In addition, MV validates each model on a regular basis. The validation results and its capital impact are reported on a quarterly basis to senior management and to DNB. Independent Model Validation is one of the cornerstones of ING Bank’s risk model 227ING Group Annual Report 2012 1 W h o w e are 2 R
Eastern Europe) and in its core products (Structured Finance and Benelux Corporate market).
Key Risks ING Bank recognises the following key risks (financial as well as non-financial risks) that are associated with its business activities.
In order to achieve this risk ambition, ING Bank believes it should have the following targets: • Rating: have a rating ambition which is in line with the strongest among its peer group; • State Support: be able to restore capital and liquidity position following a stress situation on its own strength; • Regulatory based: be in a position to meet current and forthcoming regulatory constraints and targets; • Peer comparison based: have a risk profile that compares favourably to its main banking peers.
For financial risks a sequence of different risk appetite frameworks are implemented to address the most significant risks. This implies that a whole framework of credit risk limits is in place that monitors the overall quality of the ING Bank credit portfolio, but also of all the underlying portfolios. In addition, specific concentration risk appetites are defined on product level, geographic level and (single name) counterparty level which are cascaded down into the organisation. For market risk, the risk appetite for the trading book activities within Financial Markets is accompanied by a risk appetite framework for market risks in the banking books. For both types of market risk, limits at Bank level are translated down into the organisation. The liquidity & funding risk appetite statements that are defined on ING Bank level are translated down into the organisation, taking the liquidity & funding specific situation of each (solo) unit into account.
For allocation of Economic Capital to units and products, diversification factors are calculated for each risk type. These factors are applied consistently throughout ING Bank. The level of diversification benefit is dependent on both the inter-risk correlations as well as the relative size of the undiversified EC exposure for each risk type.
Economic Capital and Regulatory Capital Main risk management tools for ING Bank are Economic Capital (EC) and Regulatory Capital (RC). Both of these Capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic risks it faces. RC is driven by methodologies prescribed by regulators whereas EC is driven by internally developed models.
The tables below provide ING Bank’s Economic Capital and Regulatory Capital by risk type and business line. The main driver of the decrease in capitals compared to 2011 is the divestment of ING Direct US and ING Direct Canada in combination with the further derisking of the balance sheet. Excluding ING Direct US and Canada in 2011, the total EC for 2011 would have been EUR 24 billion and the total RC for 2011 would have been EUR 23.5 billion.
In addition to the ‘bottom-up’ calculated credit risk EC, ING Bank has added EUR 4.2 billion to its internal Economic Capital framework for elements such as concentration risk and model risk. This amount is not yet allocated per business line.
To accomplish this, regulations focus primarily at the following issues: • The Basel III proposal more stringently aligns risk taking with the capital position of financial institutions via enlarged risk weights for counterparty credit risk. The Basel III proposal narrows the definition of core Tier 1 and Tier 1 capital, and limits a bank’s leverage via a ratio that should become part of Pillar 1 of the Basel framework. The Basel Committee has also issued proposals for liquidity and funding requirements via the so-called Liquidity Coverage Ratio and the Net Stable Funding Ratio. The aim of the first metric is to monitor a bank’s capability to survive a short-term liquidity stress, where the latter aims to ensure that long term asset activities are similarly funded.
The Basel III accord was originally intended to enter its first phase of implementation on 1 January 2013. This has been extended by the regulators. Nonetheless, ING Bank has been preparing for the functioning of the key Basel III elements and was prepared to implement. Significant management actions have been undertaken on both the liquidity and capital front to adjust the business model and exposure to certain asset classes to minimise the impact of Basel III developments. Examples include reducing short-term funding and shifting significant derivative settlement to Central Clearing Parties. Although not all definitions and parameters of Basel III have been finalised, ING Bank has been making continuous impact analyses of the proposed changes. The overall effect of Basel III on ING Bank’s capital and liquidity ratios, even before management actions, was considered to be lower than most peers. The key principles of Basel III have been included in both the Solvency and Liquidity Risk Appetite Framework that are continuously monitored by senior management.
Capital markets and money markets improved in the course of 2012 and ING Bank continued to have access to funding at acceptable pricing, sufficient long tenors and good volume. Short term professional funding was further reduced and partly replaced by long-term debt, as the bank continues to lengthen its funding profile as part of its balance sheet optimisation programme ahead of Basel III. ING Bank issued EUR 33 billion of long term debt in 2012. Growth in funds entrusted continued to develop favourably at Retail Banking, while within Commercial Banking deposits from corporate treasuries and assets managers decreased. Throughout the credit and liquidity crisis, 233ING Group Annual Report 2012 1 W h o w e are 2 R
ING has maintained its liquidity position within conservative internal targets. ING Bank’s Loan-to-Deposit ratio, excluding securities that are recorded at amortised costs in loans and advances and the IABF government receivable, improved to 1.13.
In order to properly assess, monitor, and manage the credit risks over such a broad spectrum of products, industries, and geographies, Credit Risk Management (CRM) is organised both locally and centrally. The local risk management teams have knowledge of specific geographic markets and the products and their risk characteristics. The central risk team focuses on more global industries and customers.
ING Bank’s credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of the top-down risk appetite framework, which sets concentration limits for countries, individual counterparties and counterparty groups and investment activities. The aim is to expand relationship-banking activities, while maintaining stringent internal risk/reward guidelines and controls. To ensure a proper risk reward balance in our portfolios, the risk appetite framework is linked to the Medium Term Planning (MTP) process.
Single name and sector concentration ING Bank has established the concentration risk framework in order to identify, measure monitor concentrations at portfolio and/or counterparty level. It consists of single name concentration: losses due to the unexpected jump-to-default of a single counterparty. Sector concentration (systemic risk): substantial increase of the ING Bank risk profile (expressed in increased risk weighted assets) due to the joint deterioration of a group of correlated counterparty/transactions, sensitive to the same external (macro-economic) factor(s) related to their geographic location, exposure class or industry. The risk metrics used for the single name concentration is the loss given default amount.
ING Bank performs periodical stress tests based on a standardised and pre-determined 1-in-10year-stress event (i.e. at 90% confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and EC are recalculated to assess what the combined impact of such a year would be. The additional CRWA that ING should allocate in such an event is named CRWA@ Risk. These stress test results are submitted to CPC on a periodical basis, in which the results are explained and discussed. If needed actions are formulated.
Product Approvals Across ING Bank the product approval and review process ensures effective management of risks associated with products. It ensures that sound due diligence is performed by relevant stakeholders to ensure that risks (credit, operational, legal etc.) are mitigated.
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The commercial lending risk program is a detailed analysis of a defined product and/or industry that identifies the major risk drivers and mitigants, the internal business mandate, and proposes the minimum risk (including business) parameters – and potentially the maximum product and/or portfolio limit - to undertake that business. A risk program is always prepared by the Front Office responsible for the internal business mandate and requires an approval from the Global Credit Committee (unless specifically delegated to a region).
Practice Based Drivers ING Bank tries to have an ‘early in early out’ approach to troubled exposures. This means that ING has a very conservative default definition. This will have a direct impact on the level of RWA. For non-retail customers, ING uses a borrower rating which means that a customer will only have one PD regardless of the type(s) of transactions done with ING Bank. This also means that if one facility is in default, all facilities of the client are in default. ING Bank generally does not use a ‘quarantine’ period for defaulters. Once a customer is deemed to be performing, a non-default PD will be given to the borrower.
In order to provide a short overview the main differences between RC and EC, within ING Bank are listed here below: Conceptual differences between Regulatory Capital and Economic Capital Regulatory Capital Economic capital
Use of Regulatory Downturn PD values, which are floored for non-Sovereign exposures
Economic LGD values (without downturn factors and without Regulatory floor for Residential Mortgages)
Regulatory (Basel II based) confidence level of 99.90% Linked to our Risk Appetite, a more conservative confidence level of 99.95% is used
For Securitisations the Securitisations Framework is followed (external risk weights based on external ratings)
Expected Loss (EL): The expected loss provides a measure of the value of the credit losses that ING Bank may reasonably expect to incur on its portfolio. ING Bank must hold a reserve (as part of its capital base) to cover the expected losses in its credit portfolio. In its basic form, the expected loss can be represented as: EL = PD * EAD * LGD
Under the RBA, the risk-weighted assets (RWA) are determined by multiplying the amount of the exposure by the appropriate regulatory risk weights, which depend on: • The external rating or an available inferred rating; • The seniority of the position; and • The granularity of the position.
Next to the model choice, the definition of default is an important starting point for model building. ING Bank uses a framework that integrates elements of the regulatory definition of ‘Default’ and the loan loss provisioning indicators under IAS 39. The rationale is that several indicators are very close to the indications of an obligor’s ‘unlikeliness to pay’ under Basel II and similar regulations. Integration of both frameworks makes it possible to use the regulatory risk components PD, LGD and EAD in the collective provisioning process under IAS 39, further enhancing ING Bank’s compliance with the Basel II ‘use test’. Key differences between the parameters used for Loan Loss Provisioning and Regulatory Capital calculations are that Regulatory Capital parameters are typically through the cycle while Loan Loss parameters tend to be more point in time. Additionally, the LGD for Regulatory Capital calculations is based on a down-turn LGD.
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In addition to the two approaches ING recognises that certain trading products that are outside of this scope may be deemed insufficiently accurate. For example, highly structured or exotic derivative transactions may differ significantly from the generic transactions used to calculate the Add-ons. For the assessment of risk exposures of such complex products a bespoke calculation is made.
Risk ratings assigned to counterparties are regularly, at least annually, reviewed, and the performance of the underlying models regularly monitored. Over 95% of ING Bank’s credit risks have been rated using one of the in-house developed PD rating models. Within the AIRB Portfolio, the level of Basel II ratings exceeds 99% coverage by exposure. Some of these models are universal in nature, such as models for Large Corporates, Commercial Banks, Insurance Companies, Central Governments, Local Governments, Funds, Fund Managers, Project Finance, and Leveraged Companies. While other models are more regional or country specific, such as PD models for SME companies in Central Europe, the Netherlands, Belgium, Luxembourg, and the United Kingdom, as well as residential mortgage and consumer loan models in the various retail markets.
Rating Models for retail counterparties are predominantly statistically driven and automated, such that they can be updated on a monthly or bi-monthly basis. Models for SME companies, and larger corporates, institutions and banks are manually updated, and are individually monitored on at least an annual basis.
The Pillar 3 disclosure provides detail of the ING portfolio classified by these Exposure Classes. This should be helpful for comparison with other AIRB banks. However, ING Bank does not manage its portfolio according to these exposure classes but based more on geography, customer segment, industry, and product. Therefore, additional portfolio breakdowns are also provided in Pillar 3 that reflect these management classifications of the portfolio.
Securitisations ING Bank primarily plays three roles in its exposure to securitisations programs which are: ING Bank as Investor ING Direct has been the primary investor in securitisation transactions within ING Bank. Its core strategy is gathering customer deposits and providing lending products to its retail customers. The savings product is typically the first product to be launched in a country followed by mortgages and other retail products (current accounts, unsecured loans, credit cards etc.). The difference between retail liabilities and own originated retail assets is invested in high quality bonds and when appropriate in certain internal assets originated by other ING Bank entities. The execution of this business model in a cost-efficient manner is ING Direct’s competitive advantage. Given ING Direct’s business model as a liability driven operation with a focus on cost efficiency, ING Direct invests with a view to minimise credit risk, while ensuring sufficient liquidity. Hence, ING Direct accumulates highly rated debt securities with minimal credit risk thereby capitalising on its economies of scale.
243ING Group Annual Report 2012 1 W h o w e are 2 R
Credit Risk systems and data standards The acceptance, maintenance, measurement, management and reporting of credit risks at all levels of ING Bank is accomplished through promotion of single, common credit risk data standards and the integration into common credit risk tools that support standardised and transparent credit risk practices. ING has chosen to develop the credit risk tools centrally. Corporate Credit Risk Management (CCRM) together with the Bankwide Customer Domain (BCD) jointly designs and operates the tools, the process and the environment while the ING units (the users) provide the data input and various other ING departments and/or external regulators provide the rules, policies, and methodology embedded in the various tools.
Credit Risk reporting Credit risk reporting is a crucial element of credit risk management. Regulators and ING Bank’s management increasingly recognise the value of risk-reporting systems and accessibility of data to monitor trends as well as to keep consistency and credibility in published data. A dedicated credit risk reporting department addresses various reporting requirements as well as key reporting principles.
Role of reporting department The credit risk reporting department contributes in the following ways to CRM: • Provides periodic overviews of credit capital, migration of risk weighted assets, concentration overviews by industry/sector/counterparty names required or requested by the DNB and other European regulators; • Participate in the various exercises/simulations conducted by regulators and other policy-makers by being transparent in the data and analysis shared, to allow useful results and work towards more stable and efficient financial markets; • Provides senior management and other risk departments an insight showing trends and quantitative as well as qualitative analysis in material risk areas within ING Bank in a comprehensive and simplified manner to facilitate informed decision-making; • Addresses ad hoc requests from regulators, analysts and rating agencies and other external stakeholders which are driven by current market events impacting specific regions, portfolios or counterparties; • Serves as a control function by analysing various portfolios and comparing them to certain risk policies. In addition, significant monthly portfolio changes are analysed and reviewed.
247ING Group Annual Report 2012 1 W h o w e are 2 R
Credit Risk types Within the Lending portfolio, by nature the largest risk category with 78%, there was an upward shift towards rating classes A and AA. In these buckets a noticeable shift in outstandings was seen from Central Governments to Private Individuals, in line with ING’s continuous focus on core clients. In the Investment portfolio there was a shift to better risk categories across the Institutions portfolio. Bond investments especially in Southern Europe were actively de-risked. The decrease in the AA bucket for Money Market is directly related to less deposits given to the Dutch and North American central banks. The decrease in the AAA bucket for Investment is directly related to the divestment of Direct US and Direct Canada.
The largest relative geographic area of growth was Rest of Europe which was mainly due to increased exposure to Private Individuals in Turkey and Poland. Germany was the second region in terms of relative growth which was also due to increased exposure to Private Individuals.
In line with ING Bank’s de-risking strategy, the portfolio developments in the Americas showed the biggest relative decline due to the sale of ING Direct US and ING Direct Canada. Exposure in the Netherlands continued to decline mainly due to decreased exposure to the Dutch Central Bank. Exposure continued to grow in core home markets of Europe, while declining in North America due to the sale of the units ING Direct US and Canada in the course of 2012. This also had a large relative effect and far outweighed any currency movements.
The use of Central Clearing Parties (CCPs) is becoming an increasing element of the derivative business. CCPs do not really mitigate the counterparty risk. Instead, the credit risk is shifted from Counterparties to CCPs. By year end 2012 the notional Pre-Settlement exposure that was cleared via CCPs increased by 50%.
249ING Group Annual Report 2012 1 W h o w e are 2 R
Credit derivatives ING Bank actively participates in the credit risk derivative (CDS) trading market, as a net purchaser of credit risk protection from other counterparties. ING Bank has purchased a small amount of credit risk protection for hedging purposes, usually in order to reduce concentration on certain ‘legal one obligor groups’ without having to reduce ING Bank’s relationship banking activities. ING Bank does not actively sell credit default swaps for hedging or investment purposes. Although Basel II rules permit a reduction of credit risk capital under certain circumstances where ING Bank has purchased CDS protection, ING Bank does not currently make use of this provision in determining its Basel II capital base.
Exposures at default for Commercial Banking are reported for the most relevant exposure classes being Institutions, Corporate and Central Governments and Central Banks. Regulatory credit risk exposure at default is inclusive of both on balance and off balance sheet exposures, and of all risk categories.
Central Governments and Central Banks 84,462 107,613 1,731 2,879 135 83 3 12 1,520 2,726 73 58 * Regulatory Exposure At Default based on Basel II Accord.
The cover tables show a breakdown of ING Bank’s retail and commercial portfolios. The Residential Mortgages portfolio relates to private individuals and small and medium sized enterprises. The growth in this portfolio was mainly driven by Germany. After the sale of ING Direct USA and ING Direct Canada, ING Bank’s residential mortgage portfolio outstandings decreased to approximately 39% of ING Bank’s credit outstandings.The Financial Institutions portfolio is comprised of commercial banks and non-bank financial institutions. Corporates range from large enterprises to small and medium sized companies. Central governments and central banks consist of all governmental layers, from local to national and central banks. The decrease in this portfolio was mainly driven by exposure in The Netherlands.
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Past-due obligations ING Bank continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 5-7 days after an obligation becomes past due are considered to be operational in nature for retail loans and small businesses portfolios. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
(1) Based on lending (consumer loans and residential mortgages only). (2) Based on credit risk measurement contained in lending and investment activities.