Commercial Real Estate Given the increased risk profile in the real estate sector, ING Bank decided in 2008 to reduce its real estate portfolio and this reduction continued in 2014. The portfolio is now at the level targeted by ING Bank’s risk appetite for this asset class. The book is performing better compared to 2013, reflected by an improved Credit RWA density, lower number of clients on the watch list, NPL ratio showing a steady decline in 2014 and a material reduction in risk costs.
› Lending risk: arises when ING Bank grants a loan to a counterparty, or issues guarantees on behalf of a counterparty. This includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured as the notional amount of the financial obligation that the counterparty has to repay to ING Bank, excluding any accrued and unpaid interest, discount/ premium amortisations or impairments.
› Investment risk: is the credit default and risk rating migration risk that is associated with ING Bank’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. This can be viewed as the worst-case loss that ING Bank may incur as a result of holding a position in underlying securities whose Issuer’s credit quality deteriorates or defaults. All investments in the banking book are classified in the investment risk category. The primary purpose of ING Bank’s investments in the banking books is for liquidity management.
The CRM role encompasses the following activities: › Measures, monitors and manages the credit risks in the Bank’s portfolio; › Challenges and approves new transactions or any changes to previously approved terms and conditions applicable to clients; › Manages the levels of provisioning and risk costs, and advice on impairments; › Provides consistent policies and systems and tools to manage the credit lifecycle of all credit risk taking activities.
The Models Development Committee (MDC) serves as a technical advisor to CRC and is a planning body for future model development. The MDC has a delegated mandate to approve credit risk models which cover smaller portfolios. The ING Bank Provisioning Committee (IPC) is the sole Approval Authority that can approve Loan Loss Provisions (LLP) amounts for all ING Bank entities. The ING Bank Impairment Committee decides on the quarterly debt, equity and real estate impairments in Available for Sale (AfS) books. The IPC and Impairment Committee are fully integrated as of 2014 and executed in connection with the Finance department.
Retail risk The Retail banking business line covers Retail Banking Benelux and Retail Banking International. There is a functional reporting line from the business units to the Retail Risk Management (RRM) department. The retail risk portfolio is defined as a group of homogeneous credit assets, where a set of policies and processes for approving high volumes of counterparties and transactions can be applied. Exposures are pooled and managed through a set of standard policies and procedures over its entire life cycle. Several reports are made regularly for monitoring and managing purposes. These reports are intensively discussed with the (regional) risk managers. Credit RWA and other key credit risk metric developments are monitored on portfolio level during the month.
RRM has two specific delegated mandates: RRM has the mandate to re-allocate retail risk appetite statement boundaries between different segments. Secondly, RRM has the mandate to approve the annual update for the PD, LGD, and EAD parameters for the CRR/ CRDIV Standardised portfolio.
Supported business processes include Credit Risk Approval, Loan Loss Provisioning and Credit Risk Reporting through the development and maintenance of Credit Risk systems.
Strategy & Business Management Strategy & Business Management (S&BM) is a strategic business partner for various stakeholders within CCRM, the ING organisation and the regulator. S&BM sets policy, advises on strategic matters, credit and reputation risk within ING; provides management information on credit risk for all portfolios; and coordinates and facilitates various CRM non-risk and supporting processes.
Credit risk appetite statements are defined top-down across the credit risk categories (pre-settlement, money market, lending, investment), and connected to ING Bank high-level risk appetite across all risk types (credit, market, business and non-financial risk). They consist of a set of high-level credit risk metrics; expected loss, economic capital, risk-weighted assets and exposure at default. For each credit risk metric a boundary is set that is cascaded down and monitored on a monthly basis. The adherence to the boundaries and the pro-active approach to manage the portfolio within the risk appetite boundaries are part of the key performance indicators of the business line managers and as such have a direct impact on their remuneration.
Credit risk capital Regulatory Capital is a law based prudent measure defined by regulators and serves as the minimum amount of Tier 1, Tier 2 and supplementary capital required to absorb for unexpected losses. RC is the minimum amount of capital (based on 99.90% confidence level) that ING Bank must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
RWA comparison Comparison of RWA and risk weights across institutions is inherently challenging. Differences in RWA among banks have been classified by BIS in 3 categories: 1) Risk based drivers that stem from the differences in underlying risk at the exposure/ portfolio level and in business models/ strategies including asset class mix; 2) Practice-based drivers including approaches to risk management and risk measurement; 3) Regulating environment such as supervisory practices, implementing laws and regulations including national discretion and accounting standards.
Risk based drivers ING Bank portfolio is heavily dominated by secured lending especially in the areas of residential mortgages, structured finance, leasing and commercial real estate. Secured lending tends to have a much lower LGD, given the collateral involved, which is a key driver of RWA calculation. Another important element of the ING business model is the focus on retail exposures collateralised by residential property. ING’s retail portfolio is mainly comprised of residential mortgages. The regulatory formula for this exposure class tends to result in the lowest RWA, all other factors being equal.
Regulatory environment ING Bank is regulated by many host supervisors; however the primary supervising entity is ECB. ECB ensures that the regulatory rules (CRR/CRDIV) are adhered to, including the strict ‘significant change’ policy that requires all changes to the internal models (PD, LGD and EAD) above a threshold to be reviewed and approved by ECB.
The 1.06 regulatory scaling-factor is used. The 1.06 regulatory scaling-factor is not used. Regulatory LGD values including potential downturn adjustment are used.
For non-Sovereign exposures the PD values are floored at 3 BPS. Use of non-floored economic PD. For Securitisations the risk weights are determined by applying the CRDIV complaint external rating based look-up tables. For Mont Blanc exposures the Internal Assessment Approach is used.
ING specific correlations are used, in order to capture the ING portfolio specifics including diversification benefits, concentration risk and single name risk.
CVA risk is taken into account as calculated under Pillar I based on the CRR Standardised Approach.
Standardised Approach Unlike the AIRB approach, the standardised approach applies a fixed risk weight to each asset as dictated by the Financial Supervisory Authorities, and is based on the exposure class to which the exposure is assigned. As such, the Standardised Approach is the least sophisticated of the Regulatory Capital methodologies and is not as sensitive as the risk-based approach. Where external rating agency ratings are available, they may be used as a substitute to using the fixed risk weightings assigned by the Financial Supervisory Authorities. Because the underlying obligors are relatively small, the underlying obligors tend not to have external ratings.
Advanced Internal Rating Based Approach There are four elements which drive the Regulatory ‘risk-based approach’ to the determination of the capital base.
There are three types of modelling which form the foundation of these PD, EAD and LGD models used throughout the Bank.
› Statistical models are created where a large set of default or detailed loss data is available. They are characterised by a sufficient number of data points that facilitate meaningful statistical estimation of the model parameters. The model parameters are estimated with statistical techniques based on the data set available; › Expert models are based on the knowledge and experience of experts from both risk management and front office staff and literature from rating agencies, supervisors and academics. These models are especially appropriate for ‘Low Default Portfolios’, where limited historical defaults exist; › Hybrid models contain characteristics of both expert and statistical models.
› MtM plus model based add-on approach: In this approach, the PS risk is calculated as the sum between the MtM of the trade and the model-based Add-on. The MtM fluctuates through the life of the contract. The model-based Add-on is product-specific, and takes into account remaining time to maturity, profiling per time-buckets etc. Add-ons are updated with a frequency that takes into account the major market changes. This methodology is used for pre-deal exposure assessment of all ING Bank financial markets products and for post-deal risk calculations for financial markets portfolios for which computational efforts and costs associated with implementation of Scenario Simulation approach are not justifiable; › Scenario Simulation approach (Monte Carlo approach): Scenario Simulation approach is the most complex of the methods for PS risk calculations. This approach is the only approach that fully takes into account the daily market conditions, including correlations between the risk factors and portfolio benefits. This approach is also referred to as Monte Carlo (MC) approach and is currently used for the largest volume of derivative products such as FX and interest rate derivatives. ING Bank is in the process of implementing this approach for more products. The monitoring of the PS exposures and the limit setting for the products within the scope of the MC approach are based on the exposures resulting from the MC approach, the pre-deal check exposure assessment is based on the MtM plus model add-on approach.
ING Bank’s PD rating models are based on a 1-22 scale (referred to as the “Masterscale”), which roughly corresponds to the same rating grades that are assigned by external rating agencies, such as Standard & Poor’s, Moody’s and Fitch. For example, an ING Bank rating of 1 corresponds to an S&P/Fitch rating of AAA and a Moody’s rating of Aaa; an ING Bank rating of 2 corresponds to an S&P/ Fitch rating of AA+ and a Moody’s rating of Aa1, and so on.
Risk ratings for performing loans (1-19) are calculated in ING Bank IT systems with internally developed models based on data either manually or automatically fed. Under certain conditions, the outcome of a manually fed model can be challenged through a clearly defined rating appeal process. Risk ratings for non-performing loans (20-22) are set on the basis of an approved subjective methodology by the global or regional restructuring unit. For securitisation portfolios, the external ratings of the tranche in which ING Bank has invested are leading.
Exposure classes BCBS (Basel Committee) and the European law (CRR/CRDIV) have developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a common counterparty type or product type. For the AIRB Approach, most of the exposure classes have subcategories. ING Bank has applied the following definitions to determine Exposure Classes: › Sovereigns include Sovereign Government entities, Central Banks and recognised Local / Regional Authorities as well as Supranational Organisations; › Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments; › Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other; › Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and › Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards.
Exposure classes ING Bank portfolio per risk category, as % of total EAD 2013 Lending Investment Money Market Pre-Settlement Total Total (ALL)
Residential Mortgages and Corporates comprise over 65.3% of the total ING Bank portfolio (down from 66.8% in 2013). Even though the volume of residential mortgages has remained fairly stable over the year, as a proportion of the total portfolio they have declined most notably in the Netherlands.
› No Loss – Exit without loss: ING Bank (or the borrower) liquidates collaterals and calls guarantees in order to recover the exposure or the Borrower fully repays. Thereafter the relationship is terminated. ING Bank does not experience any loss in the process.
Data Quality standardised and transparent credit risk practices. ING has chosen to develop the credit risk tools centrally. Credit Risk Management (CRM) together with the Bank-wide 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.
The CCRM/BCD customer-centric data model conforms strongly to the three core business needs of ING Bank: › To transact efficiently with our counterparties; › To be compliant with our internal and external obligations; › To monitor the risks we undertake.
ING Bank consolidated risk data warehouse (Vortex) Vortex was built based on the credit risk requirements, which means it thinks, calculates and reports based on this concept. Vortex has three main functions and three main purposes. The three main functions of Vortex; › Credit risk data warehouse covering ING Bank credit risk exposure; › Calculation engine: Vortex calculates country risk, large exposure, exceptions, average limit/outstanding, provisions, economic capital and regulatory capital; › Provide reports at a transactional, organisational, counterparty, department or ING Bank entity level.
Vortex Advanced Analytics Since the beginning of 2014, CRM has introduced SAS based Vortex Advanced Analytics (VAA) as a tool for advanced risk analysis. It enables creation of flexible analyses and reports with high granularity within a short turnaround time. The biggest advantage of using VAA is that it significantly reduces the time spent on data collection and data preparation allowing more time to be spent on value adding analyses. VAA has also provided independence in accessing the right data and reduction in manual interventions due to automated data collection and preparation. VAA was used extensively in the ECB Comprehensive Assessment and continues to be used for the ongoing ad-hoc regulatory requests to which CRM caters to.
› Problem loan management and determining the level of ISFA provisions; › Document management (an electronic library); › Research reports from external rating agencies (S&P, Fitch, Moody’s, and Graydon) as well as internal equity research; › STARpro automatically receives organisation data from GRID and exposure information from Vortex.
The Approval Package module supports the credit approval process by automating the creation and management of credit application documents and routing them to reviewers and approvers. Approval Package is the tool that collects the data from all of the other modules (including data received from other STARpro modules and all exposure data from Vortex), in order to put together the credit application package. For annual reviews, the user is required to check the existing data (sourced from their local tools via Vortex), and make any requested changes. For new deals, the user (usually an account manager) inputs the entire deal structure (using local source system codes) directly into Approval Package. The tool then has a workflow function to guide the credit application through the credit approval process.
The Problem Loans module is used to create provisions for organisations where the rating is set to 20, 21 or 22 and the outstanding is equal or bigger than the threshold (in general 1 million Euro, in individual cases or for certain units, the threshold could be lower). It also records detailed information on organisations in default. In addition the Problem Loan tool supports the non-performing loan provisioning process by automating the creation of problem loan applications and routing provisioning proposals to designated reviewers and approvers. It also provides a centralised ING Bank-wide repository for problem loan applications. All relevant policies, regulations and methodologies are as much incorporated in the systems as possible, providing an integrated approach.
Credit risk types Continued transfer of performing mortgages from WestlandUtrecht Bank to NN Bank combined with the economic downturn reflected in the mortgage ratings predicted by the Dutch mortgage models resulted in an increase in BB rated and decrease in BBB rated Lending outstandings. Investments as a proportion of the total ING Bank portfolio have grown to 12.8% (2013: 12.4%). The investment portfolio saw a healthy growth in AAA-rated outstandings due to increased placements with European sovereigns as it becomes more of a liquidity portfolio to support liabilities under a new Liquidity Coverage Ratio regime. Due to local regulatory requirements in certain units, Money Market postings tend to be with central banks and other highly rated financial institutions.
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities. The ratings reflect probabilities of default and do not take collateral into consideration.
During 2014, the overall portfolio expanded, which caused shifts in concentration per economic sector. A more prominent place is now taken in by Central Governments in the RBI portfolio due to an increased position in the German, Spanish and Italian Unsecured Bonds, whilst the Central Bank concentration decreased mainly due to a swap of cash held at the Central Bank into debt securities. The concentration of mortgages continues to decrease, seen in the private individuals number. Also, the share of Real Estate in the Commercial Banking portfolio decreased substantially due to actively reducing the portfolio via regular repayments.
Aging analysis (past due but not non-performing): ING Bank consumer lending portfolio, outstandings (1)
Past due for 1–30 days 4,185 5,556 Past due for 31–60 days 849 1,125 Past due for 61–90 days 109 129
(1) Based on consumer lending. The amount of past due but not non-performing financial assets in respect of non-lending activities was not significant.
In 2014 the Retail portfolio showed a decrease in the past due but not impaired portfolio of 24%. Past due outstandings decreased over the year mainly due to new forbearance policy resulting in a shift from performing loans to non-performing loans, due to better collection of arrears and due to an overall improvement seen in the economic conditions. The deconsolidation of ING Vysya Bank had an impact of 7% in reducing the exposures. Without these for mentioned declines the decrease would be around 3%.
1) Bankruptcy or financial reorganisation: The Borrower has sought or has been placed (or is likely to seek or be placed) in bankruptcy or similar protection, where this would avoid or delay repayment of the financial asset; 2) The Borrower has failed in the payment of principal or interest/fees and such payment failure has remained unresolved for the following period: › Corporates: more than 90 days; › Financial Institutions and Governments: from day 1, however, a research period of 14 calendar days will be observed in order for
The table below represents the economic sector breakdown of credit risk outstandings for loans and positions that have been classified as non-performing loans.
(1) Economic sectors below EUR 500 million in both years are not shown separately but grouped in Other.
Loan loss provisions Loan Loss provisions are calculated and accounted for in accordance with International Financial Reporting Standards (IFRS-EU). LLP are reported for financial assets that are measured against amortised costs (Loans and Receivables, Held-to-Maturity Investments). There are three types of LLP: › Individually Significant Financial Asset (ISFA) Provisions: when there is objective evidence that a financial asset is defaulted as result of one or more prescribed events that trigger a default. ING assigns a risk rating 20, 21 or 22. Specific provisions are calculated if the exposure to a Borrower exceeds the threshold amount. The threshold amount varies per business unit, but generally is nil in Commercial Banking, and a maximum of EUR 1 million in the Retail ‘home markets’. A specific provision is calculated based on several scenarios and assumptions. Provisions level is up to date given the quarterly reviews; Discounted cash flow (DCF) is measured when this is a significant risk driver which can be calculated. The future cash flow is based on best estimate of when/if recoveries will occur. Recoveries can be from any source, such as the sale of collateral, on-going cash flows, sale of a business/subsidiary, etc.
› Incurred But Not Recognised (IBNR) Provisions: are made for the ‘performing’ loan portfolio as an estimate or proxy for the losses/ defaults that may have already occurred in the portfolio, but which ING Bank has not yet determined or recognised. The PD time horizon used in the calculation of IBNR provisions refers to the period during which an asset is impaired (in default), but not yet recognised as such - due to lack of objective evidence – and the moment that objective evidence of impairment occurs and becomes available to ING (“response time”). The primary modification is that the PD time horizon (12 months) is shortened to periods of 3, 6, or 9 months, depending on the type of customer. The decision to differentiate the time horizon per customer segment was based on an assessment of the average response time for specific customer types and at least once a year, the PD time horizon is validated.
Changes in the composition of the group 0 –2 0 –14 –170 –4 –170 –20 Write-offs –715 –756 –716 –652 –298 –201 –1,729 –1609
The total risk costs for the year 2014 were just under EUR 1.6 billion confirming the downward trend since the end of 2013. Where the average quarterly risk costs over the years 2012 and 2013 were EUR 550 million, since the beginning of this year they have trended downwards to stabilise at around EUR 400 million per quarter. The total stock of provisions decreased to EUR 6.0 billion due to the deconsolidation of ING Vysya Bank and slightly higher write-offs due to the sale of non-performing loans.
There was a decrease in coverage ratio to 35.5% (2013: 38.6%) mainly due to an increased inflow into the non-performing loan portfolio in Q4 2014 after implementation of the new EBA rules for forbearance which enforce a broader definition of non-performing clients.
As a result of follow up on EBA and updating and implementing the changes in 2014, the forborne assets of 2014 are not comparable with 2013. The incomparability is mainly the result of the following: 1) EBA issued more stringent definitions on the type of assets that should classify as forborne and on the non-performing criteria. This resulted in new assets being classified as forborne in 2014 and new forborne assets being classified as non-performing, which ING did not classify as such in 2013.
The forbearance classification on a client shall be discontinued, when all of the following conditions are met: › The contract is considered as performing and has been reported as “performing forbearance” for a minimum of two years; › Regular payments of significant aggregate amounts of principal or interest have been made during at least half of the forbearance reporting period; › None of the exposure to the client is more than 30 days past-due at the end of the forbearance reporting period.
ING Bank The total ING Bank forborne assets amounted to EUR 9.9 billion at 31 December 2014.
(1) Commercial Banking includes Lending and Investments outstandings of the business portfolio, while Retail Banking includes Lending outstandings of the consumer portfolio.
Country Forborne assets Of which: Performing Of which: Non-Performing Forborne assets Of which: Performing Of which: Non-Performing
The Retail Banking table shows a breakdown of forborne assets on ING Bank’s consumer retail lending portfolio, which includes mortgages and consumer loans.
The Turkish government reduced the maximum credit card limit, hence large numbers of credit card accounts were modified.
Exposures are categorised into different Value to Loan (VTL) buckets that give insight in the level of collateralisation of ING Bank’s portfolio. VTL is calculated as the cover value divided by the outstandings at the balance sheet date. The cover values are pre-haircut and indexed values and exclude any cost of liquidation. Covers can either be valid for all limits, sub-limits or a particular outstanding of a borrower, the latter being the most common. To prevent erroneous inflation of the level of collateralisation, the coverage of all outstanding is capped at 100% if there is over-collateralisation on a certain outstanding. As a result, the coverage levels disclosed are conservative. Each limit is subsequently assigned to one of the six defined VTL buckets: no cover/data not available, >0% - 25%, >25% to 50%, >50% to 75%, >75% to <100%, and ≥ 100%. As the nature of the Pre-settlement portfolio determines that collateral is netted, these VTL buckets are not shown for the Pre-settlement portfolio.
Total Lending, Investment and Money Market 663,541 551,209 18,169 77,408 88,070 143,777 31.9% 26.1% 42.0% Pre-settlement (3) 48,024
The lending portfolio grew over the year, partially due to the appreciation of the USD (6.0 billion) and the AUD (2.0 billion) against the Euro. The fully covered ratio showed an improvement over the year, both in the consumer and business portfolios, with the fully covered outstandings increasing from 50.2% to 55.1%. The consumer lending portfolio overall showed an improvement in the fully covered ratio thanks to improved VTL’s in the residential mortgages, which are by far the largest constituent of the portfolio. While the Business Lending portfolio benefitted from de-risking activities and growths in sectors which show high levels of collateralisation.
Investment outstandings increased over the year, mainly due to increased placements with European sovereigns due to the new regulatory liquidity regime. However, since investments traditionally have no covers, the no-covers ratio showed a small increase in 2014. This was also due to reduction in covers seen in Investments in the German portfolio where a more conservative method for recognition of government guarantees was implemented (where government support was considered implicit and not explicit). Also, as a part of the ING One Bank initiatives, the investment portfolio in the Spanish market was overhauled, which further led to reductions in the covers for investments.
(1) including loans to ING Group and NN Group. (2) excluding intercompany positions
Reversing the trend observed in the past years, house prices in the Netherlands went up in 2014. This helped to increase the total residential mortgages cover values whilst mortgage outstandings declined by 3.0%. As the Netherlands is the biggest market for mortgages for ING Bank, this had a significant impact on the coverage quality of the portfolio.
The numbers shown are conservative as the savings pledged to the mortgage product, “Spaarhypotheek” (or Mortgage with external Saving account) present in the Dutch mortgage portfolio are not taken into account in the table above.
The table below provides the ING Bank’s portfolio broken down per NAICS Industry code. This table cannot be directly compared with ING Bank’s Real Estate Finance portfolio as the scope and definition are differently determined.
For financing properties outside the Netherlands, the revaluation cycle is also set to three years. In case the agreed LTV covenants are not met, an annual or bi-annual revaluation will take place.
Continued derisking activities in the Real Estate sector caused outstandings to decline by 4.3%. Furthermore, this sector being traditionally the most collateralised, an improvement was seen in the coverage over 2014. New deals in Real Estate were done on more conservative collateral terms, while the coverage was also boosted by some collateral value increases in 2014. The improvement was also caused by an increase in outstandings for sectors such as Transportation & Logistics and Utilities, which have traditionally higher coverage. This improvement was however partially negated by growth seen in outstandings to traditionally low collateralised sectors like Commercial Banks and General Industries.
The next table represents the different types of outstandings in 2014 and 2013. The “Gross MtM before netting and collateral” is the exposure calculated in accordance with the Current Exposure Method (CEM, which in the EU regulation is referred to as the Mark-toMarket method) without accounting for any netting or collateral benefit. The “MtM after netting” is the exposure, according to the CEM, taking into account the benefit of legally enforceable netting agreements (e.g. ISDAs), but without considering the benefit of margin collateral (e.g. CSAs). The “MtM after netting and collateral” is the exposure according to the CEM, taking into account both the benefit of netting and marginal collateral. In other words, the gap between the “MtM after netting” and “MtM after netting and collateral” is the liquid collateral (cash and securities). The Outstandings column represents CEM exposure (MtM after netting and collateral) plus the Potential Future Exposure (PFE) at a 97.5% confidence level for derivatives and securities.
The Market Risk Management department (MRM) is the designated independent department that is responsible for the design and execution of the bank’s market risk management functions in support of the ALCO function. The MRM structure recognises that risk taking and risk management to a large extent occurs at the regional/local level. Bottom-up reporting allows each management level to fully assess the market risk relevant at the respective levels.
For the trading books, the linear interest rate risk in the banking books and equity investments, the Value at Risk (VaR) (measured at a 99% confidence interval, a one day holding period and under the assumption of an expected value of zero) is taken as a starting point for the economic capital calculations for market risk. To arrive at the economic capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
(1) Regulatory capital for equity investments are reported under credit risk regulatory capital.
Year-on-year variance During 2014, market risk economic capital increased significantly from EUR 4.7 billion to EUR 6.3 billion. The main drivers of the increase are an update of the model parameters and an increase of the equity investment positions, primarily impacting the equity investments risk type. A short explanation for the main items: › Trading: the decrease in economic capital is largely driven by an increased diversification with the risk types.
› Interest rate risk in the banking books: the exposure is mainly driven by the long-term investment of ING Bank’s capital (investment of own funds). In this overview the replication of capital is presented in line with the regulatory prudential approach and therefore capital itself is classified as an overnight interest rate position. Overall the economic capital is relatively stable compared to 2013, since a shorter duration of the investment in own funds offsets the extension of the historical period of the risk parameters.
› Foreign exchange: the increase is mainly resulting from ceasing the hedge of the common equity tier 1 ratio for foreign exchange rates of a selection of emerging market currencies.
› Real estate: the decrease is mainly resulting from the run-off exposure of Real Estate Development › Equity investments: the main drivers of increase of Economic Capital are an update of the model parameters, an extension of the historical period, the inclusion of ING Vysya Bank as an equity investment and the appreciation of Bank of Beijing.
Risk profile In the following sections, the interest rate risk exposures in the banking books are presented. ING Bank uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective.
Year-on-year variance analysis NPV-at-Risk for a +100 bps shock increased during 2014. An overall increase of EUR 209 million is shown. This mainly results from a change in the strategic interest rate position. The sensitivity for a -100 bps shock has mainly changed as a result of lower rates, whereby for fewer positions a -100 bps shock can be applied, as the interest rates are limited to zero in the calculations.
Euro –15,890 –13,900 US Dollar 261 214 Other –21 –339 Total –15,650 –14,025
By business Commercial Banking –1,773 –626 Retail Banking Benelux –55 –100 Retail Banking International 981 2,757 Corporate Line –14,803 –16,056 Total –15,650 –14,025
By accounting category Amortised Cost 16,311 11,482 Fair value through equity –30,205 –24,318 Fair value through profit and loss –1,756 –1,189 Total –15,650 –14,025
Net banking currency exposures banking books Foreign Investments Hedges Net exposures amounts in thousands of euros 2014 2013 2014 2013 2014 2013
Valuation techniques range from discounting of cash flows to valuation models. Such models are based on relevant factors such as the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour. Some of these price factors require various assumptions which imply that valuation models are subjective by nature. According to what valuation technique is used and what assumptions are made, the obtained fair value can be different, hence the implied downward and/or upward uncertainty of the accounting value may vary. For a classification of fair valued exposure to products in accordance with their degree of valuation uncertainty, refer to the section Financial instruments - Level Disclosure.
Value at Risk MRM uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital.
Basel Committee/CRD III As of 31 December 2011 the Basel requirements on Stressed VaR and the Incremental Risk Charge have come into force in European legislation (CRD III), complementing the use of VaR. ING follows this framework for its regulatory capital calculations since Q4 2011. CRD IV has come into force as of 2014, but it has no impact on the Market Risk Framework. The Basel Committee is performing a Fundamental Review of the Trading Book, which may have a significant impact on the Pillar I calculations. The review is still in consultation and full implementation is not expected before end of 2017.
Event risk Event risk is a valuable risk management tool. Event risk evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, MRM performs separate stressed scenario tests to monitor market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stressed scenario tests for monitoring the market risk under these extreme conditions. Event risk is based on historical as well as hypothetical extreme scenarios. The result is an estimate of the profit and loss caused by a potential event and its world-wide impact for ING Commercial Banking. The event risk number for the ING Commercial Banking trading activity is generated on a weekly basis. Like VaR, event risk is limited by ALCO Bank.
The increase in market risk Regulatory Capital for Foreign Exchange relates to the FX risk in the equity stake in ING Vysya Bank.
Foreign exchange Foreign exchange Chinese Yuan 282 Chinese Yuan 297 US Dollar –257 US Dollar –214 Swiss Franc –65 Romanian Leu 46 Australian Dollar 40 Singapore Dollar –21 South Korean Won 21 Taiwan Dollar 19
Most important interest rate and credit spread sensitivities at year-end amounts in thousands of euros 2014 2013
› Customer behaviour funding & liquidity risk: The potential negative impact on an organisation’s income or cash position due to liquidity options embedded in assets and liabilities that include a client behaviour risk.
The Management Board Bank defines the funding and liquidity strategy, target funding and liquidity position and the risk appetite based on recommendations from Bank Treasury, Capital Management, Market Risk Management and Finance.
The 2nd line Market Risk Management function is responsible for defining the governance with regard to funding and liquidity management. Next to this, Market Risk Management sets the standards for the funding and liquidity risk approach (identify, assess, control, monitor and report) and determines adequate policies and procedures for managing and monitoring liquidity risk in view of compliance with guidelines and limits.
› Liquidity risk transfer and pricing: ALCO Bank sets and maintains a Funds Transfer Pricing (FTP) framework that optimises Bank-wide funding and liquidity risk management, whereby all business units must transfer their structural funding and liquidity risks to Bank Treasury whilst managing their own customer behaviour liquidity risk costs.
› Levels of liquidity: › Compliance with regulatory requirements › Adequate levels related to defined stress scenarios
Funding type Retail deposits 47% 46% Corporate & other deposits 22% 23% Interbank (incl. central bank) 6% 5% Lending/repurchase agreement 4% 4% Public debt 19% 20% Subordinated debt 2% 2%
In the buffer, only assets that are included that are “unencumbered” and freely available for liquidity purposes.
› The size of the buffers is supported by estimates of liquidity needs performed under the Bank’s or business entity’s stress testing and be aligned with the liquidity risk appetite.
Regulatory developments During 2014 there were many regulatory developments related to funding and liquidity. One of the most important was the finalisation of the Delegated Act by the European Commission, providing detailed guidance on the LCR, taking into account comments from the industry as well as European Union specificities.
Next to this additional guidance has been provided on a broad range of additional regulatory reporting requirements such as asset encumbrance and monitoring metrics. At the end of October, the BCBS published a final version of the Net Stable Funding Ratio, which will be implemented by 2018. In the coming years, both the EBA and the EC will review how the NSFR will be implemented in the EU.
Main developments in 2014 Internal and external fraud ING Bank is continuously working on strengthening its global fraud resilience including enhanced collaboration against cybercrime. Developing applications, or exploring and combining existing data search tools that can be used for behavioural monitoring are becoming more and more important in both internal and external fraud prevention and are being further developed into an effective set of organisational controls.
Corruption risk ING Bank set up a programme to create a statutory framework in respect of sound and ethical operations designed to prevent corruption in the form of conflicts of interest and/or bribery.
board members and senior managers and is created to ensure that every employee in every part of ING understands how their actions and behaviour can help earn and retain customer and stakeholder trust. The modules consist of several case studies and real life examples which require staff to think about various aspects of the issue. Each module also includes a statement from a senior manager. The topics covered in 2014 were: › Cybercrime An introduction to cybercrime, focusing on how cybercriminals operate and the risks that cybercrime creates for employees, ING and our customers. By using practical examples staff are challenged to think about what can be done to minimise cybercrime risks.
In March 2014, ING Group repaid the penultimate EUR 1.225 billion non-voting equity securities (core Tier 1 securities) to the Dutch State. ING Bank paid a dividend to ING Group to facilitate the payment. ING Group’s financial position allowed us to accelerate the final payment of EUR 1.025 billion to November 2014, six months ahead of the schedule as agreed with the European Commission. ING has now completely repaid the EUR 10 billion non-voting equity securities issued in 2008 as well as EUR 3.5 billion in premiums and coupons. The total repayment of EUR 13.5 billion equates to a 12.7% internal rate of return for the Dutch State.
In addition, under the IAS 19 accounting rules, ‘unrecognised actuarial gains and losses’ on defined benefit pension plans are recognised immediately in equity, which increases volatility driven by movements in financial markets. The transfer of the obligations connected to the current Dutch DB Plan removes this source of volatility for both Bank and Insurance. It also removes the potential direct negative impact on capital in the event of a net pension liability. Consequently, the agreement has made the capital position more stable.
Capital adequacy assessment As at 1 January 2014, the CRR/CRD IV capital rules entered into force. The capital position table on the next page reflects own funds according to the Basel III rules as specified in the CRR/CRD IV. As CRD IV will be phased in gradually until 2019, the table shows the CRD IV positions according to the 2019 end-state rules and the 2014 rules. This makes clear which items phase in directly, which phase in gradually and which not yet in 2014. In addition, ING not only reports these metrics for ING Bank, but as of the fourth quarter of 2014 also introduced this analysis for ING Group. During 2014, ING Group and ING Bank were adequately capitalised.
(2) Of which EUR 5,778 million is CRR/CRD IV-compliant and EUR 3,593 million to be replaced as capital recognition is subject to CRR/CRD IV grandfathering rules. (3) The fully loaded RWA deviated from the phased-in RWA as a result of higher market values, the significant investments in Financial Institutions for the Bank exceeded 10% of CET1 capital. Only the amount up to this limit (which is lower phased-in than fully loaded) is to be 250% risk weighted, while the excess is deducted.
Group capital position: Deductions of significant investments in financial institutions (fully loaded) (phased in)
As per 31 December 2014 the total amount of available distributable items following the CRD IV definition is EUR 36,228 million up from EUR 34,693 million in 2013.
Share premium 16,046 16,038 Other reserve 21,597 23,268 Share of associate reserve 11,853 7,144 Non distributable −13,719 –12,340
(1) Shareholders’ equity for 2013 has been restated to reflect the changes in accounting policies as disclosed in the section ‘Changes in accounting policies in 2014’ on page 108.
(3) Investments in subsidiaries less equity (including core Tier 1 securities) of the Group holding company. This net debt position is provided as equity to NN Group and ING Bank.
IGD capital Insurance operations 15,764 20,783 Group debt −1,491 –4,910 Regulatory capital 60,287 61,160
Required capital banking operations 27,501 26,913 Required capital insurance operations 6,274 8,146 Total required capital 33,775 35,059
– long-term A negative A2 negative A+ negative – short-term A-1 P-1 F1+
Equity 3 Share capital 925 921 Share premium 16,046 16,038 Non-voting equity securities 1,500
Result of group companies after taxation 3,380 3,565 Other results after taxation –2,129 –20 Net result 1,251 3,545
ING Group 326 Parent company annual accounts Parent company profit and loss account
(1) Other reserves includes Retained earnings, Treasury shares, Net defined benefit asset/liability remeasurement reserve and Unappropriated result.
On 30 September 2013, Voya Financial Inc. (‘Voya’) was transferred to ING Groep N.V. by way of a dividend in kind. As the transfer was performed at carrying value, the transaction did not impact ING Group’s Net result from continuing and discontinued operations nor ING Group’s total equity in 2013. As a result, Voya was a direct subsidiary of ING Groep N.V. until the loss of control and deconsolidation in 2014.
As at 31 December 2014 an amount of EUR 7,153 million (2013: EUR 8,378 million) is expected to be settled after more than one year from the balance sheet date.
Result for the year 3,545 3,545 Unrealised revaluations 617 –905 –288 –288 Changes in treasury shares 378 378 378 Repurchase premium –375 –375 –375 Transfer to share of associates and joint ventures reserve –119 –119 –119 Transfer to retained earnings 4,362 4,362 –4,362 Employee stock option and share plans –195 –195 –195 Impact of Voya –2,526 –2,526 –2,526 Changes in the composition of the group and other changes 119 119 119
As at 31 December 2014, the Share of associates and joint ventures reserve includes an amount of EUR 1,070 million (2013: EUR 987 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN that cannot be freely distributed.
Interest rate Year of issue Due date Notional amount in original currency 2014 2013
Debenture loans 5,397 5,429 Amounts owed to group companies 72 824 Other amounts owed and accrued liabilities 1,447 335 Derivatives from group companies 56 291
The number of debentures held by group companies as at 31 December 2014 is 268,920 with a balance sheet value of EUR 28 million (2013: 84,320 with a balance sheet value of EUR 9 million).
The annual accounts include ING Group’s consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2014, the consolidated profit and loss account, the consolidated statement of comprehensive income, the consolidated statement of cash flows, the consolidated statement of changes in equity for 2014 and the notes comprising a summary of the significant accounting policies and other explanatory information. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2014, the parent company profit and loss account, the parent company statement of changes in equity for 2014 and the notes comprising a summary of the significant accounting policies and other explanatory information.
Based on our professional judgement we determined materiality for the annual accounts as a whole at EUR 240 million. Materiality is based on 5% of the result before tax from continuing operations, adjusted for unusual items. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the annual accounts for qualitative reasons.
The ING Group audit team executed a programme of planned visits and regular communication that has been designed to ensure that the audit progress and findings for each of the in-scope locations were discussed between the ING Group audit team and the EY component team.
By performing the procedures mentioned above at group entities, together with additional procedures at ING Group level, we have been able to obtain sufficient and appropriate audit evidence regarding ING Group’s financial information as a whole to provide a basis for our opinion on the annual accounts.
Divestments of VOYA and NN Group In 2014, ING Group further reduced its stake in Voya Financial Inc. (‘VOYA’) to 19%. This led to the loss of control and deconsolidation of VOYA in March 2014. The deconsolidation resulted in an after tax loss of EUR 2.0 billion. As at 31 December 2014 the carrying value, after subsequent sales of shares in September and November 2014, was EUR 1.6 billion. The remaining investment is accounted for as an Available For Sale equity investment and Discontinued Operations. See note 57 to the consolidated annual accounts for full details of the VOYA divestments.
Loan Loss Provisions (see page 138) The appropriateness of loan loss provisions is a key area of judgement for management. The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices. The use of different modelling techniques and assumptions could produce significantly different estimates of loan loss provisions. Associated risk management disclosure is complex and dependent on high quality data. Specific ING Group portfolios of focus included the residential mortgage portfolio in the Netherlands, the SME lending portfolios in Belgium and the Netherlands and the commercial real estate finance portfolio in the Netherlands.
We assessed and tested the design and operating effectiveness of the controls over valuation, independent price verification and model approval. We performed additional procedures for areas of higher risk and estimation with the assistance of our valuation specialists. This included, where relevant, comparison of judgements made to current and emerging market practice and reperformance of valuations on a sample basis. We also assessed the impact of other sources of fair value information including collateral disputes and gains or losses on disposal. Finally we assessed and tested the design and operating effectiveness of the controls over related disclosures including valuation sensitivity and fair value hierarchy.
We have assessed and tested the design and operating effectiveness of the controls over the governance, execution and accounting of the transaction. This included work by our pension specialists on the mechanics of the transaction and the assessment of any residual risks. We also assessed the appropriateness of the accounting for the transaction including the derecognition of the net pension asset and the timing of the recognition of the resulting loss.
› Consideration of the appropriateness of the non-economic assumptions used in the valuation of Japan Closed Block variable annuity guarantees in relation to lapse or extension assumptions by reference to company specific and industry data.
Further key audit procedures included assessing the Group’s methodology for calculating the insurance liabilities, reserve adequacy tests and an assessment of internal controls in this respect, including the analyses of the movements in insurance contracts liabilities and reserve adequacy surplus per segment during the year. We assessed whether the movements are in line with the changes in assumptions adopted by NN Group, our understanding of developments in the business and our expectations derived from market experience.
› A review of the documentation on the unit linked exposures and a discussion thereon with management and its internal and external legal advisors.
› A detailed consideration of the recognition and measurement requirements to establish provisions under ING Group’s accounting framework.
We also considered whether the ING Group’s disclosures in respect of this legal exposure is compliant with the relevant accounting requirements. We focused on the adequacy of disclosure of the related risks and assumptions in note 51 to the annual accounts.
We have exercised professional judgement and have maintained professional scepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our audit included e.g.: › Identifying and assessing the risks of material misstatement of the consolidated annual accounts, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
› Evaluating the overall presentation, structure and content of the annual accounts, including the disclosures; and › Evaluating whether the annual accounts represent the underlying transactions and events in a manner that achieves fair presentation.
From the matters communicated with the Supervisory Board, we determine those matters that were of most significance in the audit of the annual accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
Risks related to financial conditions, market environment and general economic trends Because we are a financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business, liquidity, funding and capital markets environments specific to the geographic regions in which we conduct business. The ongoing turbulence and volatility of such factors have adversely affected, and may continue to adversely affect, the profitability, solvency and liquidity of our insurance, banking and asset management business. Factors such as interest rates, securities prices, credit spreads, liquidity spreads, exchange rates, consumer spending, changes in client behaviour, business investment, real estate values and private equity valuations, government spending, inflation or deflation, the volatility and strength of the capital markets, political events and trends, and terrorism all impact the business and economic environment and, ultimately, our solvency, liquidity and the amount and profitability of business we conduct in a specific geographic region. In an economic downturn characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investments and lower consumer spending, the demand for banking and insurance products is usually adversely affected and ING’s reserves and provisions typically would increase, resulting in overall lower earnings. Securities prices, real estate values and private equity valuations may also be adversely impacted, and any such losses would be realised through profit and loss and shareholders’ equity. Some insurance products contain minimum return or accumulation guarantees. If returns do not meet or exceed the guarantee levels, we may need to set up additional provisions to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Similarly, a downturn in the equity markets causes a reduction in commission income we earn from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates and credit spreads. See also ‘—Interest rate volatility and other interest rate changes may adversely affect our profitability’, ‘—Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations’, and ‘—Market conditions observed over the past few years may increase the risk of loans being impaired. We are exposed to declining property values on the collateral supporting residential and commercial real estate lending’ below.
Shareholders’ equity and our net result may be significantly impacted by turmoil and volatility in the worldwide financial markets. Negative developments in financial markets and/or economies may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential consequences listed above. The condition of global and local financial markets and economic conditions generally may further have a direct effect on the regulatory solvency position of NN Group under Solvency II or the Theoretical Solvency Criterion in the Netherlands. See ‘—Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations’ and ‘—We operate in highly regulated industries. Changes in laws and/ or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability’ below.
In the event that our current resources do not satisfy our needs, we may need to seek additional financing. The availability of additional financing will depend on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be limited if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient, there is a risk that we may not be able to successfully obtain additional financing on favourable terms, or at all. Any actions we might take to access financing may, in turn, cause rating agencies to re-evaluate our ratings.
We are subject to the jurisdiction of a variety of banking and insurance (in the case of NN Group) regulatory bodies, some of which have proposed regulatory changes in recent years that, if implemented, would hinder our ability to manage our liquidity in a centralised manner. Furthermore, regulatory liquidity requirements in certain jurisdictions in which we operate are generally becoming more stringent, including those forming part of the ‘Basel III’ requirements discussed further below under ‘—We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability’, undermining our efforts to maintain this centralised management of our liquidity. These developments may cause trapped pools of liquidity and capital, resulting in inefficiencies in the cost of managing our liquidity and solvency, and hinder our efforts to integrate our balance sheet, which is an essential element of our Restructuring Plan.
We may incur losses as a result of unforeseen and/or catastrophic events, which are inherently unpredictable, and the actual claim amount in the life and non-life insurance and reinsurance businesses may exceed our established reserves or we may experience an abrupt interruption of activities, each of which could result in lower net results and have an adverse effect on our financial condition and results of operations. In our life and non-life insurance and reinsurance businesses, we are subject to losses from natural and man-made catastrophic events. Such events include, without limitation, weather and other natural catastrophes such as hurricanes, floods, earthquakes and epidemics that may be more severe or difficult to predict as a result of variable climate conditions, as well as man-made disasters and core infrastructure failures such as acts of terrorism, military actions, power grid and telephone/Internet infrastructure failures and political and social unrest. The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and cannot always be adequately reserved for. The occurrence of such events could create economic and financial disruptions and lead to operational difficulties that could impair our ability to manage our business and may adversely affect our assets under management (‘AUM’), results of operations and financial condition. Claims resulting from catastrophic events could also materially harm the financial condition of our reinsurers, which would increase the probability of default on reinsurance recoveries. Our ability to write new business could also be adversely affected.
There can be no assurance that our business continuation and crisis management plan or insurance coverage would be effective in mitigating any negative effects on operations or profitability in the event of a disaster, nor can we provide assurance that the business continuation and crisis management plans of the independent distributors and outside vendors on whom we rely for certain services and products would be effective in mitigating any negative effects on the provision of such services and products in the event of a disaster.
See below under ‘Risks Related to the Group’s Business, Operations, and Regulatory Environment — Operational risks, such as systems disruptions or failures, breaches of security, cyber attacks, human error, changes in operational practices or inadequate controls may adversely impact our business and reputation’ for more information on other operations risks we face.
Furthermore, we are subject to different tax regulations in each of the jurisdictions where we conduct business. Changes in tax laws could increase our taxes and our effective tax rates. Legislative changes could materially impact our tax receivables and liabilities as well as deferred tax assets and deferred tax liabilities, which could have a material adverse effect on our business, results of operations and financial condition. One such change relates to the current debate in the U.S. over corporate tax reform for multinational corporations and corporate tax rates. Changes in tax laws could also make certain ING products less attractive, which could have adverse consequences for our businesses and results.
accounting model addressing the so-called ‘own credit’ issue that was already included in IFRS 9 Financial Instruments. As of July 2014, IFRS 9 replaced IAS 39, the accounting standard heavily criticised in the wake of the financial crisis, for annual periods beginning on or after 1 January 2018, with early adoption permitted. Such changes could also have a material impact on our reported results and financial condition, as well as on how it manages its business, internal controls and disclosure.
Basel III and CRD IV In December 2010, the Basel Committee on Banking Supervision (‘Basel Committee’) announced higher global minimum capital standards for banks and introduced a new global liquidity standard and a new leverage ratio. The Basel Committee’s package of reforms, collectively referred to as the ‘Basel III’ rules, will, among other requirements, increase the amount of common equity required to be held by subject banking institutions, prescribe the amount of liquid assets and the long-term funding a subject banking institution must hold at any given moment and limit leverage. Banks will be required to hold a ‘capital conservation buffer’ to withstand future periods of stress such that the total Tier 1 common equity ratio, when fully phased in on 1 January 2019, will rise to 7%. Basel III also introduced a ‘countercyclical buffer’ as an extension of the capital conservation buffer, which would allow national regulators to require banks to hold more capital during periods of high credit growth (to strengthen capital reserves and moderate the debt markets). Further, Basel III has strengthened the definition of capital that will have the effect of disqualifying many hybrid securities, including those issued by the Group, from inclusion in regulatory capital, as well as the higher capital requirements for trading, derivative and securitisation activities as part of a number of reforms to the Basel II framework. In addition, the Basel Committee and the Financial Stability Board (‘FSB’) published measures in October 2011 that would have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for, and instituting more intensive and effective supervision of, ‘systemically important financial institutions’ (‘SIFIs’) and so-called ‘Global’ SIFIs (‘G-SIFIs’), in addition to the Basel III requirements otherwise applicable to most financial institutions. The implementation of these measures began in 2012, and full implementation is targeted for 2019. ING Bank was designated by the Basel Committee and the FSB as one of the global systemically important banks (‘G-SIBs’), forming part of the G-SIFIs, in 2011, 2012, 2013 and 2014, and by the Dutch Central Bank (De Nederlandsche Bank N.V., ‘DNB’) and the Dutch Ministry of Finance as a domestic SIFI in November 2011. The Basel III proposals and their potential impact are monitored via semi-annual monitoring exercises in which ING Bank participates. As a result of such monitoring exercises and ongoing discussions within the regulatory environment, revisions have been made to the original Basel III proposals as was the case with the revised Liquidity Coverage Ratio in January 2013 and the revised Net Stable Funding Ratio and Leverage Ratio in January 2014. It remains to be seen whether further amendments to the 2010 framework and standards will be made by the Basel Committee in the coming years.
The framework for Solvency II is set out in the Solvency II Directive, which was adopted by the European Council on 10 November 2009 (Directive 2009/138/EC). The Solvency II Directive is scheduled to come into force on 1 January 2016.
EU Insurance Guarantee Scheme Certain jurisdictions in which NN Group’s insurance subsidiaries operate require that life insurers doing business within the jurisdiction participate in guarantee associations, which raise funds to pay contractual benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. The occurrence of such a guarantee event may give rise to an obligation on the relevant insurance subsidiary to pay significant amounts under the guarantee. Insurance guarantee schemes may also oblige insurers to make annual payments to the guarantee association. An insurance guarantee scheme has been in place in Japan since 1999, and NN Group is obliged to make annual contributions to the guarantee scheme. The EC has been discussing EU-wide insurance guarantee schemes for several years and intends to introduce an EU directive on insurance guarantee schemes. As at the date of the publication of this Report, no proposals for this directive have yet been published. Any introduction of insurance guarantee schemes to which NN is subject may impact our results of operations.
Single Supervisory Mechanism In November 2014 the European Central Bank (‘ECB’) assumed responsibility for a significant part of the prudential supervision of banks in the Eurozone, including ING Bank, following a year-long preparatory phase which included an in-depth comprehensive assessment of the resilience and balance sheets of the biggest banks in the Eurozone. ING Bank was among the seven Dutch institutions covered by the assessment (out of 130 institutions overall). While the ECB has assumed the supervisory tasks conferred on it by the Single Supervisory Mechanism (‘SSM’) Regulation, the DNB will still continue to play a big role in the supervision of ING Group and ING Bank. The SSM has created a new system of financial supervision for countries within the Eurozone, with the possibility of non-Eurozone Member States participating by means of close cooperation. With the SSM only having been in place since November 2014, it is difficult at this stage to identify what exact impact the SSM will have on ING Bank and ING Group. The SSM may have a significant impact on the way ING’s banking operations are supervised in Europe.
Dodd-Frank Act On 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’ or ‘Dodd-Frank Act’) was signed into law in the U.S. The Dodd-Frank Act effects comprehensive changes to the regulation of financial services in the U.S. and has implications for non-U.S. financial institutions with a U.S. presence or that transact with U.S. counterparties, such as ING. Dodd-Frank
Dodd-Frank also includes various securities law reforms that may affect the Group’s business practices and the liabilities and/or exposures associated therewith, including a provision intended to authorise the SEC to impose on broker-dealers’ fiduciary duties to their customers, as applied to investment advisers under existing law, which new standard could potentially expose certain of ING’s U.S. broker-dealers to increased risk of SEC enforcement actions and liability. In 2011, the SEC staff released a study on this issue, and members of the SEC’s Investor Advisory Committee voted in November 2013 to recommend the proposal implementing a uniform fiduciary standard for most brokers and registered investment advisers to the SEC.
Among the powers proposed to be granted to supervisory authorities under the Bank Recovery and Resolution Directive include, among others, the introduction of a statutory ‘write-down and conversion’ power and a ‘bail-in’ power, which would give the relevant Dutch resolution authority the power to (i) cancel existing shares and/or dilute existing shareholders by converting relevant capital instruments or eligible liabilities into shares of the surviving entity and (ii) cancel all or a portion of the principal amount of, or interest on, certain unsecured liabilities (which could include certain securities that have been or will be issued by ING) of a failing financial institution and/or to convert certain debt claims (which could include certain securities that have been or will be issued by ING) into another security, including ordinary shares of the surviving group entity, if any. It is currently contemplated that the majority of measures (including the write-down and conversion powers relating to Tier 1 capital instruments and Tier 2 capital instruments) set out in the Bank Recovery and Resolution Directive will be implemented with effect from the autumn of 2015, with the bail-in power for other eligible liabilities (which could include any securities that have been issued or will be issued by ING, that are not Tier 1 or Tier 2 capital instruments) expected to be introduced by 1 January 2016.
Additional Governmental Measures Governments in the Netherlands and abroad have also intervened over the past few years on an unprecedented scale, responding to stresses experienced in the global financial markets. Some of the measures adopted subject us and other institutions for which they were designed to additional restrictions, oversight or costs. Restrictions related to the Core Tier 1 Securities and the Illiquid Asset Backup Facility (‘IABF’) (together, the ‘Dutch State Transactions’) and the Restructuring Plan are further described in Note 56 ‘Transactions with the Dutch State and the European Commission Restructuring Plan’ to the consolidated financial statements of ING Group.
In February 2013, the EC adopted a proposal setting out the details of the financial transaction tax, which mirrors the scope of its original proposal of September 2011, to be levied on transactions in financial instruments by financial institutions if at least one of the parties to the transaction is located in the financial transaction tax zone (‘FTT-zone’), currently limited to 11 participating Member States (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain). The initial proposal foresaw the financial transaction tax for the 11 participating Member States entering into effect on 1 January 2014, which would have then required us to pay a tax on transactions in financial instruments with parties (including Group affiliates) located in such FTT-zone. On 6 May 2014, the Economic and Financial Affairs Council noted that 10 out of the 11 original participating Member States had proposed implementation of the FTT in two stages, the earliest stage being implemented from 1 January 2016. However, on 31 October 2014, the Italian Presidency of the Council of the EU announced that negotiations between participating Member States had yet to agree on key issues. The actual implementation date will thus depend on the future approval by the European Council and consultation of other EU institutions, and the subsequent transposition into local law. Depending on its final form, the introduction of an FTT in the Netherlands or outside the Netherlands could have substantial adverse effect on ING’s business and results.
In addition, the confidence of customers in financial institutions is being tested. Consumer confidence in financial institutions may, for example, decrease due to our or our competitors’ failure to communicate to customers the terms of, and the benefits to customers of, complex or high-fee financial products. Reduced confidence could have an adverse effect on our revenues and results of operations, including through an increase of lapses or surrenders of policies and withdrawal of deposits. Because a significant percentage of our customer deposit base is originated via Internet banking, a loss of customer confidence may result in a rapid withdrawal of deposits over the Internet.
U.S. Sovereign Credit Rating In 2011, Standard & Poor’s Ratings Services (‘S&P’) lowered its long-term sovereign credit rating on the U.S. from AAA to AA+. Although other ratings agencies have not similarly lowered the long-term sovereign credit rating of the U.S., they have put that credit rating on review. Amid the lingering uncertainty over the long-term outlook for the fiscal position and the future economic performance of the U.S. within the global economy and potential future budgetary restrictions in the U.S., as illustrated by the recent budget negotiations and partial shutdown of the U.S. government in October 2013, there continues to be a perceived risk of a future sovereign credit ratings downgrade of the U.S. government, including the rating of U.S. Treasury securities. On 15 October 2013, Fitch Ratings placed the U.S.’s AAA credit rating under ‘rating watch negative’ in response to the crisis, a step that would precede an actual downgrade, which was however upgraded again to ‘stable’ in March 2014. It is foreseeable that the ratings and perceived
creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government could also be correspondingly affected by any such downgrade. Instruments of this nature are key assets on the balance sheets of financial institutions and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the shortterm debt market. The impact of any further downgrades to the sovereign credit rating of the U.S. government or a default by the U.S. government to satisfy its debt obligations likely would create broader financial turmoil and uncertainty, which would weigh heavily on the global financial system and could consequently result in a significant adverse impact to the Group.
Interest rate volatility and other interest rate changes may adversely affect our profitability. Changes in prevailing interest rates may negatively affect our business, including the level of net interest revenue we earn, and for our banking business, the levels of deposits and the demand for loans. In a period of changing interest rates, interest expense may increase and interest credited to policyholders may change at different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. Changes in the interest rates may negatively affect the value of our assets and our ability to realise gains or avoid losses from the sale of those assets, all of which also ultimately affect earnings and capital, as well as our regulatory solvency position. In addition, our insurance and annuity products and certain of our retirement and investment products are sensitive to inflation rate fluctuations. A sustained increase in the inflation rate in our principal markets may also negatively affect our business, financial condition and results of operations. For example, a sustained increase in the inflation rate may result in an increase in nominal market interest rates. A failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in mispricing of our products, which could materially and adversely impact our results of operations. On the other hand, recent concerns regarding negative interest rates and the low level of interest rates generally may negatively impact our net interest income and the profitability of our life and disability insurance products, which may have an adverse impact on our profitability.
› higher costs for certain derivative instruments that may be used to hedge certain of our product risks; and/or › lower profitability, since we may not be able to fully track the decline in interest rates in our savings rates; › lower interest rates may cause asset margins to decrease thereby lowering our results of operations. This may for example be the consequence of increased competition for investments as result of the low rates, thereby driving margins down; › outflow of liabilities for example due to low rates paid on them; › life insurance and annuity products being relatively more attractive to consumers due to minimum guarantees with respect to such products that are frequently mandated by regulators; › increased premium payments on products with flexible premium features; › a higher percentage of insurance and annuity contracts remaining in force from year to year than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and creating asset-liability cash flow mismatches; › additional provisions for guarantees included in life insurance and annuity contracts, as the guarantees become more valuable to policyholders; › reserve strengthening by affecting the results of our reserve adequacy testing in extreme cases of low interest rates; › potential impact on the solvency level under Solvency II; › higher costs for certain derivative instruments that may be used to hedge certain of our product risks; and/or › (depending on the position) a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity and our profitability.
sector’s insured deposits for payouts, to be built up in 10 years, but ultimate contributions will be risk-based. It is yet unclear what this proposal will mean for the proposed Dutch changes.
Inflation and deflation may negatively affect our business. A sustained increase in the inflation rate in our principal markets would have multiple impacts on us and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates, which may: 1) decrease the estimated fair value of certain fixed income securities that we hold in our investment portfolios, resulting in: › reduced levels of unrealised capital gains available to us, which could negatively impact our solvency position and net income, and/or › a decrease in collateral values, 2) result in increased surrenders of certain life and savings products, particularly those with fixed rates below market rates, 3) result in insufficient level of reserves to cover actual expenses, due to an increased level of expenses in our existing life insurance book, 4) actual claims payments significantly exceeding associated insurance reserves in the context of certain non-life risks, due to: › claims inflation (which is an increase in the amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), together with
› an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation and its effect on the amounts ultimately payable to policyholders, and, consequently,
A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may: 1) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealised capital gains available to us which would reduce our net income and negatively impact our solvency position, 2) negatively impact performance, future sales and surrenders of certain products where underlying investments are often allocated to equity funds, 3) negatively impact the ability of our asset management subsidiaries to retain and attract AUM, as well as the value of assets they do manage, which may negatively impact their results of operations, and/or 4) result in decreased fee income associated with a decline in the variable annuity balances invested in fixed income funds.
In addition, a failure to accurately anticipate higher inflation and factor it into our product pricing and reserves assumptions may result in a systemic mispricing of our products, resulting in underwriting losses, which would negatively impact our results of operations.
Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from risks associated with those fluctuations. Our hedging strategies also rely on assumptions and projections regarding our assets, liabilities, general market factors and the creditworthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities may not have the desired beneficial impact on our results of operations or financial condition. Poorly designed strategies or improperly executed transactions could actually increase our risks and losses. Hedging strategies involve transaction costs and other costs, and if we terminate a hedging arrangement, we may also be required to pay additional costs, such
We may not be able to protect our intellectual property and may be subject to infringement claims by third parties, which may have a material adverse effect on our business and results of operations. In the conduct of our business, we rely on a combination of contractual rights with third parties and copyright, trademark, trade name, patent and trade secret laws to establish and protect our intellectual property. Although we endeavour to protect our rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, trade names, patents, trade secrets and know-how or to determine their scope, validity or enforceability. In that event, we may be required to incur significant costs, and our efforts may not prove successful. The inability to secure or protect our intellectual property assets could have a material adverse effect on our business and our ability to compete.
Holders of NN Group’s products where the customer bears all or part of the investment risk, or consumer protection organisations on their behalf, have filed claims or proceedings against NN Group and may continue to do so. A negative outcome of such claims and proceedings brought by customers or organisations acting on their behalf, actions taken by regulators and/or governmental authorities against NN Group or other insurers in respect of unit-linked products, settlements or any other actions for the benefit of customers by other insurers and sector-wide measures could substantially affect NN Group’s insurance business and, as a result, may have a material adverse effect on NN Group’s and ING’s business, reputation, revenues, results of operations, solvency and financial condition and prospects. In addition, claims and proceedings may be brought against NN Group in respect of other products with one or more similar product characteristics sold, issued or advised on by NN Group in and outside the Netherlands. In this risk factor NN Group means NN Group N.V. and its subsidiaries. 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 Dutch insurers are in general being accused of being less transparent in their offering of such 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 two main consumer protection organisations to offer compensation to their unit-linked policyholders where individual unit-linked policies had a cost charge in excess of an agreed maximum and to offer similar compensation for certain hybrid insurance products. At 31 December 2008 costs of the settlements were valued at EUR 365 million for which adequate provisions have been established and of which a substantial portion has been paid out. The remaining unpaid part of the provision as per 31 December 2013 is solely available to cover costs relating to the settlements agreed in 2008. A full agreement on implementation was reached in 2010 with one of the two main consumer protection organisations with the second main consumer protection organisation signing its agreement in June 2012. In addition, ING’s Dutch insurance subsidiaries announced additional measures (“flankerend beleid”) 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 additional agreement on these measures with the two main consumer protection organisations. In 2012 almost all unit-linked policyholders were informed about the compensation. The agreements with the two consumer protection organisations are not binding on policyholders. Consequently, neither the implementation of the compensation schemes nor the additional measures offered by NN Group prevent individual policyholders from initiating legal proceedings against ING’s Dutch insurance subsidiaries and making claims for damages.
NN Group has in the past sold, issued or advised on unit-linked products in and outside the Netherlands, and in certain jurisdictions continues to do so. Moreover, NN Group has in the past, in the Netherlands and other countries, sold, issued or advised on large numbers of insurance or investment products of its own or of third parties (and in some jurisdictions continues to do so) that have one or more product characteristics similar to those unit-linked products that have been the subject of the scrutiny, adverse publicity and claims in the Netherlands. Given the continuous political, regulatory and public attention on the unit-linked issue in the Netherlands, the increase in legal proceedings and claim initiatives in the Netherlands and/or the legislative and regulatory developments in Europe to further increase and strengthen consumer protection in general, there is a risk that unit-linked products and other insurance and investment products sold, issued or advised on by NN Group, may become subject to the same or similar levels of regulatory or political scrutiny, publicity and claims or actions by consumers, consumer protection organisations, regulators or governmental authorities.
Ratings are important to our business for a number of reasons. A downgrade or a potential downgrade in our financial strength or our credit ratings could have an adverse impact on our operations and net results. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. Our credit ratings are important to our ability to raise capital and funding through the issuance of debt and to the cost of such financing. In the event of a downgrade, the cost of issuing debt will increase, having an adverse effect on net results. Certain institutional investors may also be obliged to withdraw their deposits from ING following a downgrade, which could have an adverse effect on our liquidity. We have credit ratings from S&P, Moody’s Investor Service and Fitch Ratings. Each of the rating agencies reviews its ratings and rating methodologies on a recurring basis and may decide on a downgrade at any time. For example, on 30 April 2014, S&P affirmed the long-term debt ratings of ING Groep N.V. to A- but revised the outlook from stable to negative.
Our restructuring programs may not yield intended reductions in costs, risk and leverage. Projected cost savings and impact on our risk profile and capital associated with the Restructuring Plan are subject to a variety of risks, including: › actual costs to effect these initiatives may exceed estimates; › divestments planned in connection with the Restructuring Plan may not yield the level of net proceeds expected, as described under
Additional risks relating to ownership of ing shares Because we are a Dutch company and because Stichting ING Aandelen holds more than 99.9% of our Ordinary Shares, the rights of our depositary receiptholders may differ from the rights of shareholders in other jurisdictions or companies that do not use a similar trust structure, which could affect your rights as an equity investor.
The Trust is entitled to vote on any Ordinary Shares underlying the bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In exercising its voting discretion, the Trust is required to be guided primarily by the interests of the holders of bearer depositary receipts, while also taking into account: › our interests, and › the interests of our affiliates.
Securitisation exposures 168 2,101 Equity portfolios in the banking book under the simple risk weight approach 1,006 12,575 Other Non-Credit Obligation Assets 1,356 16,947 Total Credit Risk 20,494 256,176
Own funds The CRR requires ING Group to disclose information on own funds in a specific format that was provided in the EBA Implementation Technical Standards. The EBA templates Annex I, II and Annex VI are disclosed on the corporate website ing.com.
Credit risk Basis and scope of credit risk presentation In the credit risk section of the Pillar III, data included in tables are related to ING Bank’s core credit risk activities in the areas of: Lending (both on- and off-balance); Securities Financing, Derivatives (collectively Pre-Settlement Risk, Money Market) activities (including reserve deposits at Central Banks) and Investment Risks. Credit Risk in the trading book is excluded and covered in the Market Risk section of the Annual Accounts.
Unless stated otherwise, the tables included in this section focus on the measurement of Regulatory Exposure at Default (READ) and Credit Risk Weighted Assets (RWA) under the CRR/CRD IV definitions. READ is generally the sum of the on-balance and off-balance sheet: Lending, Investment, Money Market and Pre-Settlement activities plus an estimated portion of the unused credit facilities extended to the obligor. The amounts associated with Investment and Lending activities are based on the original amount invested less repayments. Additionally, the risk weighting amounts (plus add-ons) are included. Multiplying RWA by 8% will result in the level of Regulatory Capital (RC) that is required to be held against these portfolios (for the Credit Risk portion of the activities).
Off-balance sheet exposures include the letters of credits and guarantees, which are associated with the Lending Risk category. Additionally, off-balance sheet exposures include a portion of the unused limits, associated with the expected use of the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called ‘Credit Risk outstandings’.
Exposures associated with Securitisations (Asset Backed Financing, Commercial / Residential Mortgage Backed Securities) are shown separately. These amounts also relate to the amount invested prior to any impairment activity or mark-to-market adjustments. These amounts are also considered to be ‘Credit Risk outstandings’.
Opening amount 222.2 209.7 Book size (1) 5.9 –0.3 Divestments / De-consolidations –7.0 –6.0
realignments. (4) Methodology and policy: methodology changes to the calculations driven by internal changes in policy and regulatory policy changes.
The SA exposure class “Exposure in default” is mapped to the ING exposure class in which the exposure would have been if it was performing.
READ RWA READ RWA READ RWA READ RWA READ RWA READ RWA READ RWA
Includes both AIRB and SA portfolios; excludes equities and ONCOA. Default Fund Contribution to CCP’s is included under exposure class Institutions.
The ING Bank portfolio falls for 91.1% under the AIRB approach and for 8.9% under SA in terms of RWA. The total portfolio increased in 2014 by EUR 40.0 billion in READ to EUR 790.3 billion and by EUR 4.5 billion to 226.7 billion in RWA. The increase in RWA is mainly a result of updates of key risk factors related to CRR/CRD IV changes, next to the FX movements. Excluding the regulatory impact of the new CRR/CRD IV requirements, READ increased due to targeted increase of the book size in Structured Finance and Corporate & FI Lending, growth of the mortgages portfolios in Belgium and Germany, and an increase in the investment portfolio in anticipation of the new Liquidity Coverage Ratio regime. This increase was partially compensated by the deconsolidation of ING Vysya Bank, and the downsizing of the Real Estate Finance and Securitizations portfolios.
Given that a major purpose of sovereign credit exposure is to support high quality liquid assets, it is consistent that most exposure is in the best quality risk bands.
In contrast to these increases, similar to 2013, Residential Mortgages were transferred from WestlandUtrecht Bank to NN Bank, causing a decline of approximately EUR 1.3 billion READ. The transfer consisted of performing loans only. Additionally, the de-consolidation of ING Vysya Bank which decreased the READ by EUR 1.6 billion (mainly Residential Mortgages and Overdrafts) also impacted the Retail portfolio.
While in 2013 the LTV for the Dutch mortgage portfolio deteriorated, it improved from 91% in 2013 to 87% during 2014. The downward trend in the Dutch housing industry seems to have bottomed out in 2014. As a result an increase in the Dutch house price index for the first and third quarter of 2014 improved the LTV ratio.
The advanced internal rating based approach (airb) The AIRB approach has five elements that drive the CRR/CRD IV ‘risk-based approach’ for the determination of RWA. RWA times the BIS ratio of 8% leads to Regulatory Capital. The elements are: the CRR/CRD IV exposure class, Probability of Default (PD), Exposure at Default (EAD), Loss Given Default (LGD) and Maturity (M).
Probability of Default (PD): The first element is the counterparty’s probability of default, which measures a counterparty’s creditworthiness in terms of likelihood to go into default. The result of this calculation attempts to measure the senior, unsecured standalone creditworthiness of an organisation without consideration of structural elements of the underlying transactions, such as collateral, pricing or maturity. Each borrower should have a rating which translates into a PD.
Number of AIRB rating models per exposure class PD models EAD models LGD models
The main differences among the models within the same asset class are explained below.
› Corporate: The SME PD models are estimated statistically and directly predict a PD. The Corporate Large and Commercial Property Finance Models are both expert based scorecards and predict a rating. The risk drivers and adjustment factors are specialised to the type of clients in the portfolios. The EAD models all follow the same structure and are based upon the current exposure and current limit. Main differences are types of products involved and behaviour of the unutilised amount of the limit that is expected to be utilised at the time of default. The LGD models all follow the same structure, but have different parameters.
Corporate Corporates Large 69,293 60,352 Commercial Property Finance 27,822 28,267 SME Belgium 21,363 20,814
Residential mortgages Mortgages (Residential) Holland 134,202 137,396 Mortgages (Residential) Germany 64,530 63,821 Mortgages (Residential) Australia 29,577 28,516
Disclosures of model outcomes The table next, shows the PD, LGD, READ, RWA and RWA density per exposure class. This should be read in conjunction with the table in the following paragraph ‘changes in risk parameters since last reporting date’.
Exposure per risk weight bucket per exposure class 0% 10% 20% 35% 50% 75% 100% 150% Others Total
As of 31 December 2014, ING Bank holds specific (ISFA) and collective (INSFA) provisions of EUR 3,722 million and EUR 1,507 million, respectively (2013: EUR 3,729 million and EUR 1,589 million respectively), representing the difference between the amortized cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 766 million (2013: EUR 835 million) in provisions (IBNR) against the performing portfolio.
Risk costs decreased across all business lines. Particularly, Commercial Banking saw a big decrease due to continued lower risk costs in Real Estate Finance (while risk costs for the Business Lending portfolio in Retail Banking Benelux also showed a reduction). The deconsolidation of ING Vysya Bank caused a reduction of EUR 170 million in the stock of provisions for Retail Banking International.
Credit quality by industry ING Bank uses a common industry classification methodology based on the NAICS system (North American Industry Classification System). This methodology has over 1,500 detailed industry descriptions, which are aggregated into 22 industry classes at the highest level. Certain countries require ING Bank to report locally based on other industry classification methodologies, which are generally
Past due but not non-performing consumer loans (based on outstandings) Residential mortgages Other retail Total Total
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. (1) Economic sectors not shown specifically in the table have past due loans of less than EUR 150 million, and are grouped under ‘Other’.
Non-performing exposure increased mainly in the Netherlands and Belgium, especially the Residential mortgages exposure class. This was the result of the implementation of the updated ING Bank forbearance policy based on the EBA recommendations issued in July 2014. More stringent definitions issued by EBA, inclusion of the required history and implementation of the probation periods increased the amount of forborne assets. Also the implementation of the stricter default triggers on forborn assets led to a shift from the performing to non-performing book. Write-offs on large real estate clients led to decreases in non-performing exposures in Other Europe and Americas.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account. (1) At the end of 2014, the stock of provisions included provisions for amounts due from banks: EUR 6 million (2013: 19 million) (2) Rest of the World
Sovereigns Institutions Corporate Residential mortgages Other retail Total Total 0% risk weight 162 1,818 9,528 7,076 7,597 26,182 25,873 10% risk weight 51 1,400 10,173 711 1,648 13,983 14,374 20% risk weight 75 979 17,020 258 1,371 19,702 16,922 35% risk weight 0 913 11,908 80 858 13,758 10,272 50% risk weight 0 228 9,112 42 759 10,141 6,772 75% risk weight 1 183 2,912 9 541 3,646 3,706 100% risk weight 2 108 2,297 9 367 2,784 2,145 150% risk weight 0 70 371 2 54 497 358 200% risk weight 0 33 432 2 22 490 481 1250% risk weight Total 292 5,732 64,137 8,364 16,896 95,421 85,776
Derivatives by product type The table below is based on the marked-to-market (MtM) plus (regulatory) add-on methodology used for calculating CRR/CRD IV RWA for determining the gross exposures. This means that the READ figure listed hereunder is significantly below the notional amount. The mark-to-market plus (regulatory) add-on is recalculated daily to reflect both changes in the markets as well as portfolio composition. The Current Exposure Method (the methodology to calculate the READ) together with the other building blocks (PD, LGD and Maturity), allow ING Bank to classify a large part of its derivatives exposures under the AIRB approach.
Over-the-counter and exchange traded derivatives This section provides a quantitative and qualitative analysis of ING’s Credit Risk that arises from its derivatives transactions. This quantifies notional derivatives exposure, including whether derivatives are traded over-the-counter (OTC) or traded on recognised exchanges (ETD). Where the derivatives are OTC, the table shows how much is settled by central counterparties and how much is not, and provides a description of the collateral agreements in place.
› The notional value of transactions that are done under bilateral CSA agreements relates for 74% to Interest Rate derivatives, for 20% to FX derivatives and for 6% to Credit, Equity and Commodity Derivatives.
› Unilateral CSA agreements relate mainly to agreements that are unilateral against ING and mainly consist of Interest Rate Derivatives.
Like the derivatives portfolio, there was a big impact of CRR/CRD IV regulations on the READ of the Securities Financing portfolio. Of the total increase seen in this portfolio, READ of this portfolio grew by EUR 3.9 billion due to the enforcement of these new regulations. In terms of READ, the Equity Financing portfolio seems larger (52.5%), however, in terms of notionals the Equity Financing portfolio is relatively small (14.2%). Excluding the regulatory impact, growth in the portfolio was seen in Bond and Equities Financing Given and was mainly concentrated in US and UK institutions, while Bond and Equities Financing taken saw a decline in volume. Compared to 2013, a decline was seen in Bond Financing Given to Sovereigns and was mainly due to reductions implemented in Russia.
The guarantees for the same portfolio relate to mortgages covered by governmental insurers under the Nationale Hypotheek Garantie (NHG) in the Netherlands.
Outstandings by tenor bucket The table below shows the outstanding of ING Bank by runoff profile. The figures assume that no new credit risks are introduced into the portfolio and that there are no delays in repayments associated with non-performing loans, nor are there write offs associated with provisions. The portfolio tenor is implied by the difference in the figures between two periods.
Securitisations Product Type Residential Mortgage Backed Securities 4,025 5,273 –23.7% Asset Backed Securities 2,218 2,088 6.2%
Mont Blanc has no investments in securitisation positions that ING Bank has securitised. Nor are there entities either managed or advised by ING Bank that invest in Mont Blanc.
Liquidity and funding Although the most senior tranches in securitisations are no longer efficient to release regulatory capital under CRR/CRD IV, they are used to obtain funding and improve liquidity. To be eligible as collateral for central banks securitised exposures must be sold to a Special Purpose Vehicle (SPV) which, in turn, issues securitisation notes (‘traditional securitisations’) in two tranches, one subordinated tranche and one senior tranche, rated AAA by a rating agency. The AAA tranche can then be used by ING Bank as (stand-by) collateral in the money market for secured borrowings.
Equity exposure – Simple risk weight method On balance sheet amount Off balance sheet amount RW Exposure amount RWA Capital requirements
Opening amount 732 2,126 5,476 463 8,797 Movement in risk levels and market movement 478 694 1,105 284 2,561 Model updates/changes – – –1,250 – –1,250 Acquisitions and disposals –32 –18 – 665 616 Total movement 446 676 –145 949 1,926
Impact on capital IFRS-EU Equity –3,276 –1,628 –432 –141 –1,227 Core Tier 1 Equity (Basel III, fully loaded) –1,076 –1,854 –432 –141 –1,218 * Basel III on a fully loaded basis, no phase in assumed. • Indicates the item has an impact on the capital as indicated in that column.
P&L Impact Items on fair value which revalue through P&L, excluding debit valuation adjustments, impact IFRS-EU equity as well as Basel III equity. Debit valuation adjustments of own issued debt only impacts IFRS-EU equity and not Basel III equity. Debit valuation adjustments of derivatives will not be part of Basel III equity.
(1) The total is based on prudential scope of consolidation that differs from the accounting scope of consolidation. The difference is mainly NN Group, which is held for sale and accounted for EUR 13.5 billion Net Asset Value in the above table
Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered in EUR millions 010 040 010 Carrying amount of selected financial liabilities 100,935 141,156
Of the unencumbered other assets included in the table ‘Assets’, the vast majority of the assets is not available for encumbrance.
Alt-A Residential Mortgage Backed Security (Alt-A RMBS) A type of United States residential mortgage, which is considered riskier than a ‘prime’ and less risky than a ‘sub-prime’ mortgage. Parameters generally taken into account are borrower credit scores, residential property values and loan-to-value ratios. Alt-A mortgages are further characterised by a limited degree of income and/or asset verification.
Available Financial Resources (AFR) The available financial resources equal the market value of assets minus the market value of liabilities, excluding hybrids issued by ING Group, which count as capital. ING’s policy is that the available financial resources should exceed economic capital for Bank, Insurance and Group.
Bank for International Settlements (BIS) The Bank for International Settlements is an international organisation, fostering the cooperation of central banks and international monetary policy makers.
Claim A demand for payment of a policy benefit because of the occurrence of an insured event, such as the death or disability of the insured or the maturity of an endowment, the incurrence of hospital or medical bills, the destruction or damage of property and related deaths or injuries, defects in, liens on, or challenges to the title to real estate, or the occurrence of a surety loss.
Collateralised Debt Obligation (CDO) A type of asset-backed security that provides investors with exposure to the credit risk of a pool of fixed income assets.
Collateralised Loan Obligation (CLO) A type of CDO that is backed primarily by leveraged bank loans.
Common Equity Tier 1 capital Capital definition specified in article 26 of the CRR. Common Equity Tier 1 items of institutions consist of the following: (a) capital instruments (b) share premium accounts related to the instruments referred to in point (a) (c) retained earnings (d) accumulated other comprehensive income (e) other reserves (f) funds for general banking risk.
Corporate Governance Committee The Corporate Governance Committee, consisting of members of the Supervisory Board, assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting, and advises the Supervisory Board on improvements.
Country risk The risk that a government will not fulfil its obligations or that it obstructs the remittance of funds by debtors, either for financial reasons (transfer risk) or for other reasons (e.g. political risk).
Credit Default Swap (CDS) A CDS is a financial derivative instrument that synthetically transfers the credit risk of a specific reference entity between two counterparties. The protection buyer pays a fixed periodic fee, usually expressed in basis points per annum, on the notional amount. The protection seller makes no payment unless some specified credit event relating to the reference entity occurs, in which case he/she is obliged to make a payment to compensate the loss incurred by the protection buyer.
Credit Valuation Adjustment (CVA) An adjustment to the valuation of OTC derivative contracts to reflect the creditworthiness of OTC derivative counterparties.
Cumulative preference shares Shares that entitle the holder to a fixed annual dividend. In the case of a profit distribution, these shares take precedence over ordinary shares. If and to the extent that the profit available for distribution is not sufficient to pay the dividend referred to above in full, the shortfall will be made up from the reserves insofar as possible. If, and to the extent that, the dividend distribution cannot be made from the reserves, the profits earned in subsequent years shall first be used to make up the shortfall before any distribution may be made on shares of any other category.
Depositary receipt of ordinary shares More than 99.9% of the ordinary shares issued by ING Groep N.V. is held by Stichting ING Aandelen (ING Trust Office). In exchange for these shares, ING Trust Office has issued depositary receipts in bearer form for these shares.
Discounted bills Bills that are sold, less interest, giving the owner the right to receive an amount of money on a given date.
Employee benefits All forms of consideration given by a company in exchange for service rendered by employees or for the termination of employment.
Final dividend The final dividend is the total dividend for the year as approved by the shareholders in the annual General Meeting of Shareholders less any interim dividend paid during the year.
Held for sale A business or group of assets for which the carrying amount will be recovered principally through a sale transaction rather than through continuing use. When a business or a group of assets are to be sold together in a single transaction, and the sale is considered to be highly probable, these are classified separately in the balance sheet as Assets held for sale. A sale is highly probable when management is demonstrably committed to the
ING Group Annual Report 2014 sale, which is expected to occur within one year from the date of classification as held for sale. Liabilities directly associated with those assets, and that are included in the transaction, are included in the balance sheet as ‘liabilities held for sale’.
Interest-bearing instrument A financial asset or liability for which a time-proportionate compensation is paid or received, in relation to a notional amount.
In the money A call option is said to be in the money if the exercise price is lower than the price of the underlying value; a put option is said to be in the money if the exercise price is higher than the price of the underlying value.
Irrevocable letters of credit Concerns an obligation on behalf of a customer to pay an amount of money under submission of a specific document, or to accept a bill of exchange, subject to certain conditions. An irrevocable letter of credit cannot be cancelled or adjusted by the bank that has granted it for the duration of the agreement unless all those concerned agree.
Liquidity Coverage Ratio (LCR) Regulatory measure for the liquidity of banks, which compares the amount of high quality liquid assets with a potential outflow over a one-month period. The measure is introduced under Basel III. LCR is defined as: stock of high quality liquid assets / assumed 30-day cash outflow.
Liquidity risk The risk that ING Group, or one of its subsidiaries, cannot meet its financial liabilities when they fall due, at reasonable costs and in a timely manner.
Loan to Deposit ratio (LtD ratio) Measure for the liquidity of banks. The LtD ratio is defined as: own originated loans / own originated deposits.
Management Board Banking The Management Board Banking (MBB) consists of: › the CEO, CFO and CRO of ING Group › the vice-chairman and head of Market Leaders of ING Bank › the head of Challengers & Growth Markets of ING Bank › the head of Commercial Banking of ING Bank › the chief operations officer of ING Bank.
Master agreement Contract between parties in which agreements are reached for most of the terms and conditions of future transactions such that negotiations only focus on deal-specific terms. Well-known master agreements include ISDA (for over-the-counter derivative transactions), GMRA (for repo or repurchase transactions) and GMSLA (for securities-lending transactions).
NPS is calculated by subtracting the percentage of customers who are detractors from the percentage of customers who are promoters.
New sales New sales of life insurance, measured as Annual Premium Equivalent (APE), have been defined as the total of annual premiums and 10% of single premiums received on production in a given period.
Non-voting equity securities Core Tier 1 securities issued to the Dutch State in November 2008 for a total consideration of EUR 10 billion. In December 2009, EUR 5 billion, in May 2011, EUR 2 billion, in November 2012, EUR 750 million and in November 2013 EUR 750 million was repaid to the Dutch State. In November 2014, the last tranche was repaid to the Dutch State. This capital injection qualified as core Tier 1 capital for regulatory purposes.
Notional amounts Represent units of account, which in respect of derivatives, reflect the relationship with the underlying assets. They do not reflect, however, the credit risks assumed by entering into derivative transactions.
Premium income The amount paid by the purchaser of an insurance contract less any commission or brokerage fees payable to an insurance agent. This represents the gross income of an insurance company.
Recovery plan As a consequence of the global financial crisis, ING Bank has set up an all-encompassing recovery planning process to enhance the bank’s readiness and decisiveness to tackle financial crises on its own strength.
Reserve adequacy test To ensure reserves remain adequate over time, the insurance liabilities (future claims and premium income) are tested against the projected investment yields. For many insurance portfolios, stochastic testing is performed, taking the 90th percentile of the results as the required level at which adequacy should be ensured.
Risk Committee The Risk Committee, consisting of members of the Supervisory Board, assists and advises the Supervisory Board in monitoring the risk profile of the company as well as the structure and operation of the internal risk management and control systems.
Settlement risk Settlement risk rises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates or times and receipt is not verified or expected until ING Group has paid or delivered its side of the trade. The risk is that ING Group delivers, but does not receive delivery from the counterparty.
Solvency I Solvency I is the current prudential framework that lays out the amounts of regulatory capital an insurance undertaking must hold against unforeseen events.
Sub-prime mortgage Mortgage loans made to borrowers who cannot get a regular mortgage because they have a bad credit history or limited income.
(c) For institutions calculating risk-weighted exposure amounts in accordance with Chapter 2 of Title II of Part Three, general credit risk adjustments, gross of tax effects, of up to 1,25 % of risk-weighted exposure amounts calculated in accordance with Chapter 2 of Title II of Part Three of the CRR.
Unit-linked A unit-linked insurance product functions as a savings product, but also offers coverage for specific life events. The policyholder invests in ‘units’ (stock, bonds, or mutual funds) and the return depends on the performance of these units. The insurance company may decide to provide guarantees on the return of the units.
Value in use The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.
In print Dutch only. › ING Bank Annual Report › Annual Report on Form 20-F, in English
This Annual Report contains the Reports of the Executive Board and Supervisory Board as well as the Annual Accounts and Other information for the financial year 2014 in their original language (English).
Disclaimer Certain of the statements contained in this Annual Report are not historical facts, including, without limitation, certain statements made of future expectations and other forwardlooking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation: (1) changes in general economic conditions, in particular economic conditions in ING’s core markets, (2) changes in performance of financial markets, including developing markets, (3) consequences of a potential (partial) break-up of the euro, (4) the implementation of ING’s restructuring plan to separate banking and insurance operations, (5) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (6) the frequency and severity of insured loss events, (7) changes affecting mortality and morbidity levels and trends, (8) changes affecting persistency levels, (9) changes affecting interest rate levels, (10) changes affecting currency exchange rates, (11) changes in investor, customer and policyholder behaviour, (12) changes in general competitive factors, (13) changes in laws and regulations, (14) changes in the policies of governments and/or regulatory authorities, (15) conclusions with regard to purchase accounting assumptions and methodologies, (16) changes in ownership that could affect the future availability to us of net operating loss, net capital and builtin loss carry forwards, (17) changes in credit ratings, (18) ING’s ability to achieve projected operational synergies and (19) the other risk factors and uncertainties detailed in the Risk Factors section contained in this Annual Report.