• The divestment of Voya was completed and our stake in NN was reduced to 14.1% in early 2016, bringing us closer to completing our restructuring and consolidating our position as one of Europe’s leading banks.
The “Risk and capital management” chapter describes how we manage risks and ensure optimal use of capital for value creation. The “ING Shares” chapter contains key information for our shareholders. The integrated report which encompasses the “Report of the Executive Board” section concludes with the assurance report of our external auditor.
This report aims to inform stakeholders about our financial and non-financial performance in 2015. This includes a look at how we create value over time and how the Think Forward strategy address the challenges, risks and opportunities ING faces in a fast-changing world.
Chairman’s statement 63 Report of the Supervisory Board 65 Corporate governance 70 Report of ING Trust Office 83 Report of ING Continuity Foundation 86 Conformity statement 87 Section 404 Sarbanes-Oxley Act 88 Report of independent registered public accounting firm 90 Remuneration report 91 Works councils 102
To stay at the forefront, innovation is crucial. We are embedding that in our day-to-day business. Thousands of employees have now taken part in our internal Innovation Bootcamps where staff develop solutions that make a difference for customers. Three of these are being piloted and six more are in early development. We are also accelerating innovation at ING by going outside for specialised expertise. We did this in 2015 by partnering with fintechs, like US-based online lending experts Kabbage, with which we are piloting instant lending for SMEs in Spain. We have also appointed a Head of Fintech.
Delivering for customers 2015 was a year of good progress for ING. I am pleased with the important steps we took to implement our Think Forward strategy with its purpose of empowering people to stay a step ahead in life and in business.
We also aim to increase standardisation so that we can innovate faster on the basis of shared platforms and build scale at lower cost. And we will work to direct our efforts through better prioritisation for more effectiveness.
The role of a financial institution is to support and promote economic, social and environmental progress leading to a better quality of life for people in society, while generating adequate returns for shareholders. This is what the value we create for and with our stakeholders, such as customers and shareholders, should be about. This naturally fits with our purpose: “empowering people to stay a step ahead in life and in business”.
Social and network We add value for our customers by making banking more accessible guided by our Customer Promise: Clear & Easy, Anytime-Anywhere, Empower, Keep Getting Better. Many consumers feel challenged when making financial decisions. We see an important role we can play in empowering customers with products, services and tools that make it easier for them to handle their money matters and make sounder financial decisions.
What does a bank do? Banks play an important role as an intermediary, or go-between, in the financial system. They have three main functions, around which they offer customer service and advice: 1. Banks are largely responsible for the payments system. Electronic payments are becoming more important as people use less cash. This means that banks are processing more card payments, transfers, direct debits, etc. every day.
Managing and monitoring risks is at the heart of banking. We have strict policies in place at various levels to address both financial and non-financial risk, including social and environmental risk.
Social and network • Over 90 million interactions through our financial empowerment initiatives • Customers in seven countries score ING as #1 bank • 1 million children reached through UNICEF partnership since 2005
Human • EUR 68 million invested in developing our employees • Knowledge, capacity and energy of over 54,000 employees
We continue to face a challenging economic environment. Economic growth has returned to the main markets where we are active, but it remains sluggish. Interest rates remain at historic lows, putting pressure on savings and lending margins, which make up a large portion of our revenues. As a response, we are increasing our focus on services to customers that generate fee income, such as investment services.
At ING we believe that our purpose as a financial institution is to contribute to the sustainable development of society by empowering people to stay a step ahead in life and in business. In 2015, we made good progress implementing our strategy and promoting the organisation and culture we need to deliver on our Customer Promise.
In Retail Banking, we define the retail primary relationship as a payment account with recurrent income and at least one other product with ING. In Wholesale Banking, we aim to increase primary relationships by increasing our so-called “flow” relationships (e.g. transaction services, working capital solutions) and the percentage of relationships where we are the client’s lead finance provider.
New customer-bank relationship model – Spain In Spain, an innovative omnichannel platform gives customers new ways to access banking services, with features like expense categorisation, simulators, peer comparison and an interactive financial dashboard. It is strengthening the customer relationship and boosting mobile adoption. Customer contact is rising by 10 percent a year and in 2015 reached an average of 12 per month, with 60 percent via the mobile app. One out of four loan applications is now submitted via the mobile app.
Our strategy and progress – continued 3. Performance culture Performance culture is what ultimately makes a strategy work: our people make it work. That is why we introduced the Orange Code in 2015 – a new set of values and behaviours that sets out our way of working. At the same time we are also making improvements to the way in which we manage performance and will introduce a new leadership curriculum early in 2016, all as part of our efforts to enhance our performance culture and ensure we deliver on our Customer Promise.
4. Lending capabilities Broadening our lending capabilities to match deposit franchises is our fourth strategic enabler. We need to diversify our lending capabilities in order to continue to grow our client franchises. To do so, we are seeking opportunities in Retail, SME and Consumer Lending, as well as focusing on Wholesale Banking lending growth in our Challengers & Growth Markets.
Wholesale Banking’s Target Operating Model Wholesale Banking’s Target Operating Model transformation programme aims to simplify doing business with ING by creating an easier client experience based on a more uniform approach across countries, products and services, and providing easier digital access. InsideBusiness, the online and mobile platform introduced in 2015, is a digital gateway for corporate clients offering tools that provide financial insights and easy access to a range of products and services.
The weak and fragile nature of the recovery and falling inflation expectations prompted the European Central Bank (ECB) to embark on quantitative easing early in 2015. This sent eurozone bond yields to unprecedented lows in the first half of the year. German government bond yields with a duration up to nine years turned negative for a short time. Important money market rates such as three-month Euribor and six-month Euribor sank below zero. As worries about a global slowdown mounted, the ECB announced in December that it will extend its quantitative easing until March 2017, and lowered the deposit rate a further 10 basis points to -0.3%.
Progress on regulatory initiatives that are most relevant to us November 2014 marked the start of the Single Supervisory Mechanism (SSM), with a central role for the ECB in the prudential supervision of eurozone banks. This was a decisive moment in the creation of the European Banking Union.
Meanwhile, the US economy continued to grow at a modest pace in 2015, despite headwinds from a stronger dollar and reduced investment in the oil industry because of low oil prices. The labour market in particular did well, with unemployment falling to levels well below the long-term average. The question of when the US Federal Reserve would start raising rates was therefore a dominant theme on financial markets throughout the year. Expectations began to be tempered at mid-year when the slowdown in emerging markets sparked fears this would also take a toll on the US economy. The US economy remained strong enough however for the Federal Reserve to embark on the first rate hike in more than nine years at its December meeting.
Market and regulatory context – continued about the risk weighting methodology and the interest rate risk in the banking book. Our main concern is that there is insufficient overview of the combined impact of all initiatives. Moreover, it is unclear what regulatory end-state policymakers are aiming for. This regulatory uncertainty complicates multi-year strategic planning and pushes banks towards confining themselves to no-regret decisions. Also considering the competitive pressures and fast market developments outlined below, we believe this piecemeal approach to regulation is not in the best interest of banks and their stakeholders.
The banking industry is highly regulated. Banks strive to act in the interests of their customers. Safe banking requires specific knowledge of financial services and in-depth knowledge of customers as well as rigorous risk-management systems. As competition from outside the banking sector continues to increase, we have to become faster, more agile and more innovative. We believe that our long track record as a financial institution and a strong brand give us an excellent platform from which to face existing and future challenges and become a better company for all our stakeholders. We are a leader in digital banking, and we have scale combined with local market expertise. We are investing in building profitable, mutually beneficial relationships with our customers, based on the quality of our service and a differentiating customer experience. An example is our strategic partnership with Kabbage. Together, we have launched a pilot project in Spain, offering small and medium-sized enterprises (SMEs) loans up to EUR 100,000. Kabbage’s automated loan application and approval process is both accelerated and simple for customers. It makes use of full credit scoring and real-time risk monitoring and allows SMEs with an existing business account to get a loan within ten minutes, based on real-time business data.
ING Bank has always been a strong supporter of the SSM. As a predominantly European cross-border universal bank, we have a clear interest in the proper functioning of European financial markets and in a harmonised approach to European supervision. We believe that it will contribute to a more efficient use of financial funds across Europe and as such should help to foster growth prospects of the European economy.
• Well-known, strong brand with positive recognition from customers in many countries.
• Strong capital and liquidity position; solid financial and operating performance.
• Further improve the customer experience by accelerating innovation. Front-runner status in digital solutions gives ING Bank an edge.
• Possibility of threats from new entrants from outside of the industry.
We believe we are currently one of the front-runners in digital innovation in the banking sector, but we are not complacent. Many of our retail customers are avid users of technological devices. Expectations keep rising: customers are well informed, they know what they want and they want it immediately. We are investing resources to ensure that we become faster and more agile, and increase our innovative capabilities. We do that to meet the ever-changing expectations of our customers, while respecting the fact that they are entrusting us with their banking matters which are personal and confidential in nature. At the same time we are maintaining options for face-to-face service, which remains a valuable channel when customers require advice about more complex products and services.
Digitalisation and changing customer behaviour Banking in future will be digital. This revolution is already well underway: customers are adopting digital channels en-masse, especially mobile. Nearly 90 percent of our retail customers use digital channels to contact us. And some 70 percent of those use digital channels exclusively. The shift to mobile in retail banking is starting to be mirrored in wholesale banking, albeit at a slower pace (and probably less far-reaching way).
Balancing financial and non-financial expectations This is the second year that we are reporting on all of these material topics in an “integrated” report that includes both financial and non-financial information.
Customer centricity, transparency and openness are key The materiality survey results show that customer centricity is the most important topic for stakeholders. This includes topics such as customer privacy, responsible lending, fair pricing and communications, and usability and accessibility of our products and services.
The topics were based on an extensive analysis of issues that either ING itself can have an impact on through our business and strategy, or that can impact ING’s own business. These topics were checked against ING’s own risk assessment as well as guidelines from international bodies such as GRI G4 and the Sustainability Accounting Standards Board (SASB).
Customer centricity D Innovative business developments E Customer privacy and data security F Enhancing customer financial capabilities G Stability of IT systems and platforms H Usability and accessibility of our products and services I Fair communication about our products and services J Responsible lending and debt prevention
Wherever possible, we are transparent about how we lobby and the positions we take. Still, we cannot always publish all details about our contacts with supervisors or other stakeholders, for instance when we believe that the information we share with them must be kept confidential for competitive reasons or as part of the supervisory relationship.
More information on ING’s tax principles can be found on www.ing.com/15ar2
We actively follow all developments in financial supervision and regulation in all countries where we do business. Our goal is to comply with all financial regulation and be fully cooperative regarding financial supervision in a way that supports the interests of our stakeholders to the fullest possible extent.
The internet places so much power in the hands of any technically proficient individual that there will continue to be risks online. We work to raise our customers’ awareness of what they can do to safeguard their own information, such as using strong passwords, installing updates and not sharing personal information with others.
These activities require capital. We can increase profitability by raising prices or lowering interest rates paid on savings accounts, but reasonable pricing of our products and services is also very important both to us and our clients, as we know we must remain competitive.
Transparency and customer confidentiality It is clear to us that our stakeholders want to know more about where, why and to whom we lend money, and how we see the future of certain clients or sectors. But there is sometimes a conflict of interest between greater portfolio transparency, commercial interests and customer confidentiality/privacy.
In light of this, part of ING’s remuneration policy was updated at the General Meeting of Shareholders in May 2015. The resulting increase in fixed salary for the Executive Board members was met with criticism in the Dutch media and society, which we recognise and understand. We need to reconcile competing stakeholder views: on the one hand, shareholders and the challenges we face both require us to secure the best talent for our organisation, including our Board. On the other hand, society at large generally finds compensation for senior leaders too high.
Another example is the aviation sector. The most prominent producers in France and the United States also share knowledge and technology with their governments for national nuclear weapons programmes. ING does not fund nuclear weapons, but we do want to be able to continue to finance regular aircraft manufacturing. We therefore still finance these parts of their businesses.
It is our duty to handle our customers’ data with the utmost care. We strive to be transparent about ING’s handling of customer data, and when customer consent is required for data handling, to allow them to withdraw such consent at any time.
Data privacy and security section in the “Operational excellence and innovation” chapter.
Our services should be available for our customers anytime, anywhere. We have had challenging reliability issues in the Benelux, largely due to ageing and complex legacy systems. We are working hard to improve this. In the second half of 2015, our systems availability for our online payment channels in the Netherlands and Belgium was 99.6%.
We aim to find the right balance between providing the transparency and openness that society and NGOs ask of us, while respecting our customers’ privacy. Being transparent and open about our investments, products and services, and other topics is helping the business move forward and earning the trust of our stakeholders.
Effective underlying tax rate (in %) Banking 28.0 25.8 24.9 Risk-weighted assets ING Bank (EUR billion, year-end) 318 296 283 Underlying risk costs in bps of average RWA 44 55 83
Net Promoter Score Retail Banking (number of countries with number one ranking) 3 7 9 6 Total number of Retail Banking primary relationships (in million) 4 8.9 8.4 5 7.8 Sustainable transitions financed (in EUR billion) 4 23.8 19.5 n/a Sustainable assets under management (in EUR million) 4 2,573 1,538 886 Total extrapolated CO2e emissions (in kilotonne) 96 102 127 Human Capital Return on Investment indicator 2.48 2.30 2.36 1 The leverage ratio is calculated using the published IFRS-EU balance sheet, in which notional cash pooling activities are netted, plus off balance-sheet commitments. The pro-forma leverage ratio of ING Bank, taking into account the combined impact of grossing up the notional cash pool activities and the alignment with the Delegated Act (which was adopted in January 2015) is 4.1%, an increase of 0.5 percentage point compared with year-end 2014.
Addition to the loan loss provision Fully loaded CET 1 ratio ING Group Underlying cost/income ratio ING Bank
We measure our performance in this area to be sure our efforts are really driving sustained improvements in the financial behaviour of our customers and society. In 2015, 20.5 million people felt financially empowered and we had more than 90 million interactions with customers and non-customers through our financial empowerment initiatives.
Our promise to deliver services anytime, anywhere also implies a commitment to make them accessible to all sections of society. As an example, all 631 branches in the Netherlands are wheelchair-accessible and all 2,608 ATMs are adapted for the visually and/or hearingimpaired, with braille keypads, large fonts and audio that increases in volume when a customer’s card or money is not removed quickly enough.
What will they use for banking: finger, eye or voice recognition?
Our SRI methodology covers all asset classes, including government bonds, corporate bonds, investment funds and index trackers. At year-end 2015, the sustainable assets under management (SAUM) for our customers totalled EUR 2,573 million, up from EUR 1,538 million at year-end 2014, underlining our customers’ growing interest in products and services that meet specific sustainability criteria. In 2015, Belgium also began offering their clients SRI investment possibilities, including a sustainable portfolio made up of investment funds.
In line with ING’s commitment to support entrepreneurs and the economy, we are also taking a fresh approach to lending in our Benelux markets. In Belgium we have partnered with crowdfunding platforms Seedrs and KissKissBankBank to offer a fast-track funding process to entrepreneurs for whom a classic bank loan is not necessarily the best or only solution. This partnership offers entrepreneurs with innovative ideas the opportunity to diversify their funding sources and test their projects with a broad audience.
Underlying income increased by 3.0 percent compared with 2014 to EUR 11,228 million, due to higher income in most of the Challengers & Growth Markets, while income growth in the Benelux was flat. Interest results increased as a result of volume growth and an improved interest margin on savings, while the margin on current accounts declined due to the low interest-rate environment. Lending margins remained stable. Income was negatively affected by EUR 127 million of non-recurring charges related to mortgage portfolios in Italy and Belgium where we experienced higher-than-expected repayments and renegotiations.
• The Financial Times’s “The Banker” magazine rated ING as the Best Bank of the Netherlands, Best Bank of Belgium and ING Bank Śląski as the Best Bank of Poland.
• ING-DiBa was awarded “Best Bank” (for the eighth time) and “Most Popular Bank” (for the ninth consecutive time) by €uro magazine. Also in Germany, Interhyp was rated Germany’s “Best Mortgage Provider” for the tenth time in a row.
We have made good progress in solving stability issues with our IT systems in the Benelux, and will continue to focus on this until we have reached our goal of ensuring “always on” online payment services in these countries.
Looking ahead to 2016, we will continue to focus on delivery of the Think Forward strategy through earning more primary relationships, using advanced analytics to better understand and service customers, innovating and pursuing new sources of revenue beyond traditional banking. Further standardisation of IT systems bankwide will be prioritised, as this will support increased collaboration and faster innovation.
Integral to our Think Forward strategy is driving sustainable progress. We strongly believe that financial services play a significant role in creating a sustainable world. As part of our differentiating client experience, we support clients’ sustainable transitions throughout our wholesale banking portfolio. We monitor and assess our transactions for sustainable features that are making these transitions possible. We also actively engage with our clients to generate new business opportunities in the field of sustainable financing. We believe that our focus on clients who adopt sustainable practices is helping to ensure a healthy and strong portfolio.
Staying a step ahead Our clients are at the heart of our strategy. Throughout 2015 we focused on improving the client experience. We aimed to broaden and deepen relationships in line with our capabilities, and have made progress in realising the bank’s strategy.
• Best Global Bank in Emerging Markets • Best Trade Finance Bank in the Netherlands • Best Foreign Exchange Provider in the Netherlands • Best Treasury & Cash Management Provider in
Expanding our network We not only strengthened our digital presence and offering, we also invested in our network to serve our clients better and to seize growth opportunities in different geographies.
We also made progress in developing new businesses that support clients and add a valuable source of fee income. For example, we launched a High-Yield Bond initiative, aimed at European non-investment grade clients. It will help make us more resilient in the face of growing disintermediation in the European funding market, and allow us to tap into the growing high-yield business.
Wholesale Banking’s lending growth contributed to more sustainable balance sheets in our Challengers & Growth Markets. In 2015, we expanded local expertise in some of our funding-rich countries to support balance sheet integration. In Germany, Wholesale Banking loans increased from EUR 7.5 billion in 2014 to EUR 13.5 billion at year-end 2015 as we continued to grow the franchise and optimise the balance sheet.
The rise in mobile and digital banking has changed the expectations and needs of our corporate customers. They expect the same experience across every channel, as well as 24/7 access to their most important products and services. Our InsideBusiness platform is our response. It empowers clients to conduct transactions online and get key information that affects their companies’ financial position from any internet-enabled device, at any time.
Putting our strategy into practice – our business activities in 2015
5 As of year-end 2014, ING reports on loans to clients who have been identified as environmental outperformers based on independent reputable data provider or internal client assessments.
ING participated in a GBP 1.37 billion project finance for Galloper Wind Farm Ltd. for the construction of a 336 megawatt offshore wind farm in the UK. Once completed, the wind farm is expected to generate enough renewable energy per year to meet the electricity needs of around 330,000 homes. It will significantly contribute to meeting the UK’s 2020 target to source 15 percent of its energy for heat, transport and power from renewable sources. ING acted as coordinating bookrunner, MLA and lender.
ING played a prominent role in Dufry’s EUR 3.6 billion acquisition of World Duty Free, one of the world’s leading airport retailers. ING was appointed as underwriter, bookrunner, MLA and agent in the financing package and also active bookrunner of the DCM takeout, based on our longstanding and trusting relationship with Dufry. In addition, ING was mandated as Financial Advisor in the issuance of a Fairness Opinion for Dufry’s Board of Directors with respect to the acquisition. Following a number of acquisitions over the past 10 years, this deal helps Dufry to form an industry-leading business that will control almost a quarter of the world‘s airport retail market.
Both asset and income growth were positive in 2015, but the decrease in commodity prices slowed ITEF’s asset growth. However, volumes grew, and this is expected to continue thanks to a number of new business initiatives. ITEF business units have also worked closely with Financial Markets to offer joint solutions to our customers. Despite the challenging market circumstances, the segment continues to show very healthy results.
Through FM we also provide our clients with a gateway to global institutional markets. We offer a full range of services, across four main business lines: Emerging Markets, Developed Markets, Global Equity Products and Global Capital Markets. We provide clients with hedging solutions to mitigate financial risk, be that currency, interest rate, equity, commodity or credit risk. We also provide investment solutions to meet specific investment objectives, as well as financing solutions through clients’ public or private debt or equity issuance.
In support of Wholesale Banking’s sustainable offerings, ING’s FM issued a dual tranche EUR 500 million and USD 800 million green bond in 2015. The proceeds will be used to (re)finance existing loans to sustainable projects, with at least 20 percent of proceeds going to fund new projects. We also acted as joint bookrunner and arranger on a EUR 1 billion dual-tranche green bond issue by TenneT, a European electricity transmission system operator.
ING issued a dual tranche five-year EUR 500 million and three-year USD 800 million green bond. This is ING’s first-ever green bond transaction. The money raised will go to projects in six categories eligible under ING’s newly established green bond framework, including renewable energy, green buildings, public transport, waste, water and energy efficiency. We have chosen a broad selection of sectors, which reflects our ambition to support sustainability across all industries and sectors.
Real Estate & Other Real Estate & Other (RE&O) focuses on a smooth divestment of the remaining real estate portfolio of the former Real Estate Development and Real Estate Investment Management operations. RE&O also includes General Lease activities outside the Benelux and Poland which have been discontinued. RE&O continued to successfully complete the divestments of various large real estate exposures, for example in the US and the Netherlands. With this further reduction, the divestment plan is nearly completed. For this reason, the remaining activities of RE&O will be transferred to ING Corporate Investments as per 2016.
Financial Markets Financial Markets (FM) is a well-diversified business targeting developed markets and fast-growing economies, focusing on rates and currencies in addition to credit products. FM is a client-driven business
Geopolitical unrest in Ukraine continued to strain relations between Russia, Europe and the US. The Ukraine lending portfolio continued to be under pressure, but was manageable. The quality of our Russian portfolio remained strong, with the non-performing loans ratio stable at 3 percent.
Non-financial dilemmas In addition to the more traditional financial sector regulation, regulators are starting to show an interest in sustainability-based financial risk. One example is the potential financial risks of climate change regulation. Prior to the 2015 Paris Climate Change Conference, we committed to continue to reduce our global credit exposure to thermal coal-related businesses.
ING acted as a joint lead arranger and bookrunner in the successful closing of one of the largest project finance transactions in the US: the USD 11.5 billion financing of Cheniere’s Corpus Christi Gas Liquefaction Project. The project covers the development, construction and operation of the first large-scale greenfield liquefied natural gas export terminal in the United States. In addition to project financing, we helped the client to hedge their interest rate exposure prior to financial close of the transaction. This allowed them to benefit from the low interest rate environment at that time.
Many challenges remain, but we can be proud of our achievements in 2015.
Our culture was furthered strengthened when 96 percent of employees in the Netherlands took the Banker’s Oath in 2015. The Oath is a set of principles that reconfirms the industry’s commitment to ethical behaviour and includes a disciplinary sanction mechanism for Netherlands-based employees. Oath taking has been a requirement for members of the Executive and Supervisory Boards in the Netherlands since 1 January 2013.
The Orange Code comprises: Values that set the standard – the non-negotiable promises we make to the world and the principles we stick to no matter what. • We are honest • We are responsible • We are prudent
ING Behaviours - the commitments we make to each other and the standards by which we will measure each other’s performance. • You take it on and make it happen • You help others to be successful • You are a step ahead
People – continued or supporting them in learning new skills to better equip them for their next role, whether that be inside or outside ING. The ING Mobility Centre provides resources and guidance to employees that are made redundant.
Development and training We need our people to have the right skills so we can deliver on our business strategy, offer top-class customer service and make it possible for them to develop their full potential. We encourage employees to take the lead in their own personal and career development. We allocate a budget for employees for training, professional development and personal development. In 2015, we invested EUR 68 million in learning and development.
The IITP is made up of five tracks: Wholesale Banking, Retail Banking, Finance, Risk and IT and is primarily delivered by ING’s own staff. In 2015, the IITP comprised 39% female and 61% male trainees, divided into 25% retail, 43% Wholesale Banking and 32% support function trainees. Since 2008 the programme has attracted a total of 863 trainees. It is our intention for 50 percent of IITP trainees to be female by 2016.
Compensation The primary objective of our remuneration policy is to retain and recruit highly qualified employees and bring new talent into the organisation. In determining compensation, we consider scope of responsibilities, complexity, alignment of risk and rewards, legislation and the long-term objectives of the company. Besides remuneration, employees frequently cite culture, development opportunities and other benefits as factors influencing their decision to join or remain with ING.
We always aim to treat employees with respect and communicate with them fairly and transparently. How we consult employees depends on local legislation and culture. In some countries, employee consultation is a legal requirement. In many European countries, employee consultation is arranged via works councils. At Group level, we aim to encourage local employee participation in countries where employee consultation is not already formally established.
Where countries have weaker labour laws we abide by our own human rights policy, developed in accordance with the International Labour Organisation convention, to protect working conditions.
• An apprenticeship for socially disadvantaged teenagers provides special development support so they can pursue careers in office management.
We are also in the process of setting up a completely new infrastructure organisation (“Bank Infra”), which will, over time, provide standardised global infrastructure services to all ING business units. The Bank Infra organisation will function as a broker, offering the best and most modern infrastructure services, scalable on-demand, through carefully selected partners. Bank Infra will initially provide global data centre, cloud, security and workplace services. Build and engineering activities, as well as Operations, will be split and managed outside of the Netherlands.
Accelerating the pace of innovation Innovation at ING is focused on bringing better solutions to customers faster. It is about sourcing fresh ideas that improve the customer experience, selecting the best ones and then successfully implementing those ideas in new products and services. We do not innovate for the sake of it, nor for what we call “gadgetry”, but instead focus all innovation efforts on customers and our Customer Promise.
Qustomer ING has acquired Qustomer, an innovative loyalty platform in Belgium. The aim is to combine Qustomer’s features with ING’s own innovations in the area of payments to create an integrated shopping experience. At ING, we’re always looking for the next step ahead.
In 2015, the divestment of our stake in Voya Financial Inc. further strengthened the capital base as did several transactions in NN Group shares, which resulted in the deconsolidation of NN Group as of the end of May 2015. These transactions not only improved ING Group’s Common Equity Tier 1 ratio, they also converted the double leverage into a cash surplus. The reduction of our
Execution Value creation /risk taking Alignment between risks taken and the risk appetite
We believe that technology and innovation will play a crucial role in the future of banking in general, and in ING’s strategy in particular. The growth of digital distribution and communication channels has increased the speed and convenience for our customers in conducting their banking business with us. Customer demand for banking services anytime and anywhere changes the way customers interact with the bank. We are committed to meeting the demand for convenience without compromising security. As stability of our IT systems and data security are very material to our stakeholders, ING continues to implement and improve comprehensive prevention, detection and responsive measures to defend customers, information and systems against cyber-attacks.
A comprehensive chapter on ING’s risk management practices is part of the consolidated annual accounts of this Annual Report.
Managing risks Effective risk management continuously pursues the right balance between creating value and mitigating the potential impact of unexpected events. At ING we continually challenge our understanding, measurement and management of risk. We combine advanced technology and common sense to further strengthen our strategy while retaining the trust of our stakeholders. This is even more important in today’s competitive environment.
2015 developments Despite some signs of recovery, the uncertainty in the macroeconomic environment persisted throughout 2015. Political and economic instability in Greece and slowing growth in the Chinese economy impacted markets worldwide and slowed down a recovery of the eurozone economy. At the same time, ING faced a persistent low interest rate environment that puts pressure on the net interest margin. The ongoing conflicts in the Middle East and Russia/Ukraine, as well as volatility in commodity prices further impacted the global macro-economic environment.
We continue to screen all ING corporate clients against our ESR Framework for the entirety of our relationship. The ESR Framework incorporates assessment tools that are used in ING’s mainstream processes and systems. It is therefore fully integrated into regular client and transaction reviews. We review environmental and social risks for all lending transactions on a yearly basis following annual credit reviews. ESR transactions where funds will be used for project financings require enhanced ESR due diligence. Such enhanced ESR evaluation is also required for any high-risk transactions, such as those that impact indigenous people.
CRR/CRD IV and upcoming regulations As the next phase in regulatory requirements on banks’ risk and capital management, the regulators are focusing on the required capital calculations across banks. Since the financial crisis, there has been much debate on the risk-weighted capitalisation of banks, and specifically on the internal models used to determine banks’ capital requirements and the variation in the outcome of these models across banks.
In addition, the increasing divergence of a level playing field in Europe remains a concern for ING. With the harmonization of supervision in Europe through the Single Supervisory Mechanism progressing, we see a convergence of capital requirements as reflected in the published SREP requirements by various banks. At the same time, this trend is being impeded by national competent authorities setting macro-prudential buffers that significantly increase common equity Tier 1 requirements. For example, ING as a global systemically important bank (G-SIB), is required to hold 1% additional common equity Tier 1 capital which is intended to address risks associated with systemically important financial institutions. For example, in some jurisdictions like the Netherlands, a 3% systemic risk buffer is imposed, which exceeds the G-SIB requirement. Since most countries within the SSM have not imposed any macro-prudential buffers beyond the G-SIB buffer, this undermines the level playing field between ING and its peers, particularly within the eurozone.
Bank Recovery and Resolution Directive Since its adoption by the European Parliament in 2014, the Bank Recovery and Resolution Directive (BRRD) has become effective in most EU countries after transposition into local law, including in the Netherlands. The BRRD aims to safeguard financial stability and prevent public funding of losses, and it provides rules on insolvency proceedings in the case of failing banks. To comply with the new rules, banks across the EU need to have recovery plans in place and to cooperate with resolution authorities to determine the preferred resolution strategy. To ensure the effectiveness of the resolution process, the BRRD requires banks to meet
ING’s Capital Management strategy is driven by its strategic aims and its risk appetite. Our policy is to retain sufficient financial flexibility to implement ING’s strategy in all market conditions. ING’s risk appetite statements form the basis of the capital plan. The capital plan sets targets above the minimum regulatory requirements.
Dividend The Executive Board proposes to pay a total dividend of EUR 2,515 million, or EUR 0.65 per (depositary receipt for an) ordinary share, over the financial year 2015. This is subject to the approval of shareholders at the Annual General Meeting in April 2016. Taking into account the interim dividend of EUR 0.24 per ordinary share paid in August 2015, the final dividend will amount to EUR 0.41 per ordinary share and be paid in cash. The total amount of EUR 1,586 million is covered by the remaining balance of “interim profits not included in CET1 capital” at year-end 2015.
ING is committed to maintaining a healthy Group CET1 ratio in excess of 12.5% and to returning capital to our shareholders. ING aims to pay a progressive dividend over time.
Developing best practice Beyond fostering a higher environmental and social performance of our portfolio, ING actively collaborates with other institutions and regulators to address environmental challenges that are specific to the sector and not just to a client.
ING has also joined the Round Table on Responsible Sustainable Palm Oil to improve our understanding of the sector and support clients (traders, plantations or retailers) in facing the challenges and opportunities of dealing with palm oil commodities.
• Economic capital. Although it is currently not a constraining factor, economic capital is used to manage the Bank’s risk profile and to set limits.
The Tier 1 ratio increased from 13.3% to 13.9%, primarily reflecting an increase in capital following the issuance by ING Group of USD 2.25 billion of CRD IV eligible AT1 securities in April 2015. These external securities were on-lent to ING Bank, partially replacing internal securities. ING Bank decreased Tier 2 capital by redeeming EUR 1.0 billion of non CRD IV eligible Tier 2 securities in September and EUR 20 million Tier 2 capital in December to align with earlier issued CRD IV securities. The merger between ING Vysya Bank and Kotak Mahindra Bank, which was completed on 7 April, had a positive impact of EUR 0.4 billion on ING Bank’s Common Equity Tier 1 capital.
reduced from 68.1% to 54.6%. Subsequently in May, June and September ING continued to divest its shares in NN Group. These transactions reduced ING Group’s stake in NN Group’s outstanding capital in 2015 from 54.6% to 25.8%. In early 2016, ING Group sold a tranche of NN Group and exchanged another tranche for anchor investment notes, reducing ING Group’s total stake to 14.1%. These transactions have had a strong positive impact on ING Group’s fully-loaded CET1 ratio, reflecting the net profit on Voya and a reversal of capital deductions of significant investments in financial institutions (NN Group and Voya) under CRR/ CRDIV capital rules. ING Group is well on track to sell NN Group by the end of 2016. This has unlocked significant flexibility. We will divest our remaining stake in NN Group while maintaining an orderly market.
The Group’s phased-in CET1 ratio at the end of the year decreased by 0.6% from the previous year to 12.9%, largely due to the increase of risk-weighted assets. The fully loaded and phased-in capital ratios further converged. At the start of 2015, the regular (annual) adjustment to align the phased-in calculations towards the fully loaded approach took place. This is primarily reflected in the phasing-in of positive revaluation reserves for equity securities and investments.
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,870.2 3,858.9 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 1.5 4.3 (Depositary receipts for) ordinary shares outstanding in the market 3,868.7 3,854.6
Sustainalytics Score: 88 (out of 100) Position: 3 (out of 409 financial peers)
Score: 77 (out of 100) Position: 3 (out of 148 financial peers)
Score: 100 for disclosure (out of 100) and A for performance Position: Included
Score: 96 for disclosure (out of 100) and B for performance Position: Included
Score: 93 for disclosure (out of 100) and B for performance Position: Included
Record date for interim dividend 2016 entitlement (Euronext Amsterdam ) 8 August 2016 2 Payment date interim dividend 2016 (Euronext Amsterdam) 15 August 2016 2 Record date for interim dividend 2016 entitlement (NYSE) 15 August 2016 2 Payment date interim dividend 2016 (NYSE)
Aris Bogdaneris Photos taken at ING’s Strategy Event for senior leaders, October 2015
W.F. (Wilfred) Nagel (59) member and CRO Executive Board ING Group and member and CRO Management Board Banking Wilfred Nagel was appointed a member of the Executive Board of ING Group on 14 May 2012. He is responsible for all of ING’s risk management departments. Wilfred Nagel became a member and CRO of the Management Board Banking on 5 October 2011.
W.L.A. (Bill) Connelly (58) member Management Board Banking and head of Wholesale Banking William Connelly was appointed to the Management Board Banking as from 1 January 2011. He is also head of Wholesale Banking. Prior to this appointment, William Connelly combined the roles of global head of Wholesale Banking Services and CEO of ING Real Estate Investment Management.
R.M.M. (Roel) Louwhoff (50) member Management Board Banking and chief operations officer Roel Louwhoff was appointed a member of the Management Board Banking on 1 May 2014. He is also chief operations officer (COO) and has global responsibility for Operations & IT, change management and procurement at ING Bank. Prior to this appointment, Roel Louwhoff was CEO of BT Operate.
Scope and boundaries Through our materiality analysis we ensure that all material economic, social and environmental topics are addressed in this report. The report covers the period 1 January to 31 December 2015 and is published on 2 March 2016. The data and content in the integrated report and Non-finance Annex aim to provide a concise, accurate and balanced account of ING’s economic, social and environmental performance in 2015. Depending on the topic, our approach and performance are explained either in text, by referring to our policies or by providing data and progress on targets.
For non-financial data, the detailed scope of the different performance indicators is highlighted in ING’s sustainability reporting protocol. www.ing.com/15ar10
Guidelines ING’s integrated report, including the Non-financial Appendix, is prepared in accordance with the G4 Sustainability Reporting Guidelines and the Financial Services Sector Supplement (comprehensive level) and Dutch Accounting Standard 400. The content and
The Corporate Governance section starting on page 70 and the paragraphs of the Remuneration report “Remuneration policy for all staff” and “2015 Remuneration all staff” on page 101 are incorporated by reference in this Report of the Executive Board.
See the assurance report of the independent auditor on page 62. The chapters “Risk and capital management” and “Remuneration report” are an integral part of the audited consolidated annual accounts.
EY concluded that these accounts give a true and fair view of the financial position of ING Group as at 31 December 2015, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
See the report of the independent registered public accounting firm on page 90.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.
Conclusion Based on our procedures performed, and with due consideration of the limitations described in the paragraph “Limitations in our scope”, nothing has come to our attention that causes us to conclude that the sustainability information in the Report, in all material respects, does not provide a reliable and appropriate presentation of the policy of ING for sustainable development, or of the activities, events and performance of the organization relating to sustainability during 2015, in accordance with the “Sustainability Reporting Guidelines” G4 (option Comprehensive) of the Global Reporting Initiative (GRI) and the reporting criteria developed by ING as disclosed in the chapter “About this report” of the Report.
In the chapter “Report of the Supervisory Board” you can read more about the subjects we discussed and about the most important topics on our agenda in 2015.
Jeroen van der Veer Chairman of the Supervisory Board of ING Group
Consistent customer focus In 2015, ING moved a step ahead with its strategy. ING needs to evolve to stay relevant for customers. We know that change is all around us. And that competition is growing. It is essential that ING address these competitive challenges and seize opportunities.
Apart from closely monitoring the financial results in 2015, the Supervisory Board’s main focus points during 2015 were the execution of the bank’s Think Forward strategy that was launched in 2014, the further divestment of Voya Financial and NN Group and the developments in the regulatory and external supervision landscape. In addition, ING’s dividend policy with a resumption of regular dividend payments to its shareholders in 2015 was on the Supervisory Board’s agenda.
The committees of the Supervisory Board discussed a range of subjects, the main ones being the quarterly results, corporate governance, risk management and human resources.
Furthermore the Supervisory Board self-assessment was on the agenda. The action points resulting from the 2014 self-assessment were acted upon during the year. As was the case in 2014, an independent external party facilitated the 2015 self-assessment process for the Supervisory Board, its committees and its members by drafting the questionnaires as well as the reports with the results. The questionnaires incorporated elements based on the renewed Dutch Banking Code that came into effect on 1 January 2015. For 2015, input was also requested from several executives that regularly interact with the Supervisory Board and attend Supervisory Board meetings. The questionnaires were completed in December 2015, after which bilateral meetings were held between the chairman of the Supervisory Board and each member (for the chairman, a bilateral meeting was held between the vice-chairman and the chairman). The respective committee results were subsequently discussed in each committee meeting, with the overall results and conclusions being discussed in the internal Supervisory Board meeting (without the Executive and Management Board Banking members present). In general, the performance of the Committees was rated highly overall and the performance of the Supervisory Board was considered to have improved since last year’s review. A number of suggestions were made as priorities for improving the performance of the Supervisory Board over the coming year, among others including focusing on milestones on strategy, and the digital / IT strategy in particular. Also continuing close monitoring and assessing the developments in the regulatory and external supervision landscape as well as in ING’s businesses were identified as key priorities , to be supported by educational sessions were deemed necessary .
The draft agenda for the 2015 Annual General Meeting was discussed and approved, including the publication on the 2014 application of the Dutch Banking Code.
Other important topics on the agenda related to risk modelling and model validation, the regulatory risk aspect, ensuring compliance with the CRD IV / CRR requirements, the ECB’s thematic review on risk governance and risk appetite as well as the ECB’s on-site inspection on compliance.
Various aspects were taken into account, such as the minimum and optimal size of a Supervisory Board combined with a sound and reasonable balance in representation of geographies, gender, and financial and generalist expertise. A number of potential candidates were discussed. This resulted in a short list of potential candidates. It was decided to nominate a new candidate for appointment by the 2016 Annual General Meeting, for which ING is awaiting the regulator’s final approval.
All relevant items discussed by the Audit Committee were reported to the Supervisory Board with the Supervisory Board approving those items as required from a governance perspective. Directly following the Audit Committee meetings, the members of the Audit Committee met with the internal and external auditors to seek confirmation that all relevant topics were discussed in the Audit Committee meetings.
In the context of a dialogue with the ECB on ING’s governance, an assessment was done on a one-tier versus two-tier board structure. Based on an external analysis the Committee concluded that there were no compelling reasons for ING to shift from a two-tier to a one-tier board. ING actively supports and promotes additional interaction between the Supervisory Board and the ING organisation. This is done to give further background to the formal agenda items to further strengthen current practice. Additional interaction focuses on discussion and information sharing and continues to be in line with Dutch legal requirements and already existing accompanying roles, responsibilities and mandates of the boards and is in addition to and without prejudice to statutory reporting lines.
Read more in the “Corporate governance” chapter on the composition of the Supervisory Board committees at year-end 2015.
Improving diversity at higher management levels, senior management succession planning and accelerated refreshment continued to be focus points.
In addition, the proposed 2015 performance objectives for the CEO and the Management Board Banking members were approved.
Similar to the Nomination Committee, the Remuneration Committee discussed the ECB request for access to the names of ING employees referred to in Article 92 (2) CRD IV in the context of ING remuneration proposals and CRD IV application as discussed at board level.
Dutch Banking Code The Dutch Banking Code (“Banking Code”), a revised version of which was adopted by the Dutch Banking Associations in 2014, is applicable to ING Bank N.V. and not to ING Group. The Banking Code can be downloaded from the website of the Dutch Banking Association (www.nvb.nl). Its application to ING Bank is described in “Application of the Dutch Banking Code by ING Bank N.V.”, available on the ING Group website (www.ing.com). This is to be read in conjunction with and deemed to be incorporated in the Annual Report of ING Bank N.V. ING Group voluntarily applies the principles of the Banking Code regarding remuneration to the members of its Executive Board and considers these principles as a reference for its own corporate governance. ING Group’s remuneration policy for the Executive Board and senior management is compliant with these principles.
Depositary receipts More than 99.9 percent of the issued ordinary shares are held by ING Trust Office (Stichting ING Aandelen). In exchange for these shares, ING Trust Office has issued depositary receipts. These depositary receipts are listed on various stock exchanges (see page 56 for an overview of the listings). Depositary receipts can be exchanged upon request of the holders of depositary receipts for non-listed ordinary shares, without any restriction, other than payment of an administrative fee of one eurocent (EUR 0.01) per depositary receipt with a minimum of 25 euros (EUR 25.00) per exchange transaction.
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: • ING Group has a two-tier board structure, in contrast to the one-tier board structure used by most US companies. In the Netherlands, a public limited liability company (naamloze vennootschap) with a two-tier board structure has an executive board as its management body and a supervisory board that advises and supervises the executive board. In general, members of the executive board are employees of the company while members of the supervisory board are not. The latter are often former state or business leaders and sometimes former members of the executive board. A member of the executive board or other officer or employee of the company cannot simultaneously be a member of the supervisory board. The supervisory board must approve specified decisions of the executive board. Under the Corporate Governance Code, all members of the supervisory board, with the exception of not more than one person, should be independent. The definition of independence under the Corporate Governance Code, however, differs in its details from the definitions of independence under the NYSE listing standards. In some cases, Dutch requirements are stricter: in other cases the NYSE listing standards are the stricter of the two. The Audit Committee, Risk Committee, Remuneration Committee, Nomination Committee and Corporate Governance Committee of ING Group are comprised of members of the Supervisory Board.
• Consistent with Dutch law, the board committees generally act only in an advisory capacity to the supervisory board and, for instance, ING’s compensation committee may not directly set the compensation of the CEO.
• Without such delegation, should ING Group wish to issue new shares, there is an increased risk that conditions in the financial markets may change during the time needed to convene a General Meeting, especially given the 42-day statutory convocation period. In view of the importance of flexibility with respect to the issuance of shares, the Executive Board and the Supervisory Board will periodically evaluate the delegation of authority to issue shares and, if necessary, make adjusted proposals to the General Meeting.
Pursuant to the first part of this authorisation, no more than 10 per cent of ING Group’s share capital may be held as treasury shares. Pursuant to the second part of this authorisation, ING Group may repurchase an additional 10 per cent of its issued share capital in the event of a major capital restructuring; a proposal to cancel the shares acquired under the second part of this authorisation must be submitted to the General Meeting at the first available opportunity.
Share issuances are decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting has been asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights to existing shareholders. The powers delegated to the Executive Board are limited: • In time: powers are delegated for a maximum 18-month period.
Corporate Governance – continued b. ING Group if, as a result of which acquisition or disposal his net short position reaches, exceeds or falls below 0.5% of the issued share capital of ING Group and each 0.1% above that.
ING Group publishes a comprehensive quarterly disclosure package that includes extensive and detailed financial figures with relevant explanatory remarks. This information is discussed thoroughly on the day of the earnings release during media and analyst and investor conference calls. These are broadly accessible to interested parties. The publication dates of quarterly earnings releases are announced in advance on ING Group’s website.
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation), are shown on page 56.
Pursuant to Regulation (EU) no. 236/2012 of the European Parliament and the Council on short selling and certain aspects of credit default swaps, any person who acquires or disposes of a net short position relating to the issued share capital of ING Group, whether by a transaction in shares, depositary receipts or American depositary receipts, or by a transaction creating or relating to any financial instrument where the effect or one of the effects of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a change in the price of such shares, depositary receipts or American depositary receipts, is required to notify, in accordance with the provisions of the above-mentioned Regulation: a. The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) if, as a result of which acquisition or disposal his net short position reaches, exceeds or falls below 0.2% of the issued share capital of ING Group and each 0.1% above that.
• The distribution of dividends or other distributions; • The appointment and/or reappointment of members of the Executive Board and the Supervisory Board; • Any other items requiring shareholder approval under
In the event that non-public, price-sensitive information is inadvertently disclosed during any bilateral contacts, ING Group will publicly announce such information as soon as possible.
Approximately 25 analysts actively cover and frequently issue reports on ING Group. A list of these analysts can be found under “Analyst Coverage” in the Investor Relations section of ING Group’s website. During 2015, ING Group did not provide any form of compensation to parties that are directly or indirectly involved in the production or publication of analysts’ reports, with the exception of credit-rating agencies.
ING Group participated at 17 industry conferences during the course of 2015. In total, there were approximately 589 meetings (including conference calls) with institutional investors and/or analysts. Conference presentations and face-to-face meetings with investors and/or analysts took place in 33 different cities across the globe.
The geographical distribution of ING Group’s investor base is diverse – an estimated 31% of our shares are held in the US, 24% in the UK, 11% in France, 8% in Germany, 5% in Switzerland, 4% in the Netherlands, 9% in rest of Europe and 8% in the rest of the world.
General Meetings are webcast via ING Group’s website (www.ing.com), so that shareholders and holders of depositary receipts who do not attend the General Meeting in person may nevertheless follow the course of affairs in the meeting online.
The following restrictions apply to the granting of voting proxies to holders of depositary receipts by ING Trust Office: • The relevant holder of depositary receipts must have announced his or her intention to attend the General Meeting observing the provisions laid down in the Articles of Association.
According to the Banker’s Oath that was taken by the members of the Executive Board, they must carefully consider the interests of all stakeholders of ING. In that consideration they must give paramount importance to client’s interests.
ING Group indemnifies the members of the Executive Board against direct financial losses in connection with claims from third parties, as far as permitted by law, on the conditions laid down in their employment or commission contract. ING Group has taken out liability insurance for the members of the Executive Board.
ING Group aims to have an adequate and balanced composition of its Executive Board. The Supervisory
Moreover, the approval of the General Meeting is required for Executive Board decisions that would be considered greatly to change the identity or nature of ING Group or its enterprise. This includes resolutions to transfer or otherwise assign all, or substantially all, of the enterprise of ING Group or its subsidiaries as a consequence of which such resolutions ING Group or the group of companies over which ING Group exercises control, would cease to engage in either insurance or banking activities.
Appointment and dismissal Members of the Supervisory Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. The list will be rendered nonbinding if a resolution of the General Meeting to that effect is adopted by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the suitability and reliability requirements set out in the Dutch Financial Supervision Act and must continue to meet these while in office.
ING Group indemnifies the members of the Supervisory Board against direct financial losses in connection with
Committees of the Supervisory Board On 31 December 2015, the Supervisory Board had five standing committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. Below you will find an organisational chart of the five committees of the Supervisory Board.
The organisation, powers and conduct of the Supervisory Board are detailed in the Supervisory Board Charter.
Under special circumstances however, the Supervisory Board may deviate from this general rule, for instance in order to maintain a balanced composition of the Supervisory Board and/or to preserve valuable expertise and experience. As a general rule, members of the Supervisory Board shall also resign at the end of an Annual General Meeting in the year in which they attain the age of 70 and shall not be reappointed. However, the Supervisory Board may, at its discretion, decide to deviate from this age limit. The schedule for resignation by rotation is available on the website of ING Group (www.ing.com).
Ancillary positions/conflicting interests Members of the Supervisory Board may hold various other directorships, paid positions and ancillary positions and are asked to provide details on these. The Dutch Financial Supervision Act, implementing the fourth EU Capital Requirements Directive (CRD IV), restricts the total number of supervisory board positions or non-executive directorships with commercial organisations that may be held by a Supervisory Board member to four, or to two, if the Supervisory Board member also has an executive board position. The European Central Bank may permit a Supervisory Board member to fulfil an additional supervisory board position or non-executive directorship. In the calculation of these maximums, positions with, inter alia, subsidiaries or qualified holdings are not taken into account. Such positions may not conflict with the interests of ING Group. It is the responsibility of the individual member of the Supervisory Board and the Corporate Governance Committee to ensure that the directorship duties are performed properly and are not affected by any other positions that the individual may hold outside ING Group.
Remuneration and share ownership Remuneration of the members of the Supervisory Board is determined by the General Meeting and is not dependent on the results of ING Group. Details of the remuneration are provided in the Remuneration report on page 98. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for longterm investment purposes. Details are given on page 99. Transactions by members of the Supervisory Board in these shares and depositary receipts for shares are subject to the ING regulations regarding insiders.
ING regulations regarding insiders are available on the website of ING Group (www.ing.com).
J. (Jeroen) Van der Veer (chairman) (Born 1947, Dutch nationality, male; appointed in 2009, term expires in 2017) Former chief executive officer of Royal Dutch Shell plc.
Other relevant ancillary positions: Member of the Supervisory Board of Het Concertgebouw N.V., member of the Supervisory Council of Nederlands Openluchtmuseum, member of Supervisory Council of Nationale Toneel (theatre), Chairman of the Supervisory Council of Stichting Platform Bèta Techniek, Chairman of the Supervisory Council of the Technical University of Delft, Chairman of the Council of Rotterdam Climate Initiative, member of the Governing Board of the European Institute for Technology & Innovation (EIT), Vice-chairman of the Global Agenda Council “The future of oil and gas” of the World Economic Forum.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING Group’s internal and external auditors. On 31 December 2015, the members of the Audit Committee were: Hermann-Josef Lamberti (chairman), Eric Boyer de la Giroday, Isabel Martín Castellá, and Robert Reibestein. Following the unforeseen departure in September 2015 of Carin Gorter, no other member of the Audit Committee is considered a “financial expert” as defined by the SEC in its final rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. Eric Boyer de la Giroday is a financial expert as defined in the Dutch Corporate Governance Code considering his academic background as well as his knowledge and experience in his previous role as board member and vice-chairman of ING Groep N.V. and ING Bank N.V.
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING as a whole as well as the structure and operation of the internal risk management and control systems. On 31 December 2015, the members of the Risk Committee were: Robert Reibestein (chairman), Eric Boyer de la Giroday, Hermann-Josef Lamberti and Jeroen van der Veer.
Changes in the composition In May 2015, the General Meeting appointed Mariana Gheorghe to the Supervisory Board, while Joost Kuiper and Henk Breukink were reappointed. Carin Gorter stepped down from the Supervisory Board on 3 September 2015.
Defense and Space Company N.V.), Chairman of the Supervisory Board of Hypo Group Alpe Adria (HAA), SEE (Austria), member of the Supervisory Board OpenXchange AG, member of the Supervisory Board of Stonebranch. The number of positions held by HermannJosef Lamberti currently exceeds the maximum allowed under CRD IV. Steps are being taken to ensure that he will be fully compliant with the CRD requirements in the future.
Ancillary positions pursuant to CRD IV: member of the Supervisory Board of ING Groep N.V. member of the Supervisory Board of ING Bank N.V. Chairman of the Board of Directors of ING Belgium S.A./N.V.
External auditor Ernst & Young Accountants LLP (“EY”) was appointed to audit the financial statements of ING Group for the financial year 2015, to audit the effectiveness of internal control over financial reporting on 31 December 2015, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Additionally EY performs a review of the sustainability information in the annual report to obtain limited assurance about whether this information is free from material misstatement.
At the annual General Meeting held on 11 May 2015, KPMG Accountants (“KPMG”) was appointed as the new external audit firm for ING Group for the audit of the annual accounts for the financial years 2016 through 2019. The appointment of KPMG was the result of a thorough tender process overseen by the Audit Committee of the Supervisory Board and in accordance with ING Group’s policy on the Auditors’ Independence.
More information on ING Group’s policy on external auditor independence is available on the website of ING Group (www.ing.com).
Change of control clauses in material agreements ING Group is not a party to any material agreement that becomes effective or is required to be amended or terminated, in case of a change of control of ING Group following a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. ING Group subsidiaries may have customary change of control arrangements included in agreements related to various business activities, such as joint-venture agreements, letters of credit and other credit facilities, ISDA-agreements, hybrid capital and debt instruments, reinsurance agreements and futures and option trading agreements. Following a change of control of ING Group (as the result of a public bid or otherwise) such agreements may be amended or terminated, leading, for example, to an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover, and liquidation of outstanding futures and option trading positions.
In accordance with the Articles of Association and the Trust Conditions, ING Trust Office voted at its own discretion on the shares for which it did not issue voting proxies and did not receive voting instructions, representing around 43 percent of the total votes that might be cast at the AGM 2015. In voting these shares, ING Trust Office was guided primarily by the interests of all holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprise in accordance with article 4 of the Trust Conditions and the best-practice and best-practice provision IV.2.6 of the Dutch Corporate Governance Code. ING Trust Office voted on these shares in favour of all voting items on the agenda of the AGM.
ING Trust Office promotes the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation in the decision-making process in annual general meetings of shareholders and holders of depositary receipts and promotes the execution of voting rights in a transparent way. At the same time it aims to prevent a situation occurring where a minority of shareholders and holders of depositary receipts could use a chance majority of votes to the disadvantage of the shareholders and holders of depositary receipts nor present nor represented at a general meeting of ING Group.
Meeting of holders of depositary receipts on 18 November 2015 According to the Trust Conditions, ING Trust Office may consult holders of depositary receipts in a separate meeting if and when it considers this necessary or desirable. In addition, one or more holders of depositary receipts who jointly hold at least 10 percent of the total number of depositary receipts issued by ING Trust Office may request the Board in writing, setting out the matters to be considered in detail, to convene a meeting of holders of depositary receipts.
Depositary-receipts structure During the years 2010-2015, participation of shareholders, other than ING Trust Office, and holders of depositary receipts in the decision-making process in annual general meetings of ING Group continually increased from 41.3 percent to around 57 percent.
No external expert advice was called in by the Trust Office in 2015.
Management believes the foregoing efforts will effectively remediate the material weakness. As the remediation is implemented, management may take additional measures or modify the remediation plan described above.
To: the Shareholders, the Supervisory Board and Executive Board of ING Groep N.V. We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on ING Groep N.V.’s internal control over financial reporting based on our audit.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ING Groep N.V. as of 31 December 2015 and 2014, and the related consolidated profit and loss accounts, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of changes in equity for each of the three years in the period ended 31 December 2015. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of those financial statements, and this report does not affect our report dated 29 February 2016, which expressed an unqualified opinion on those financial statements.
In determining compensation of ING’s leadership, a variety of factors are taken into consideration, such as the complexity of functions, the scope of responsibilities, the international character of the group, the alignment of risks and rewards, national and international legislation, the discussion in society about remuneration and the long-term objectives of ING and its stakeholders. These factors differ for each role, line of business and country. At the same time, national and international standards regarding responsible and sound remuneration have been continuously changing over the past years. As far as possible for a global financial institution of its size, ING takes into account all of the different standards applied within similar financial institutions in the various countries in which it operates.
Based on the above policy, total direct compensation is benchmarked against a peer group of companies that, in the opinion of the Supervisory Board, are comparable with ING in terms of size and scope. The Supervisory Board has determined that based on a combination of factors including international scope, complexity, revenue, assets and market capitalisation the companies in the Dow Jones Euro Stoxx 50 index are the appropriate peer group for ING. These are 50 companies, including ING, in a range of financial and non-financial industries from 12 countries within the eurozone, mainly operating in an international context.
2015 Executive Board performance evaluation ING’s Think Forward strategy is on track as evidenced by the achievements in 2015. Financial performance across Retail and Wholesale Banking improved considerably and ING is able to achieve or exceed the (financial) ambitions it has formulated in the areas of return on equity, Core Tier 1 ratio, cost/income ratio and the number of primary customer relationships. In addition to this, ING’s performance in 2015 in non-financial areas such as strategy implementation, capability development, innovation and sustainability is helping ING to create the conditions for future, long-term success of ING. Finally, ING has achieved the number one Net Promotor Score in seven retail countries, demonstrating our customer servicing approach is appreciated. At the same time, ING is being recognised for its innovation as evidenced by the awards it has won in several countries for being the most innovative bank.
Non-financial performance indicators: • Ensuring Think Forward Strategy is fully embedded in key financial and people processes of the bank
• The Think Forward strategy simulation was rolled out to senior management.
• A Strategic Recruitment Plan was approved to ensure ING’s Employer Brand is fully aligned with its commercial brand whilst enhancing the standards used in employee selection.
• A payment solution called Payconiq was developed and piloted in Belgium, to leverage pending regulations (PSD II).
• Launched a pilot for instant lending for small business loans in Spain in partnership with Kabbage, with plans for further roll-out in other countries.
The table below shows the pension costs of the individual members of the Executive Board in 2015, 2014 and 2013.
2 The number of shares is based on the average ING stock price on the day on which the 2015 year-end results were published. The shares will be awarded in May.
The Supervisory Board will continue to monitor the development of international remuneration policies and the benchmarks and will continue to support the Executive Board remuneration policy of compensating slightly below the median of the Euro Stoxx 50 benchmark. As such annual reviews will be held and trends will be looked at.
2015 Remuneration Supervisory Board 1 amounts in thousands of euros Remuneration VAT Remuneration VAT Remuneration VAT
Eric Boyer de la Giroday 2 47,565 43,094 1 Hermann-Josef Lamberti is a member of the Supervisory Board as of May 2013 2 Eric Boyer de la Giroday is a member of the Supervisory Board as of May 2014.
Performance or deferred shares Granting date Vesting date Nr. Of shares granted Nr. of shares vested Vesting price
2015 Remuneration Supervisory Board The table below shows the remuneration, including expense allowances and attendance fees per Supervisory Board member.
These proposed amendments to the current remuneration policy for the Supervisory Board will be put forward for adoption by the ING Shareholders at the 2016 AGM. If adopted, the amended policy will become effective as per 1 January 2016 amounts in euros Current 2008 Policy Proposed 2016 Policy Annual remuneration Chairman Supervisory Board Vice Chairman Supervisory Board Supervisory Board Member
− designated as at fair value through profit and loss 3,234 2,756
Total equity and liabilities 841,769 992,856 1 Shareholder’s equity (parent) and Other liabilities, as at 31 December 2014, are adjusted as a result of the change in the accounting approach for the NN Group
Diluted earnings per ordinary share from continuing operations 1.15 0.49 0.66
Share of other comprehensive income of associates and joint ventures –5 43 6
Comprehensive income attributable to: Equityholders of the parent 5,006 9,337 –3,750
– change in provisions for insurance and investment contracts –1,499 –3,527 –8,503
Investments and advances: – associates and joint ventures –40 –528 –68
Cash and cash equivalents at beginning of year 17,113 17,180 24,150
Effect of exchange rate changes on cash and cash equivalents –342 –4 882
As at 31 December 2015 Cash and cash equivalents includes cash and balances with central banks of EUR 21,458 million (2014: EUR 12,233 million; 2013: EUR 13,316 million). Reference is made to Note 35 ‘Cash and cash equivalents’.
Comparison of the Consolidated cash flow statements between 2015, 2014 and 2013 is impacted by NN Group. Included in the 2015 cash flow statement, are the cash flows of NN Group, for five months until deconsolidation at the end of May 2015. Comparative periods include NN Group for the years ended 31 December 2014 and 2013, respectively. Reference is made to Note 1 ‘Accounting policies’ for information on Changes in the composition of ING Group.
Remeasurement of the net defined benefit asset/liability 38 34 34 –10 24
Realised gains/losses transferred to the profit and loss account –94 –94 2 –92
Impact of partial divestment of NN Group –1,769 –1,769 3,042 1,273
Changes in the composition of the group and other changes1 60 60 –384 -324 1 Impact of IPO NN Group and Changes in composition of the group and other changes are adjusted as a result of the change in the accounting approach for the
Remeasurement of the net defined benefit asset/liability 38 –905 –905 –37 –942
Realised gains/losses transferred to the profit and loss account –114 –114 35 –79
Share of other comprehensive income of associates and joint ventures 6 6 6
Notes to the accounting policies Authorisation of annual accounts The Consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2015 were authorised for issue in accordance with a resolution of the Executive Board on 29 February 2016. The Executive Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Group are described in ‘ING at a glance’.
a) Changes in accounting policies in 2015 There were no changes in accounting policies effective from 1 January 2015.
The main changes in the presentation of the Consolidated annual accounts and related notes are as follows: • The layout of the Consolidated profit and loss account is changed to more clearly present the ‘Net result from continuing and discontinued operations attributable to Equityholders of the parent’; • The layout of the Consolidated profit and loss account is changed to present ‘Earnings per ordinary share’ and ‘Earnings per ordinary share from continuing operations’. Reference is made to Note 31 for ‘Earnings per ordinary share from discontinued operations’; • As of 2015, the line ‘Intangible amortisation and other impairments’ is included in ‘Other operating expenses’ and no longer as a separate line item in the Consolidated profit and loss account. Reference is made to Note 29 ‘Other operating expenses’; • As of 2015, the presentation of the table ‘Debt securities by type and balance sheet lines’ separately discloses the assets class Sub-sovereign Supranationals and Agencies’ (‘SSA’). Reference is made to Note 5 ‘Investments’; • Following the further restructuring of the insurance business in 2015, resulting in loss of control of NN Group and deconsolidation at the end of May 2015, insurance specific disclosures are condensed to those items relevant for purposes of current and comparative amounts and is mainly presented in Note 11 ‘Assets and liabilities held for sale’ (i.e. Critical and other accounting policies, ‘Proportional interest held and other key information’ related to NN Group and Voya). Similarly, Net results recognised in relation to insurance businesses are presented in Note 30 ‘Discontinued operations’ and Note 37 ‘Segments’; • As of 2015, the line Regulatory costs include contributions to the Deposit Guarantee Schemes (‘DGS’), the National Resolution Fund (‘NRF’) and local bank taxes mainly in the Netherlands, Germany, Belgium and Poland. Regulatory costs are no longer included in ‘Other operating expenses’ – Other. Reference is made to Note 29 ‘Other operating expenses’; and
• In 2015, ING changed the presentation of the components of equity as presented in the Parent company annual accounts. The changed presentation improves transparency of disclosures on the legal reserves and the non-distributable reserves. Reference is made to the Parent company annual accounts.
In May 2015, in order to fulfil its commitment to the European Commission (‘EC’), ING Group injected capital in NN Group by subscribing for newly issued shares for an amount of EUR 57 million. The transaction increased the ownership of ING in NN Group to 54.77%.
In May 2015, ING Group sold 45 million ordinary shares in NN Group. This transaction reduced ING Group’s interest in NN Group to 42.43%, resulting in ING Group losing control over NN Group. The share sale and deconsolidation of NN Group resulted in an after tax loss of EUR 1,224 million and is recognised in the profit and loss account in the line ‘Net result from disposal of discontinued operations’. The transaction had a negative impact of EUR 6,569 million, including the aforementioned loss, on the shareholder’s equity of ING Group. The profit and loss account of ING Group includes, in the line ‘Net result from discontinued operations’, the result of NN Group until deconsolidation at the end of May 2015.
Background information In April 2014, ahead of the intended NN Group Initial Public Offering (‘IPO’), ING Group secured investments from three Asian investors in NN Group by issuing subordinated notes, which were recognised on the balance sheet line ‘Subordinated loans’. In July 2014, at the time of the NN Group IPO, all notes became mandatorily exchangeable for NN Group shares and the first tranche was settled in NN Group shares. ING Group’s expected loss on the settlement of the two remaining tranches in NN Group shares was calculated as the difference between the carrying value of NN Group and the fair value of NN Group’s shares. The expected loss of EUR 1.012 million was recognised in July 2014 as a provision on the balance sheet in ‘Other liabilities’ with the corresponding debit recognised directly in ING Group’s shareholders’ equity. As a result of a decrease of the carrying value of NN Group, the difference between the carrying value of NN Group and the fair value of NN Group’s shares as at 31 December 2014 decreased by EUR 92 million to EUR 920 million.
In May 2015, ING Group reduced its stake in NN Group to 42.43% and deconsolidated NN Group. At the time of deconsolidation, the difference between the carrying value of NN Group (net of revaluation reserves) and the fair value of the entire remaining stake in NN Group was written off through the profit and loss account. For the shares expected to be delivered under the Anchor investment transaction, this difference had already been recognised as a provision in 2014, directly in shareholders’ equity. Therefore, the provision recognised for the second and third tranche of the Anchor provision was utilised, decreasing the total deconsolidation loss in ING Group’s profit and loss account, as reported in the second quarter of 2015, by EUR 1,001 1 million.
This change has no consequences for the accounting approach of other transactions which were part of ING’s divestment program.
For disclosure of the quantitative impact of the divestment of NN Group, as per 31 December 2014, reference is made to Note 54 ‘Other events’. Further reference is made to Note 13 ‘Equity’, Note 20 ‘Other liabilities’, Note 40 ‘Fair value of assets and liabilities’ and Note 43 ‘Liabilities by maturity’.
For further information on the above transactions, reference is made to Note 4 ‘Financial assets at fair value through profit and loss’, Note 5 ‘Investments’, Note 7 ‘Investments in associates and joint ventures’, Note 11 ‘Assets and liabilities held for sale’, Note 13 ‘Equity’, Note 14 ‘Subordinated loans’, Note 20 ‘Other liabilities’, Note 30 ‘Discontinued operations’ and Note 54 ‘Other events’.
The list of upcoming changes to IFRS which are applicable for ING Group: • Annual Improvements Cycle 2010 – 2012: • IFRS 2 Share-based Payment: Definitions of vesting conditions; • IFRS 3 Business Combinations: Accounting for contingent considerations in a business combination; • IFRS 8 Operating Segments: Aggregation of operating segments; • IFRS 8 Operating Segments: Reconciliation of the total of the reportable segments’ assets to entity’s assets; • IAS 16 Property, Plant and Equipment and IAS 38 Intangible assets: Revaluation method – proportionate restatement of accumulated depreciation/amortisation; • IAS 24 Related Party Disclosures: Key management personnel; • Annual Improvement Cycle 2012 – 2014: • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: Changes in methods of disposal; • IFRS 7 Financial Instruments: Disclosures: Servicing contracts; • IFRS 7 Financial Instruments: Disclosures – Applicability of the offsetting disclosures to condensed interim financial statements; • IAS 19 Employee Benefits: Discount rate – Regional market issue; • IAS 34 Interim Financial Reporting: Disclosure of information ‘elsewhere in the interim financial report’; • IFRS 11 Joint Arrangements: Accounting for acquisitions of interests in joint operations; • IAS 1 Presentation of financial statements: Disclosure initiative – amendments to IAS 1; • IAS 16 and IAS 38 Clarification of acceptable methods of depreciation and amortisation; • IAS 19 Employee Benefits: Defined benefit plans - Employee contributions; and • IAS 27 Separate financial statements: Equity method
Enhanced Disclosure Task Force (‘EDTF’) In November 2015, the EDTF published a report on IFRS 9 recommended disclosures which may be useful to help the market understand the upcoming changes as a result of using the Expected Credit Loss (‘ECL’) approach. Given that full IFRS 9 disclosures are only required for the year ending 31 December 2018, the additional EDTF recommendations during the period before adoption aims at promoting consistency and comparability across internationally active banks. ING Group has adopted these recommendations as transitional disclosures with an initial focus on qualitative disclosures.
Classification and measurement ING Group will apply a two-step approach to determine the classification and measurement of financial assets into one of the three categories, being Amortised cost, Fair Value through Other Comprehensive Income (‘FVOCI’) or Fair value through profit and loss: 1. The Business Model test will be applied to determine how a portfolio of financial instruments is managed as a whole; and 2. The Solely Payments of Principle and Interest (‘SPPI’) test will be applied to determine the contractual cash flow characteristics of financial assets in the Business Model.
• Stage 2: Lifetime ECL – under-performing In the event of a significant increase in credit risk since initial recognition, a provision is required for ECL resulting from all possible default events over the expected life of the financial instrument (‘Lifetime ECL’). ING Group has defined triggers to move to Stage 2 depending on the type of asset/portfolio. Once the ECL models are available, further calibration of the triggers will be defined and tested.
• Stage 3: Lifetime ECL – non-performing Financial instruments will move into Stage 3 once defaulted. The aim is to align the default definition for IFRS 9 with the internal definition of default for risk management purposes. Stage 3 requires a Lifetime ECL provision.
Hedge accounting The IFRS 9 hedge accounting requirements aim to simplify general hedge accounting requirements. Furthermore, IFRS 9 aims to align financial hedge accounting more closely with risk management strategies. All micro hedge accounting strategies as well as the macro cash flow hedge are in scope of IFRS 9. Macro fair value hedging is currently outside the scope of IFRS 9.
f) Critical accounting policies ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to loan loss provisions, other impairments and the determination of the fair values of financial assets and liabilities. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce significantly different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information below under ‘Principles of valuation and determination of results’.
Fair values of financial assets and liabilities Fair values of financial assets and liabilities are based on unadjusted quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices may be obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position or are valued at the price within the bid-offer spread that is most representative of fair value in the circumstances. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
A subsidiary which ING Group has agreed to sell but is still legally owned by ING Group may still be controlled by ING Group at the balance sheet date and therefore, still be included in the consolidation. Such a subsidiary may be presented as a held for sale disposal group if certain conditions are met.
Investments in associates held for sale Associates held for sale are measured at the lower of the carrying value and fair value less costs to sell. Any subsequent decrease in fair value less costs to sell below this carrying amount will be recognised in the profit and loss account. Subsequent increases in fair value will only be recognised to the extent that these are a reversal of previously recognised decreases in fair value less costs to sell. Changes in fair value include both changes in market value of the listed shares and the related foreign currency impact. Any subsequent dividend received from the associate is recognised as income in the profit and loss account as and when declared.
Group companies The results and financial positions of all group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities included in each balance sheet are translated at the closing rate at the date of that balance sheet; • Income and expenses included in each profit and loss account are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
Financial liabilities Debt securities in issue are recognised and derecognised on trade date.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity for which the Group has the positive intent and ability to hold to maturity and which are designated by management as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt securities classified as held-to-maturity is recognised in Interest income in the profit and loss account using the effective interest method. Held-to-maturity investments include only debt securities.
• Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the balance sheet as Financial assets at fair value through profit and loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-tomaturity ).
Maximum credit risk exposure The maximum credit risk exposure for items on the balance sheet is generally the carrying value for the relevant financial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Reference is made to Note 47 ‘Contingent liabilities and commitments’ for these off-balance sheet items. Collateral received is not taken into account when determining the maximum credit risk exposure.
The manner in which ING Group manages credit risk and determines credit risk exposures for that purpose is explained in the section ‘Risk management – Credit risk’.
Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the profit and loss account, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised through the profit and loss account over the remaining term of the original hedge or recognised directly when the hedged item is derecognised. For non-interest bearing instruments, the cumulative adjustment of the hedged item is recognised in the profit and loss account only when the hedged item is derecognised.
Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset, and the net amount reported, in the balance sheet when the Group has a current legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously. Offsetting is applied to certain interest rate swaps for which the services of a central clearing house are used. Furthermore, offsetting is also applied to certain current accounts for which the product features and internal procedures allow net presentation under IFRS-EU.
Joint ventures are entities over which the Group has joint control. Joint control is the contractually agreed sharing of control over an arrangement or entity, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Joint control means that no party to the agreement is able to act unilaterally to control the activity of the entity. The parties to the agreement must act together to control the entity and therefore exercise the joint control.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different valuations. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values. To illustrate the uncertainty of our real estate investments valuation, a sensitivity analysis on the changes in fair value of real estate is provided in the section ‘Risk management – Market risk’.
ING Group as the lessor When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable under Loans and advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable is unearned lease finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets under operating leases.
Share-based payments Share-based payment expenses are recognised as a staff expense over the vesting period. A corresponding increase in equity is recognised for equity-settled share-based payment transactions. A liability is recognised for cash-settled share-based payment transactions. The fair value of equity-settled share-based payment transactions is measured at the grant date and the fair value of cash-settled share-based payment transactions is measured at each balance sheet date. Rights granted will remain valid until the expiry date, even if the share based payment scheme is discontinued. The rights are subject to certain conditions, including a predetermined continuous period of service.
In 2015, the decrease in Amounts due from Banks is attributable mainly to a decrease of EUR 3,070 million related to reverse repurchase transactions and a decrease of EUR 2,001 million related to short term deposits with central banks.
No individual amount due from banks has terms and conditions that significantly affect the amount, timing or certainty of consolidated cash flows of the Group. For details on significant concentrations, refer to the section ‘Risk management – Credit risk’.
As at 31 December 2015, Loans and receivables designated as at fair value through profit and loss includes EUR 1,766 million (2014: EUR 1,112 million) with regard to reverse repurchase transactions.
Approximately 91% (2014: 90%) of the exposure in the ABS portfolio is externally rated AAA, AA or A.
Borrowed debt securities are not recognised in the balance sheet and amount to nil (2014: nil).
In 2014, Changes in the composition of the group and other changes included EUR –69,249 million as a result of the classification of NN Group as held for sale. Reference is made to Note 54 ‘Other events’.
In 2015, EUR 3.5 billion of mainly Government bonds previously classified as Available-for-sale debt securities are classified as Held-tomaturity.
In 2014, Transfers and reclassifications included transfers of investments in real estate funds from Available-for-sale investments to Associates and joint ventures and the transfer of the investment in SulAmérica S.A. from Associates and joint ventures to Availablefor -sale investments, both following changes in ownership interests.
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008) Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the first quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-for-sale to Loans and advances to customers and Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had the intention to hold for the foreseeable future. The table below provides information on the two reclassifications made in the fourth quarter of 2008 and the first quarter of 2009. Information is provided for each of the two reclassifications as at the date of reclassification and as at the end of the subsequent reporting periods. This information is disclosed under IFRS-EU as long as the reclassified assets continue to be recognised in the balance sheet.
Recognised fair value gains (losses) in shareholders’ equity (before tax) in the year prior to reclassification –192 –20
Unrealised fair value gains/losses recognised in shareholders’ equity (before tax) as at –70 –98 –137 –221 –446 –633 –902
Effect on shareholders’ equity (before tax) if reclassification had not been made –104 46 –246 –328 –1,169 –807 –376
Effect on result (before tax) for the period/year (mainly interest income) 124 182 188 219 390 467 629
Unrealised fair value gains/losses recognised in shareholders’ equity (before tax) as at nil nil nil –2 –8 –65 –67 –79
Effect on shareholders’ equity (before tax) if reclassification had not been made 54 65 56 69 15 32 –5 –27
Effect on result (before tax) for the period/year (mainly sales results) n.a n.a n.a n.a n.a n.a n.a n.a
Loans to, or guaranteed by, public authorities 30,246 26,504 18,214 18,894 48,460 45,398
Loans guaranteed by credit institutions 134 2 191 1,325 325 1,327
Loans and advances to customers and Amounts due from banks include finance lease receivables and are detailed as follows: Maturities of gross investment in finance lease receivables
− Loans and advances to customers 2,900 3,058 2,872 2,931 5,772 5,989
Banking operations Insurance operations Total 2015 2014 2015 2014 2015 2014
In 2014, Changes in the composition of the group and other changes included EUR –73 million as a result of the classification of NN Group as held for sale and EUR –170 million due to the deconsolidation of ING Vysya. Reference is made to Note 54 ‘Other events’.
The adjustment to Loans and advances to customers by type, as at 31 December 2014, had no impact on the Loan loss provisions by type.
Other The other associates and joint ventures are mainly real estate investment funds or vehicles operating predominantly in Europe.
Share of results In 2015, Share of results from associates and joint ventures, as presented in the profit and loss account, of EUR 492 million (2014: EUR 138 million) includes: • Share of results, as presented in the table above, of EUR 110 million mainly attributable to results of TMB amounting to EUR 75 million and gain on disposal of Ivy Retail SRL and Ontwikkelingscombinatie Overhoeks C.V. amounting to EUR 10 million and EUR 5 million respectively; • A net gain on Investments in associates held for sale of EUR 382 million, comprising EUR 367 million from the merger of ING Vysya with Kotak and EUR 15 million on the sale of ING Nationale Nederlanden PTE Polska, S.A. For further information on ING Vysya, reference is made to Note 5 ‘Investments’, Note 11 ‘Assets and liabilities held for sale’ and Note 54 ‘Other events’; and
In the first quarter of 2014, ING completed the sale to Swiss Re Group of 37.7 million units in SulAmérica S.A. The transaction further reduced ING’s stake in the Brazilian insurance holding to approximately 10.3%. ING received a total cash consideration of EUR 176 million. The transaction resulted in a net gain to ING of EUR 56 million which represented the difference between the carrying value and the fair value for both the 11.3% stake in scope of the transaction with Swiss Re and the 10% stake retained by ING which was recognised in 2014 in the profit and loss account in the line Share of result from associates and joint ventures. The remaining investment in SulAmérica S.A. was accounted for as an available-for-sale investment until the final divestment in 2014. Reference is made to Note 5 ‘Investments’ and Note 22 ‘Investment income’.
ING Group’s exposure to real estate is included in the following balance sheet lines: Real estate investments 77 80
Other assets – property development and obtained from foreclosures 212 405
Investments – available-for-sale 51 99 1 Excludes exposure to real estate classified as held for sale.
Gross carrying amount as at 31 December 1,092 1,052 2,482 2,368 3,574 3,420
Changes in the composition of the group and other changes –18 –6 –103 18 –40 1 –31 13 –192
Accumulated amortisation as at 31 December –1,128 –1,002 –12 –2 –1,140 –1,004
Amortisation of software and other intangible assets is included in the profit and loss account in Other operating expenses.
2015 – Changes in composition of the group and other changes In 2015, ‘Changes in composition of the group and other changes’ of EUR –6 million mainly represents goodwill on ING Lease (UK), released during the year due to disposal of the remaining portfolios to which it related. Reference is made to Note 23 ‘Result on disposal of group companies’.
2014 – Changes in composition of the group and other changes In 2014, ‘Changes in composition of the group and other changes’ represented the reclassification of goodwill to ‘Assets held for sale’. This included all goodwill that related to businesses classified as held for sale. For 2014, the amount was EUR 103 million and related to NN Group. As businesses to which these goodwill amounts related are classified as held for sale, the related goodwill was not evaluated at the level of the reporting unit to which it was allocated in the regular goodwill impairment test. Instead, it was reviewed as part of the valuation of the disposal group that was presented as held for sale as at 31 December 2014.
In 2015, the allocation of goodwill to reporting units changed as a result of the changes in reportable segments as disclosed in Note 36 ‘Segments’. Comparative amounts have been adjusted accordingly. The change did not impact the outcome of the impairment test. Additionally, ING’s Commercial Banking activities are renamed to Wholesale Banking, as of 1 January 2016.
In 2015, for all reporting units, the first step as described above indicates that there is an excess of recoverable amount over book value to which goodwill is allocated. A sensitivity analysis on the underlying assumptions did not trigger additional impairment considerations.
In 2015, Assets and liabilities held for sale decreased by EUR 163.4 billion and EUR 142.1 billion respectively.
Minority interests 1 NN Group profit and loss account, until deconsolidation at the end of May 2015. 2 ING Group’s share of NN Group profit and loss account, until deconsolidation at the end of May 2015. 3 Net result, excluding NN Group’s minority interest.
Undated subordinated notes issued by NN Group In 2014, NN Group N.V. issued Fixed to Floating Rate Undated Subordinated Notes with a par value of EUR 1 billion. The notes are undated, but are callable after 11.5 years and every quarter thereafter (subject to regulatory approval). The coupon is fixed at 4.50% per annum for the first 11.5 years and will be floating thereafter. As these notes are undated and include optional deferral of interest at the discretion of NN Group, these are classified under IFRS-EU as equity. Coupon payments are deducted from equity if and when paid or contractually due. The discount to the par value and certain issue costs were deducted from equity at issue, resulting in a balance sheet value equal to the net proceeds of EUR 986 million. These notes were included as part of minority interest as ING Group did not hold any of these notes.
Reserve adequacy As at 31 December 2014, the provisions for insurance contracts were adequate at both the 90% and 50% confidence levels, both in aggregate for NN Group and in each of the NN Group segments. The provisions for insurance contracts in the segment Netherlands Life were approximately at the 90% confidence level.
Methods applied in determining fair values of financial assets and liabilities - Held for sale - NN Group
Investments for risk of policyholders Of the EUR 2.7 billion Level 3 investments EUR 0.2 billion related to investments for risk of policyholders. Therefore Net result was unaffected by reasonable changes in fair value of these investments.
Recognised impairment (before tax) between the beginning of the year in which the reclassification took place and the reclassification nil
Effect on shareholders’ equity (before tax) if reclassification had not been made 175 10 –27 –174 129 321
Recognised provision for credit losses (before tax) nil nil nil nil nil nil b) Voya Proportional interest held and key information In light of the further restructuring and deconsolidation of Voya in 2014, specific disclosures are presented for comparative periods only. Reference is made to Note 47 ‘Contingent liabilities and commitments’ and the Parent company annual accounts, Note 7 ‘Other’ for further information on Guarantees issued by ING Groep N.V.
ING Group's share1 56.5 –1,124 –63 1 ING Group’s share after intercompany eliminations.
Disclosures in respect of Net defined benefit assets are provided in Note 38 ‘Pension and other post-employment benefits’ and deferred tax assets are provided in Note 39 ‘Taxation’.
In 2015, Shareholder’s equity attributable to the parent decreased by EUR 3,512 million to EUR 47,832 million, as at 31 December 2015. The decrease is mainly attributable to the partial sale and deconsolidation of NN Group in 2015, partly offset by Net result from continuing and discontinued operations.
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Groep N.V. currently consists of 14,500 million ordinary shares. As at 31 December 2015, 3,870 million of ordinary shares were issued and fully paid.
In addition, the holder of a depositary receipt is entitled to attend and to speak at the General Meeting of Shareholders of ING Groep N.V. either in person or by proxy. A holder of a depositary receipt, who thus attends the General Meeting of Shareholders, is entitled to vote as a proxy of the ING Trust Office but entirely at his own discretion for a number of shares equal to the number of his depositary receipts.
Depositary receipts for ordinary shares held by ING Group (Treasury shares) As at 31 December 2015, 1.5 million (2014: 4.3 million; 2013: 4.0 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 are held by ING Groep N.V. or its subsidiaries. The obligations with regard to the existing stock option plan and the share plans will be funded either by cash or by newly issued shares at the discretion of ING Group.
Changes in composition of the group and other changes –6 13 10 17
Changes in composition of the group and other changes included EUR –502 million related to the deconsolidation of Voya. Reference is made to Note 54 ‘Other events’.
Changes in composition of the group and other changes –371 119 –252
Transfer to share of associates and joint ventures reserve 161 –161
Impact of IPO NN Group related to the IPO of NN Group in July 2014. In 2015, ING Group changed its accounting approach in relation to the NN Group Anchor investment transaction. The line item Impact of IPO NN Group was adjusted by EUR 1,012 from EUR –2,339 million to EUR –1,327 million as a result of the reversal of the provision previously recognised directly in equity. The amount comprised the expected loss, at the time of the IPO of NN Group, on settlement of the two remaining tranches of mandatorily exchangeable notes in NN Group shares. As at 31 December 2014, the expected loss had decreased by EUR 92 million. The reversal of this decrease was adjusted in the line item Changes in composition of the group and other changes, resulting in a net adjustment to Other reserves of EUR 920 million, from EUR 23,677 million. Reference is made to Note 1 ‘Accounting policies’ - Change in accounting approach NN Group Anchor investment transaction, Note 20 ‘Other liabilities’ and Note 54 ‘Other events’.
In 2014, Minority interest increased with EUR 2,159 million, mainly due to the impact of the IPO of NN Group of EUR 5,397 million, the issuance of Undated subordinated notes by NN Group of EUR 986 million (net of transaction costs) as well as an increase in the Other comprehensive income of NN Group attributable to minority interest of EUR 1,089 million since the IPO. These increases were partially offset by the deconsolidation of Voya of EUR –5,100 million and the deconsolidation of ING Vysya of EUR –451 million. Reference is made to Note 54 ‘Other events’.
Ordinary shares - Restrictions with respect to dividend and repayment of capital The following equity components cannot be freely distributed: Revaluation reserves, Share of associates and joint ventures reserve (included in Other reserves), Currency translation reserve and the part of the Other reserves that relate to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Required minimum regulatory capital 29,243 2014 ING Bank NN Group Other Total
Interest rate Year of issue First call date Step-up Total Lent on to
Subordinated notes - Anchor investors In 2014, EUR 1,125 million was received from three external investors (Asian-based investment firms RRJ Capital, Temasek and Sea Town Holdings International) in relation to the IPO of NN Group. This funding, which bears a 4% interest rate, was to be repaid in three tranches of NN Group shares. The number of shares in the repayment is variable, such that the fair value of the shares at repayment date equals the notional repayment amount, taking into account a discount in the range of 1.5% to 3% of the market price.
More than 4 years but less than 5 years 7,845 5,952
More than 2 years but less than 3 years 1,958 3,220
In 2015, the decrease in Debt securities in issue of EUR 5.1 billion is mainly attributable to a decrease in certificates of deposits of EUR 3.7 billion, a decrease of EUR 0.8 billion in covered bonds, a decrease of EUR 0.4 billion in commercial paper and a decrease of EUR 0.2 billion in savings certificates due to reduced funding requirements.
As at 31 December 2015, ING Group has unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 14,646 million (2014: EUR 11,532 million).
Subordinated loans of group companies relates to capital debentures and private loans which are subordinated to all current and future liabilities of ING Bank N.V.
These initiatives are implemented over a period of several years and the estimate of the reorganisation provisions is inherently uncertain. The provision at balance sheet date represents the best estimate of the expected redundancy costs and are expected to be sufficient to cover these costs.
Changes in the composition of the group and other changes –8 8 24 –50 16 –42
Notes to the Consolidated profit and loss account 21 Interest result banking operations
Interest expense on customer deposits and other funds on deposit 4,177 5,361 6,618
Interest expense on non-trading derivatives (no hedge accounting) 652 1,255 1,205
In 2015, the result on further divestments of NN Group and the final divestment of Voya (2014: partial divestment of NN Group and the disposal of Voya; 2013: Insurance and investment management business in Hong Kong, Macau and Thailand and ING Life Korea) is not included above but included in Net result from disposal of discontinued operations. Reference is made to Note 30 'Discontinued operations' and Note 49 ‘Companies and businesses acquired and divested’.
The portion of trading gains and losses relating to trading securities still held as at 31 December 2015 amounts to EUR 147 million (2014: EUR –18 million; 2013: EUR –105 million).
Net trading income relates to trading assets and trading liabilities which include assets and liabilities that are classified under IFRS-EU as ‘Trading’ but are closely related to servicing the needs of the clients of ING. ING offers institutional and corporate clients and governments products that are traded on the financial markets. A significant part of the derivatives in the trading portfolio are related to servicing corporate clients in their risk management to hedge for example currency or interest rate exposures. In addition, ING provides its customers access to equity and debt markets for issuing their own equity or debt securities (‘securities underwriting’). Although these are presented as ‘Trading’ under IFRS-EU, these are directly related to services to ING’s customers. Loans and receivables in the trading portfolio mainly relate to (reverse) repurchase agreements, which are comparable to collateralised borrowing (lending). These products are used by ING as part of its own regular treasury activities, but also relate to the role that ING plays as intermediary between different professional customers. Trading assets and liabilities held for ING’s own risk are very limited. From a risk perspective, the gross amount of trading assets must be considered together with the gross amount of trading liabilities, which are presented separately on the balance sheet. However, IFRS-EU does not allow netting of these positions in the balance sheet. Reference is made to Note 4 ‘Financial assets at fair value through profit and loss’ and Note 19 ‘Financial liabilities at fair value through profit and loss’ for information on trading liabilities.
(in numbers) Weighted average grant date fair value (in 2015 Range of exercise price in euros
Weighted average exercise price 2013 Range of exercise price in euros
As at 31 December 2015 the share awards consists of 7,485,634 share awards (2014: 11,282,373; 2013: 21,993,875) relating to equitysettled share-based payment arrangements and 1,251,380 share awards (2014: 1,423,891; 2013: 3,066,117) relating to cash-settled share-based payment arrangements.
Notes to the Consolidated annual accounts of ING Group - continued 30 Discontinued operations Total net result from discontinued operations comprises the results from NN Group and Voya.
Net result from discontinued operations Net result from discontinued operations comprises the total net result (after tax) of the businesses classified as discontinued operations and is presented separately in the profit and loss account.
In March 2014, a further sale of Voya shares reduced ING Group’s interest in Voya to 43.2%. This share sale resulted in loss of control and deconsolidation of Voya by ING Group. The profit and loss account of 2014 included the result of Voya until the deconsolidation at the end of March 2014.
Attribution to non-voting equity securities ING Group made the final repayment on the core Tier 1 non-voting equity securities to the Dutch State in 2014. Reference is made to Note 53 ‘Transactions with the Dutch State and the European Commission Restructuring Plan’.
– Final dividend, paid in cash in May 2015 0.12 464
– Interim dividend, paid in cash in August 2015 0.24 929
Cash and cash equivalents at end of year 20,379 17,113 17,180
Treasury bills and other eligible bills included in trading assets 228 457 489
Banking, Wholesale Banking and Corporate Line Banking in the line ‘Interest result Banking operations’; • ING Turkey, previously fully reported within Retail Banking, is now segmented to both Retail Banking and Wholesale Banking; and • Bank Treasury (excluding isolated legacy costs recorded within Corporate Line) is now allocated to both Retail Banking and
– Net interest result - banking operations 12,744 –154 12,590 12,590
Underlying result before taxation 6,125 –166 5,959 5,959 Taxation 1,703 –35 1,668 1,668
Net result IFRS-EU (continuing operations) 4,659 –131 4,528 –63 4,466 Total net result from discontinued operations NN Group –779 –779
Net result IFRS-EU attributable to equity holder of the parent 4,010 1 Net result, after tax and minority interests.
IFRS-EU (continuing operations) 15,560 11,853 2,657 Total net result from discontinued operations –1,406
Net result IFRS-EU attributable to equity holder of the parent 1,251 1 Net result, after tax and minority interests.
Special items in 2014 included the impact (after tax) of the charges for making the Dutch Defined Benefit pension fund financially independent, the bank tax related to the SNS Reaal nationalisation and additional charges related to the restructuring programmes in Retail Netherlands announced before 2013.
– Net interest result - banking operations 11,980 –176 11,804 11,804
Net result IFRS-EU (continuing operations) 3,063 –32 3,031 20 3,050 Total net result from discontinued operations NN Group 455 455
Net result IFRS-EU attributable to equity holder of the parent 3,545 1 Net result, after tax and minority interests.
For information on discontinued operations, reference is made to Note 30 ‘Discontinued operations’.
– Additions to loan loss provision 433 169 57 210 478 1,347
– Total investment and other income 87 243 –27 201 379 –253 630
Underlying result before taxation 938 951 771 690 1,986 –611 4,724 Taxation 243 256 230 139 470 –117 1,221
– Additions to loan loss provision 877 183 82 279 868 2,288
Underlying result before taxation 912 715 597 527 2,077 –505 4,323 Taxation 241 213 185 120 504 –184 1,078
– Additions to loan loss provision 1,222 205 110 430 197 123 2,288
Luxemburg ING Luxembourg S.A. Wholesale banking/ Retail banking 774 298 9,331 166 35
Turkey ING Bank A.S. Wholesale banking/ Retail banking 6,070 641 17,544 155 34
Germany ING DiBa A.G. Retail banking 4,052 2,037 126,171 1,081 363
Spain Branch of ING Bank N.V. Retail banking 1,076 423 24,457 144 52
UK Branch of ING Bank N.V. Wholesale banking 642 556 32,156 362 –19
Hungary Branch of ING Bank N.V. Wholesale banking 162 46 1,129 13 5
Slovakia Branch of ING Bank N.V. Wholesale banking 265 13 573 8 2
Switzerland Branch of ING België N.V. Wholesale banking 177 187 6,927 105 30
North America USA ING Financial Holdings Wholesale banking 492 720 47,784 423 122
Japan Branch of ING Bank N.V. Wholesale banking 30 31 6,772 20 9
Singapore Branch of ING Bank N.V. Wholesale banking 472 386 19,111 230 30
Taiwan Branch of ING Bank N.V. Wholesale banking 34 23 1,744 12 1
Australia Australia ING Bank (Australia) Ltd. Retail banking 1,021 490 33,507 328 92
Changes in the composition of the group and other changes –62
Effect of curtailment or settlement In 2014, EUR –20,403 million was recognised in Effect of curtailment or settlement related to the Dutch defined benefit plan settlement as a result of the agreement that made the ING Pension Fund financially independent from ING.
Remeasurements: Actuarial gains and losses arising from changes in financial assumptions 218 1,595
Changes in the composition of the group and other changes 2 –168 –41
Actuarial gains and losses arising from changes in demographic assumptions 59 –4
Changes in the defined benefit plans in 2014 In 2014, ING reached final agreement with the trade unions, the ING Pension Fund, the Central Works Council and the Association of Retired ING Employees to transfer all future funding and indexation obligations under ING’s closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement made the ING Pension Fund financially independent from ING.
Information on plan assets and defined benefit obligation per country The defined benefit obligation per country and the plan assets per country can be specified as follows: Plan assets Defined benefit
As at 31 December 2015, the actuarial assumption for Indexation for inflation is 2.6% (2014: 2.5%). The percentage for 2015 was mainly based on the expected inflation and the best estimate assumption for future indexation in the pension plans in the United Kingdom and Belgium (2014: United Kingdom, Belgium and the Netherlands; before 2014 the percentage was based on the plan in the Netherlands).
Weighted averages of basic actuarial assumptions in annual % as at 31 December
For 2016 the expected contributions to pension plans are EUR 50 million.
The average duration of the benefit obligation at the end of the reporting period is 17 years (2014: 17 years). This number can be subdivided into the duration related to: • active members: 15 years (2014: 12 years); • inactive members: 23 years (2014: 24 years); and • retired members: 13 years (2014: 13 years).
Effect of curtailment or settlement –3 871 –37 –9 –52 –64 871 –37
Defined benefit plans In 2014, a charge of EUR 871 million was recognised in Effect of curtailment or settlement related to the Dutch defined benefit plan settlement.
Defined contribution plans The increase in Pension costs for Defined contribution plans in 2014 is as a result of the new defined contribution pension scheme for employees in the Netherlands which took effect on 1 January 2014.
Presented in the balance sheet as: – deferred tax liabilities –998 –860
More than 1 year but less than 5 years 190 145 7 4
More than 5 years but less than 10 years 118 48 1
More than 10 years but less than 20 years 34 347 6
In 2014, the Netherlands is included in the table above mainly due to the impact of the pension settlement and restructuring charges on the result. The three year medium term plan was used to substantiate the deferred tax assets in the Netherlands.
The weighted average statutory tax rate in 2015 is lower compared to 2014. This is mainly caused by the increase in the result in 2015 in the Netherlands.
The effective tax rate in 2015 is lower than the weighted average statutory tax rate. This is mainly caused by non-taxable income, the recognition of tax benefits from previously unrecognised amounts and prior year adjustments which are only partly offset by nondeductible items.
The effective tax rate in 2014 is lower than the weighted average statutory tax rate. This is mainly caused by non-taxable income, the recognition of tax benefits from previously unrecognised amounts and prior year adjustments which are only partly offset by nondeductible items.
– designated as at fair value through profit and loss 12,616 13,551 12,616 13,551 1 Other assets do not include (deferred) tax assets, net defined benefit asset and property development and obtained from foreclosures. 2 Other liabilities do not include (deferred) tax liabilities, net defined benefit liability, prepayments received under property under development, other provisions and other taxation and social security contributions. 3 Other liabilities, as at 31 December 2014, is adjusted by EUR 920 million as a result of the change in the accounting approach for the NN Group Anchor investment transaction. Reference is made to Note 1 ‘Accounting policies’ – Change in accounting approach NN Group Anchor investment transaction.
Financial assets at fair value through profit and loss and Investments Derivatives Derivatives contracts can either be exchange-traded or over the counter (OTC). The fair value of exchange-traded derivatives is determined using quoted market prices in an active market and those derivatives are classified in Level 1 of the fair value hierarchy. For those instruments not actively traded, fair values are estimated based on valuation techniques. OTC derivatives and derivatives trading in an inactive market are valued using valuation techniques because quoted market prices in an active market are not available for such instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instruments. The principal techniques used to value these instruments are based on discounted cash flows, Black-Scholes option models and Monte Carlo simulation. These valuation models calculate the present value of expected future cash flows, based on ‘noarbitrage ’ principles. These models are commonly used in the financial industry. Inputs to valuation models are determined from observable market data where possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via valuation model calibration procedures. The inputs used include prices available from exchanges, dealers, brokers or providers of pricing, yield curves, credit spreads, default rates, recovery rates, dividend rates, volatility of underlying interest rates, equity prices and foreign currency exchange rates. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus data, where available.
In 2015, there were no significant transfers into or out of Level 3.
Changes in the composition of the group and other changes 7 1 8
Financial assets designated as at fair value through profit and loss –55 –55
Financial liabilities designated as at fair value through profit and loss –83 –83
Financial assets designated as at fair value through profit and loss –67 –67
Recognition of unrealised gains and losses in Level 3 Amounts recognised in the profit and loss account relating to unrealised gains and losses during the year that relates to Level 3 assets and liabilities are included in the profit and loss account as follows: • Results on trading assets and trading liabilities are included in Net trading income; • Non-trading derivatives are included in Valuation results on non-trading derivatives; • Financial assets and liabilities designated as at fair value through profit and loss are included in Valuation results on non-trading derivatives - Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading); • Changes in the fair value of Real estate investments are included in Investment income; and • Impairments on Property in own use are included in Other operating expenses - Intangible amortisation and (reversals) of impairments.
Notes to the Consolidated annual accounts of ING Group - continued 2015 Assets Liabilities Valuation techniques Significant unobservable inputs
Loans and advances 356 7 Price based Price (%) 0% 100%
Notes to the Consolidated annual accounts of ING Group - continued 2014 Assets Liabilities Valuation techniques Significant unobservable inputs
– Rates 375 471 Option pricing model Interest rate volatility (%) 18% 58%
– Credit 43 45 Present value techniques Credit spread (bps) 1 1,362
Inflation rate is a key input to inflation linked instruments. Inflation linked instruments protect against price inflation and are denominated and indexed to investment units. Interest payments would be based on the inflation index and nominal rate in order to receive/pay the real rate of return. A rise in nominal coupon payments is a result of an increase in inflation expectations, real rates, or both. As markets for these inflation linked derivatives are illiquid, the valuation parameters become unobservable.
If ING had used input values from the upper and lower bound of this range of reasonable possible alternative input values when valuing these instruments as of 31 December 2015, then the impact would have been higher or lower as indicated below. The purpose of this disclosure is to present the possible impact of a change of unobservable inputs in the fair value of financial instruments where unobservable inputs are significant to the valuation.
Valuation uncertainty in practice is measured and managed per exposure to individual valuation inputs (i.e. risk factors) at portfolio level across different product categories. Where the disclosure looks at individual Level 3 inputs the actual valuation adjustments may also reflect the benefits of portfolio offsets.
Customer deposits and other funds on deposit 387,482 41,752 55,685 484,919
Notes to the Consolidated annual accounts of ING Group - continued b) Non-financial assets and liabilities In addition to financial assets and liabilities, the following table presents the estimated fair values of ING Group’s non-financial assets and liabilities that are measured at fair value in the balance sheet. Reference is made to Note 1 ‘Accounting policies’ in the sections ‘Real estate investments’ and ‘Property in own use’ for the methods and assumptions used by ING Group to estimate the fair value of the non-financial assets.
The fair values of the non-financial assets carried at fair value were determined as follows: Real estate investments 77 77
Amounts recognised in the profit and loss account during the year –19 –19
Amounts recognised in the profit and loss account during the year (Level 3)
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2015 on derivatives and nonderivatives designated under net investment hedge accounting was nil (2014: nil).
– designated as at fair value through profit and loss 256 963 1,112 540 363 3,234
4 As of 2015, Coupon interest due on financial liabilities no longer includes coupon interest due on perpetual loans.
44 Assets not freely disposable The assets not freely disposable consist primarily of Loans and advances to customers pledged to secure Debt securities in issue, deposits from De Nederlandsche Bank (the Dutch Central Bank) and other banks and serve to secure margin accounts and are used for other purposes required by law. The assets not freely disposable are as follows: Financial assets at fair value through profit and loss 550
Financial assets at fair value through profit and loss 4,339 7,892
Reverse repurchase, securities borrowing and similar agreements 65,854 –22,569 43,285 242 31,260 11,783
Reverse repurchase, securities borrowing and similar agreements 58,676 –18,860 39,816 543 30,395 8,878
A complaint has been filed against ING Bank in January 2015 in the New York District Court by Alfredo and Gustavo Villoldo and the executor of their father’s estate (‘Villoldo’). Villoldo holds two judgements against the Cuban government and other Cuban entities in the aggregate amount of USD 2.9 billion. Those judgements remain outstanding and uncollected. The complaint against ING Bank alleges that if ING Bank had complied with the applicable US sanction laws, Cuba assets would have been frozen by OFAC and available for execution and seizure by Villoldo. The complaint alleges that the acts set out in ING’s settlement with OFAC in 2012 constitute wire fraud, money laundering and fraudulent transfer and that Villoldo is therefore entitled to actual damages in the amount to be believed no less than USD 1.654 billion and treble damages of not less than USD 4.962 billion. In July 2015 the New York District Court dismissed all claims with prejudice. Villoldo has filed a notice of appeal, indicating that they are challenging the New York District Court’s order dismissing the case. At this moment it is not practicable to provide an estimate of the (potential) financial effect.
ING is involved in several legal proceedings in the Netherlands with respect to interest rate derivatives that were sold to clients in connection with floating interest rate loans in order to hedge the interest rate risk of the loans. These proceedings are based on several legal grounds, depending on the facts and circumstances of each specific case, a.o. alleged breach of duty of care, insufficient information provided to the clients on the product and its risks and other elements related to the interest rate derivatives that were sold to clients. In some cases, the court has ruled in favour of the claimants and awarded damages, annulled the interest rate derivative or ordered repayment of certain amounts to the claimants. The total amounts that need to be repaid or compensated in some cases still need to be determined. ING may decide to appeal against adverse rulings. As requested by the Netherlands Authority for the Financial Markets (‘AFM’) ING has reviewed a significant part of the files of clients who bought interest rate derivatives. In December 2015, the AFM concluded that Dutch banks may have to re-assess certain client files, potentially including derivative contracts that were terminated prior to April 2014 or other client files. Discussions with the AFM on the re-assessment are ongoing. Although the outcome of the pending litigation and similar cases that may be brought in the future, is uncertain, it is possible that the courts may ultimately rule in favour of the claimants in some or all of such cases. A provision has been taken on a best estimate basis. However, the aggregate financial impact of the current and future litigation as well as the potential (re-)assessment of files following discussion with the AFM could become material.
Financial assets at fair value through profit and loss 46,425 79,339
Financial liabilities at fair value through profit and loss 2,105 2,280
Divestments effective in 2013 Voya In May 2013, Voya was successfully listed on the NYSE reducing ING’s ownership interest from 100% to approximately 71.2%. In October 2013, the sale of a second tranche further reduced ING Group’s interest in Voya to approximately 56.5%. Reference is made to Note 54 ‘Other events’.
Asia - Joint venture ING Vysya Life In January 2013, ING agreed to sell its full interest in ING Vysya Life Insurance Company Ltd. to its joint venture partner Exide Industries Ltd. The transaction resulted in a net loss of EUR 15 million which was recognised in 2012. The transaction closed on 22 March 2013.
Asia - Joint venture KB Life In April 2013, ING agreed to sell its 49% stake in Korean insurance venture KB Life Insurance Company Ltd. (KB Life) to joint venture partner KB Financial Group. ING received a total cash consideration of EUR 115 million (KRW 166.5 billion) for its 49% stake in KB Life. The transaction closed 20 June 2013.
Asia - ING Life Korea In August 2013, ING announced that it had reached an agreement to sell ING Life Korea, its wholly owned life insurance business in South Korea, to MBK Partners for a total purchase price of EUR 1.24 billion (KRW 1.84 trillion). Under the terms of the agreement, ING will hold an indirect stake of approximately 10% in ING Life Korea for an amount of EUR 80 million (KRW 120 billion). ING has also reached a licensing agreement that will allow ING Life Korea to continue to operate under the ING brand for a maximum period of five years. In addition, over the course of one year, ING will continue to provide technical support and advice to ING Life Korea. The transaction resulted in an after tax loss for ING Group of EUR 1.0 billion. This transaction closed on 24 December 2013.
Financial assets at fair value through profit and loss 763 4,292 5,055
Financial liabilities at fair value through profit and loss 1 7 8
Gain/loss on disposal2 –250 944 –989 –295 1 Cash outflow/inflow on group companies in the cash flow statement included, in addition to the cash amounts in this table, also cash outflows/inflows on individually insignificant disposals. 2 The gain/loss on disposal comprised the sales proceeds, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves.
50 Principal subsidiaries For the majority of ING’s principal subsidiaries, ING Bank N.V. has control because it either directly or indirectly owns more than half of the voting power. For subsidiaries in which the interest held is below 50%, control exists based on the combination of ING Bank’s financial interest and its rights from other contractual arrangements which result in control over the operating and financial policies of the entity.
The transactions are funded by the ING Group administered multi seller Asset Backed Commercial Paper (‘ABCP’) conduit Mont Blanc Capital Corporation (‘Mont Blanc’), which funds itself in the ABCP market. Mont Blanc does not have minority interests that are significant to ING Group. ING Group facilitates these transactions by providing structuring, accounting, funding and operations services.
The normal non-structured standby liquidity facilities and the structured facilities are reported under irrevocable facilities. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Group credit and liquidity risk analysis procedures. The fees received for services provided and for facilities are charged subject to market conditions.
In 2015, ‘Management Boards’ includes the Management Board of ING Bank N.V. (‘ING Bank’). In 2014, ‘Management Boards’ included the Management Boards of ING Bank N.V. (‘ING Bank’) and NN Group N.V. (‘NN Group’). The members of these Management Boards are considered to be key management personnel and their compensation is therefore included in the tables below.
Variable compensation 1 Includes their compensation earned in the capacity as Board members. 2 Excluding members that are also members of the Executive Board of ING Groep N.V. 3 In 2015 one new member joined. 4 In addition to compensation in the capacity as Board member, the new Management Board member received a ‘sign on award’ with a total value of EUR 830,000 at the grant date, consisting for 50% of a cash amount and for 50% of shares. The award vests in the years 2015 - 2018, of which EUR 332,000 in 2015 and EUR 498,000 in the years 2016 - 2018.
5 In 2014, the compensation of the Management Board NN Group reflected the extension of the Board by two members who were appointed following the IPO of NN Group and one new member who was appointed to the Management Board NN Group on 1 August 2014.
The table above shows the fixed remuneration, expense allowances and attendance fees for the Supervisory Board for 2015 and 2014.
Shareholder agreement and other agreements Voya Financial Inc. In connection with the initial public offering of Voya Financial Inc., ING Groep N.V. entered into a shareholder agreement with Voya Financial Inc. that governs certain aspects of our continuing relationship. In particular, the shareholder agreement addresses the composition of the Voya Financial Inc. board of directors and its committees, other corporate governance matters, ING Groep N.V. approval and consent rights with respect to certain business and corporate actions Voya Financial Inc. may take, mutual rights that Voya Financial Inc. and ING Groep N.V. will have with respect to business and financial information and financial accounting matters and ING Groep N.V. rights with respect to subsequent sales of the common stock of Voya Financial Inc.
The difference between the total sales proceeds of EUR 21.1 billion (EUR 22.4 billion -/- adjustment of EUR 1.3 billion) and the fair value under IFRS-EU of EUR 15.2 billion represents a ‘Government grant’ under IAS 20. This government grant is considered to be an integral part of the transaction and is therefore accounted for as part of the result on the transaction. The transaction resulted in a reduction of the negative revaluation and therefore an increase in equity of EUR 4.6 billion (after tax).
These non-voting equity securities were deeply subordinated and ranked pari-passu with ordinary shares in a winding up of ING Groep N.V. On these non-voting equity securities a coupon was payable of the higher of EUR 0.85 per security and 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
ING Groep N.V. also had the right to convert all or some of the non-voting equity securities into ordinary shares on the basis of one non-voting equity security for 1.335 ordinary shares or bearer depositary receipts from three years after the issue date onwards, subject to certain conditions. This equated to an exchange price of EUR 7.49. The Dutch State in that case had the right to demand a redemption payment of EUR 10 per non-voting equity security, together with the pro-rata coupon, if due, accrued to such date. Both repayment and conversion of the securities had to be approved by the DNB.
The 2009 Restructuring Plan included restrictions on acquisitions and price leadership for certain products in EU markets. These restrictions continued to apply until the date on which more than 50% of each of the Insurance/IM operations was divested. The price leadership restrictions in Europe were amended to reflect specific conditions in various local markets. Under the amendments, the constraint no longer applied in the Netherlands, and ING Direct in the EU needed to refrain from offering more favourable prices than its best priced direct competitor among the ten financial institutions having the largest market share in the respective countries.
The 2012 amended Restructuring Plan was formally approved by the European Commission, by decision of 16 November 2012. As a result, the Commission closed its formal investigations as announced on 11 May 2012 and ING also withdrew its appeal at the General Court of the European Union, filed in July 2012. For principal legal reasons the EC continued with its appeal against the General Court ruling of March 2012. However, as part of the agreement of 19 November 2012, ING, the Dutch State and the EC agreed that the outcome of this appeal would not affect the EC approval of the 2012 amended Restructuring Plan. The EU Court of Justice rendered a final judgement on 3 April 2014 and dismissed the EC’s appeal against the General Court ruling of March 2012.
Notes to the Consolidated annual accounts of ING Group - continued 54 Other events NN Group
11 The amounts reflect the difference between the market value and the IFRS-EU book value of ING Group’s interest sold at the respective transaction dates. Included in the amounts is the release of corresponding revaluation reserves, where applicable. The amounts are recognised in the profit and loss account in the line ‘Net result from disposal of discontinued operations’.
July 2014 – Initial public offering (‘IPO’) On 2 July 2014, ING sold 77 million existing ordinary shares in the initial public offering of NN Group at EUR 20.00 per share. On 10 July 2014, the joint global coordinators, on behalf of the underwriters, exercised an over-allotment option to purchase 11.55 million of additional existing shares in NN Group at the same price. At the time of the IPO, a first tranche of EUR 450 million of the mandatorily exchangeable subordinated notes (the pre-IPO investments from the three Asian-based investment firms RRJ Capital, Temasek and SeaTown Holdings International) was exchanged into NN Group shares. The remaining two tranches (each for an aggregate amount of EUR 337.5 million) were mandatorily exchangeable into NN Group shares from 2015 onwards.
In September 2014, NN Group was classified as held for sale and discontinued operations. Upon classification, the carrying amount of the disposal group (or group of assets) was compared to NN Group’s fair value less cost to sell. The fair value less cost to sell was lower than the carrying value of the disposal group and as a result goodwill and certain other non-current non-financial assets totalling EUR 470 million were written-off in 2014 and recognised in the profit and loss account in the line ‘Net result from classification as discontinued operations’. As at 31 December 2014, the subsidiary NN Group was presented as Assets and liabilities held for sale and discontinued operations.
June 2015 - Second tranche exchange of subordinated notes: Anchor investors On 10 June 2015, ING announced the exchange of the second tranche of EUR 337.5 million mandatorily exchangeable subordinated notes into 13.6 million NN Group ordinary shares. The exchange price was set at a 3% discount to the NN Group closing price on 4 June 2015, resulting in an exchange price of EUR 24.78 per share. Accrued interest on these notes of approximately EUR 14.6 million were settled in an additional 0.6 million NN Group ordinary shares as per the terms of the investment. The transaction was settled on 15 June 2015 and resulted in a further decrease of the ownership of ING in NN Group from 42.43% to 38.23%. The transaction did not have a material impact on the profit and loss account of ING Group. Reference is made to Note 14 ‘Subordinated loans’ and Note 20 ‘Other liabilities’.
September 2015 – NN Group share repurchase In September 2015, NN Group repurchased 1.7 million ordinary shares from ING Group. This transaction reduced ING’s remaining interest in NN Group to 37.12%.
As at 31 December 2015, the remaining interest in NN Group of 25.75% is recognised as an Investment in associate held for sale at EUR 2,153 million. ING Group holds warrants for 35 million shares in NN Group.
January 2016 – Loss of significant influence over NN Group On 5 January 2016, ING sold a further 33 million ordinary shares of NN Group. As part of the transaction, NN Group repurchased 8 million ordinary shares. The gross proceeds to ING Group from the offering, including the repurchase by NN Group, amounted to EUR 1 billion. The transaction reduced the ownership of ING in NN Group from 25.75% (as at 31 December 2015) to 16.22%. As a result of the transaction, together with ING Group no longer having any nominees on NN Group’s Supervisory Board as of 14 December 2015, ING Group no longer has significant influence over NN Group and accounts for its remaining stake in NN Group as an available-for-sale investment. The result from this transaction, amounting to a net profit of EUR 522 million, will be reflected in ING Group’s first quarter 2016 profit and loss account. The result reflects the difference between the EUR 2.2 billion book value of ING’s 25.75% investment (as fixed at deconsolidation at the end of May 2015) and the market value of this stake of EUR 2.7 billion at the closing of the January 2016 transaction. The transaction settled on 8 January 2016. The remaining shares held in NN Group are subject to a lock-up period of 60 days.
The sale of the total 45.6 million shares from the combined transactions reduced ING Group’s stake in Voya from 18.9% (at 31 December 2014) to zero. The transactions settled on 9 March 2015 and resulted in a profit of EUR 323 million which reflects the difference between the market value of our 18.9% stake in Voya at the date on which ING Group lost significant influence and the proceeds from these transactions. The profit is recognised in the profit and loss account in the line ‘Net result from disposal of discontinued operations’. Reference is made to Note 4 ‘Financial assets at fair value through profit and loss’, Note 11 Assets and liabilities held for sale’ and Note 30 ‘Discontinued operations’.
ING Vysya Bank 2015 In 2014, ING Vysya Bank (‘ING Vysya’) and Kotak Mahindra Bank (‘Kotak’) announced their intention to merge their respective businesses. As at 31 December 2014, ING Vysya was presented as Assets held for sale. The shareholders of Kotak and ING Vysya approved this transaction in January 2015. On 31 March 2015, the Reserve Bank of India approved the transaction with an effective date of 1 April 2015.
Risk management adds value to ING Group and its stakeholders by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by aligning capital requirements with risks. Risk Management helps business units to make use of the latest risk management tools and skills to reduce funding costs and strategic risk. This enables them to focus on their primary activities in order to maintain a loyal customer base and a leadership position in our key markets and product franchises.
Group risk management function The ING Group Chief Risk Officer (CRO) is also the ING Bank CRO and therefore responsible for the day-to-day Risk Management of the Group and the Bank. As a result of the IPO of NN Group, the ING Group CRO has no direct responsibilities in the risk management of NN Group. The remaining risk functions that are specific for the Group function have been delegated to ING Bank.
Navigation map The index below enables the readers to track the main risk items through the various risk disclosures.
As part of the integration of risk management into the annual strategic planning process, the MBB issues a Planning Letter which provides the corporate strategic direction, and addresses key risk issues. Based on the Planning Letter, the business lines and business units develop their business plans which align with the Bank’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved. As part of the process, strategic limits and risk appetite levels are explicitly discussed. Based on the business plans, the MBB formulates the Strategic Plan which is submitted to the SB for approval.
The risk committees described below act within the overall risk policy and delegated authorities granted by the Management Board Bank: • ING Bank Credit Committee – Policy (GCC(P)): Discusses and approves policies, methodologies and procedures related to credit, country and reputation (ESR) risks for ING Bank. The GCC(P) meets on a monthly basis; • ING Bank Credit Committee – Transaction Approval (GCC(TA)): Discusses and approves transactions which entail taking credit risk
Risk management function Based on the three lines of defence, an independent risk management function is embedded in all levels of ING Bank’s organisation. The CRO, a MBB member, bears primary overall responsibility for the risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING Bank’s risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
The organisation chart below illustrates the new reporting lines within ING Bank risk organisation: ING Group Annual Report 2015 264
Risk culture The risk management framework based on the three lines of defence governance model is effective when a strong risk culture is present at all levels. The good reputation and integrity of ING Bank’s organisation are considered key requirements to operate successfully in the financial world. It promotes awareness of collectively shared values, ideas and goals but also of potential threats and it ensures alignment of individual performance objectives with the short- and long-term strategy. By making ING’s risk responsibilities transparent within the different levels of the organisation and holding every employee accountable for his acts, the risk culture and awareness are embedded in the organisation, which leads to effective risk management.
Definition Risk culture and risk awareness are not only items for senior management during their strategy decisions, but also for employees to be aware of the risks in their daily work. This is about (i) promoting and being aware of collectively shared values, ideas and goals towards the organisational objectives, and (ii) mitigating opportunities for unfavourable events to occur that can impact the ability of the organisation to achieve its objectives.
With the programme, ING Bank gains a sound risk culture and ensures that every employee in every part of the organisation understands how his actions and behaviour can help earn and retain customer and stakeholder trust. Recently, additional modules with current topics, were added to the programme, among others on cybercrime and personal responsibility. To enhance risk awareness, these topics are discussed between managers and employees through dialogue sessions that managers organise within their teams to create clear and consistent understanding. The endorsement from the executive level and the emphasis in the communication strengthen the culture.
Compensation Due to economic and financial turmoil, the link between risk taken and compensation policies was one of the major topics in the public and political domain. Several public institutions and initiatives advocated aligning risk and reward in risk-based compensation policies. For further information with regard to ING’s compensation policies please refer to the corporate website ing.com.
Non-financial risks: • Operational risk: the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; and • Compliance risk: the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with applicable laws, regulations, ING Bank policies and minimum standards and the ING Values as part of the Orange Code.
Risk cycle process ING uses a step by step risk management approach to monitor, mitigate and manage its financial and non-financial risks. The approach consists of a cycle of five recurrent activities: risk identification, risk assessment, risk control, risk monitoring and risk reporting. In short, this implies: determine what the risks are, assess which of those risks can really do harm, take mitigating measures to control these risks, monitor the development of the risk and if measures taken are effective and report the findings to management at all relevant levels to enable them to take action when needed.
The solvency risk appetite is closely aligned with capital management activities and policies. ING Bank has expressed tolerances for its risk-weighted solvency position (CET1 ratio), for non-risk-weighted solvency (leverage ratio) and for a more economic value based solvency (economic capital utilisation expressed via the Overall Supervisory Review and Evaluation Process (SREP) Capital Requirement). The CET1 ratio and leverage solvency risk appetite statements are not only compared to the actual reported level, but also include the potential impact of a standardised and pre-determined 1-in-10-year stress event (i.e. at a 90% confidence level with a 1-year horizon). Based on this mild stress scenario, the impact on ING Bank’s earnings, revaluation reserve and risk-weighted assets (RWA) is calculated (these are labelled earnings-at-risk, revaluation reserve-at-risk and RWA-at-risk). These stressed figures are used as input for a two-year simulation which depicts the developments of ING Bank’s solvency level versus its risk appetite.
ING measures and monitors its exposure to non-financial risk on an ongoing basis by assessing risks, analysing scenarios and mitigating actions as a result of audit and risk assessment findings. The aggregation of the assessed risk levels is expressed in an expected loss figure on non-financial risk, which is compared to the tolerance levels as captured in the NFR RAS based on a percentage of the operational income. The overall non-financial risk levels and tolerance breaches are periodically reported through the NonFinancial Risk Dashboard (NFRD). The NFRD consists of comprehensive and integrated NFR information on a quarterly basis. Changes in capital are monitored and reported in the NFRD as well. In addition, changes outside the capital tolerance band are reported to the Operational Risk Measurement Committee (ORMC) and Bank NFRC. In case risk events cause ING to move towards or beyond the tolerance level, management is required to undertake action.
As for the previous steps, the calculated impacts of the scenario are first discussed and endorsed in the STSC, and then in the BF&RC. Depending on the outcomes of the stress test, and the possibly identified vulnerabilities, mitigating actions may be proposed. Approval of these mitigating actions takes place in the MBB.
Economic capital Economic Capital (EC) is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general, EC is measured as the unexpected loss above the expected loss at a given confidence level. This economic capital definition is in line with the net market value (or surplus) definition. The EC calculation is used as part of the CRR/CRD IV Pillar II Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the supervisor.
The following fundamental principles and definitions have been established for the model: • ING Bank uses a one-sided confidence level of 99.95% and a one-year time horizon to calculate EC; • It is assumed that all currently known measurable sources of risk are included; • The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data.; • The EC calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value; • The EC calculations reflect known embedded options and the influence of customer behaviour in banking products; • The EC calculations are on a before tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; and • The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
Economic capital and regulatory capital Economic capital and regulatory capital (RC) are the main sources of capital allocation within ING Bank. Both of these capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic and regulatorybased risks it faces. The concept of EC differs from RC in the sense that RC is the mandatory amount of capital that is defined under Pillar I while EC is the best estimate of Pillar II capital that ING Bank uses internally to manage its own risk. EC is a non-accounting measure that is inherently subject to dynamic changes and updated as a result of ING Bank’s portfolio mix and general market developments. ING Bank continuously recalibrates the underlying assumptions behind its economic capital model which may have an impact on the values of EC going forward.
The tables below provide ING Bank’s EC and RC by risk type and business line. For 2015, both the total RC and EC increased compared to 2014. Both are well below the total amounts of available capital of EUR 51,052 million based on CRR/CRD IV phased-in rules. Details regarding the available capital can be found in the Capital Management paragraph, section ‘Capital Adequacy Assessment’.
Economic capital Regulatory capital 1 Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by Capital
The Basel Committee on Banking Supervision (BCBS) released several consultative papers, containing proposals to change the methodologies for the calculation of capital requirements. Within these proposals BCBS suggests methods to calculate RWA using more standardised or simpler methods in order to achieve greater comparability, transparency and consistency. These proposals will likely impact RWA for currently reported exposures (e.g. credit risk via revised standardised RWA floor) but may also lead to new RWA requirements (e.g. Interest Rate Risk in Banking Book proposals).
ING Bank participates in this debate by providing to regulators both conceptual feedback on the proposals and data for their Quantitative Impact Studies (QIS). ING Bank is of the opinion that internal models better reflect the risks in its business model, its customers and its credit quality than a standardised approach.
The typical interest rate position for ING Bank is that the duration of the assets is slightly higher than the duration of the liabilities. Given this mismatch, decreasing interest rates are under normal circumstances favourable for the interest income of ING Bank: liabilities reprice more quickly than assets, and therefore the average interest rates paid on liabilities should adapt more quickly to lower market interest rates. This would then support ING Bank’s net interest income.
Cybercrime Cybercrime is a continuous threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks increase on a global scale. ING continued building on its Cybercrime Resilience Programme moving to further enhance the control environment to protect, detect and respond to e-banking fraud, Distributed Denial of Service (DDoS) and targeted attacks (also called Advanced Persistent Threats). Additional controls are being embedded in the organisation as part of the overall internal control framework and re-assessed against existing and new threats.
Credit risk Introduction The credit risk section provides information on how ING Bank manages, measures and monitors credit risk and gives an insight into the ING Bank portfolio from a credit risk perspective. Prior to providing insight into the portfolio, we will explain how ING Bank ensures that credit risk is properly addressed and managed within ING Bank.
Governance Credit Risk (CR) within ING Bank is part of the second line of defence (the front office being the first, internal audit the third) and aligns the credit risk taking with the strategic planning of ING Bank. It is responsible for reviewing and managing credit risk including environmental and social risk for all types of counterparties. CR consists of line credit risk managers who are responsible for their business lines and manage specific portfolios and experts who support both the line credit risk manager as well as the business with tools like credit risk systems, policies, models and reporting. To ensure the independence of the risk function the CR General Manager is functionally responsible for the global network of credit risk staff.
Credit analysis at portfolio level is a function of different concentration levels and various metrics like Economic Capital (EC), Regulatory Capital (RC), Exposure at Default (EAD), Probability of Default (PD) and Loss Given Default (LGD). The risk/reward is monitored and managed at portfolio level by Risk and Finance together to ensure efficient use of ING Bank’s capital. Credit analysis at facility level is also risk/reward-oriented in that the level of credit analysis is a function of the risk amount, tenor, structure (e.g. covers received) of the facility, and the risks entered into. Risk adjusted return on capital (RAROC)-based tools are used internally to ensure a proper balance of risk and reward within the portfolio and concentration parameters. ING Bank’s credit analysts make use of publicly available information in combination with in-house analyses based on information provided by the counterparty, peer group comparisons, industry comparisons and other quantitative techniques and tools.
• Money market risk (MM): arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity. As such, money market deposits tend to be short-term in nature. In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is measured as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
For the reconciliation between credit risk outstanding categories and financial assets we refer to the section ’Credit risk management classification’ as included in the chapter ‘Accounting policies’.
Credit risk appetite Credit risk appetite is the maximum level of credit risk ING Bank is willing to accept for growth and value creation. This credit risk appetite is linked to the overall Bank-wide risk appetite framework. Articulating the credit risk appetite is a complex task that requires balanced views. It can be expressed in quantitative and qualitative measures. Having a credit risk appetite achieves: • Clarity over the credit risks that ING Bank can assume; focused execution in balancing ING Bank's credit risk exposures within the boundaries of ING's strategy, target setting and prudent risk management; • Consistent communication to different stakeholders; • Guidelines how to align reporting and monitoring tools with the organisational structure and strategy; and • Alignment of business strategies and key performance indicators of business units with the overall ING Bank credit risk appetite by means of the MTP.
Concentration risk framework Country risk framework Country risk is the risk specifically attributable to events in a specific country (or group of countries). Country risk is the risk of loss that ING Bank faces associated with lending, pre-settlement, money market and investment transactions in any given country or group of countries, as a result of country risk events. A country risk event can be described as any event or crisis, which relates mostly to large domestic economic, financial and political shocks, as well as transfer or exchange restrictions, affecting all counterparties in a specific country in an indiscriminate way. The occurrence of a country risk event may cause all counterparties in a country to be unable to ensure timely payments, despite their willingness to meet their contractual debt obligations. As such, country risk is an additional factor to be taken into account in the credit approval process of individual customers, as the country risk event probability may impact the default probability of individual counterparties.
Every country where ING has exposure has a country limit which is reviewed monthly and updated when needed. The country limit is a function of various factors including amount of capital consumption, GDP of the country, internal rating, and amount of funds entrusted generated. In case the utilisation is above 90%, the respective credit risk manager is expected to take action to bring the utilisation below 90% or to submit to the relevant approval mandate holders a country limit review requesting a higher limit to accommodate the increasing exposure. In case of countries with elevated levels of geo-political or severe economic cycle risk like Ukraine and Russia in 2014, the monitoring is performed on a more frequent basis with strict pipeline and exposure management to protect ING Bank from adverse impacts.
Single name and sector concentration ING Bank has established the concentration risk framework in order to identify, measure and monitor concentrations at country, portfolio and/or counterparty level. It consists of single name concentration i.e. losses due to the unexpected default of a single counterparty. Sector concentration (systemic risk): substantial increase of the ING Bank risk profile (expressed in increased risk weighted assets) due to the joint deterioration of a group of correlated counterparty/transactions, sensitive to the same external (macro-economic) factor(s) related to their geographic location, exposure class or industry. The LGD of a single name concentration is measured against a maximum LGD amount.
ING Bank performs periodical stress tests based on a standardised and pre-determined 1-in-10 year-stress event (i.e. at 90% confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and EC are recalculated to assess what the combined impact of such a year would be. The additional CRWA that ING should allocate in such an event is named CRWA-at-Risk. These stress test results are submitted to CPC on a periodical basis, in which the results are explained and discussed. If needed, actions are formulated.
Risk programs Within ING we distinguish between risk programs for Retail Banking and risk programs for Wholesale Banking business.
Credit approval process The credit approval process ensures that individual transactions are assessed on a name-by-name basis. For each type of counterparty (corporate, banks/financial institution, structured products clients) there is a separate process. The line credit risk managers are organised along the business lines of ING Bank and are specialised in the relevant area of expertise. The credit approval process is supported by, amongst others, a credit approval system which ensures consistency and completeness; a risk rating system which contains all the risk rating models to ensure a proper rating is given to a counterparty and a limit and exposure monitoring system which subsequently feeds into the credit approval system. The rating model is used to indicate a counterparty’s creditworthiness translated into a probability of default (PD), and to determine the maximum risk appetite that ING Bank may have for a given type of counterparty (reference benchmark). The determination of the delegated authority (the amount that can be approved at various levels of the organisation) also depends on the risk rating. ING Bank has a rating system with in total 22 grades (1=highest rating; 22=lowest rating) and are split in the following categories: • Investment grade (Risk Rating 1-10); • Non-investment grade (Risk Rating 11-17); • Sub-standard (Risk Rating 18-19); and • Non-performing (Risk Rating 20-22).
Practice based drivers ING Bank tries to have an ‘early in early out’ approach to troubled exposures. This means that ING has a conservative default definition. This will have a direct impact on the level of RWA. In addition to an impact on RWA, the conservative default definition implies that many of both corporate and retail customers classified as non-performing are not overdue for more than 90 days in either interest or principal. For most customers, ING uses a borrower rating which means that a customer will only have one PD regardless of the type(s) of transactions done with ING Bank. This means that if one facility is in default, usually all facilities of the client are in default. Once the customer is deemed performing, a non-default PD will be given to the borrower. Non-performing clients which were granted forbearance measures need to stay non-performing for a minimum of one year starting from the moment they are classified as forborne. Only after this probation period the clients may become eligible to be changed back to performing.
Regulatory environment ING Bank is regulated by many host supervisors; however the primary supervising entity is ECB. ECB supervises that the regulatory rules (CRR/CRDIV/Technical Standards) are adhered to, including through a strict ‘significant change’ approach that requires all changes to the internal models (PD, LGD and EAD) above a threshold to be reviewed and approved by ECB.
An important characteristic of the CR infrastructure and framework is that models are built for several purposes, including EC, RC and Loan Loss Provision. These rating models are broadly used throughout the ING Bank organisation which is therefore compliant with the Basel Use Test requirement and ensures active feedback on the risk parameters by business units.
The 1.06 regulatory scaling-factor is used. No scaling-factor is used. Regulatory LGD values including potential downturn adjustment are used.
In the Solvency Report other non-credit obligation assets (ONCOA) are included.
EC is calculated using the economic values of rating models (PD, EAD and LGD). In line with regulatory requirements, so-called ‘significant changes’ to these rating models are communicated to the regulator for approval. Significant changes relate to the impact on Credit RWA (Pillar I) or to the significance (size) of the model for the ING Bank portfolio.
Exposure Class: The fifth element is the exposure class (a grouping of credit risks associated with a common obligor type or product type) which is a driver for the correlation factor. To calculate risk weighted assets the default correlation between a transaction and all other transactions in the portfolio are taken into account. The correlation factor determines which portion of the standalone risk of a transaction is retained when the transaction is included in the portfolio and the portfolio diversification benefits are taken into consideration.
Under the RBA, the RWA are determined by multiplying the amount of the exposure by the appropriate regulatory risk weights, which depend on: • The external rating or an available inferred rating; • The seniority of the position; and • The granularity of the position.
Credit risk model governance All PD, EAD and LGD models are built according to the ING Bank internal credit risk modelling methodology standards and model life cycle. After thorough review of the documentation by the Model Development Committee (MDC) and Model Validation (MV), the Credit Risk Committee (CRC) approves the models. For certain local models, the approval authority is delegated by the CRC to the MDC. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation. The capital impact from the implementation of approved models is reported to the ECB in a quarterly report. In addition, MV validates each model on an annual basis. During such periodical validation the model performance is analysed via amongst others backtesting. Most of the credit models reviewed by MV show a conservative observed performance compared to predicted levels.
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
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; • Other Retail 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; and • Securitisations include securitisation programs for which ING Bank acts as an investor, sponsor or originator.
Exposure classes ING Bank portfolio per risk category, as % of total EAD
Models used for exposure classes ING Bank has developed PD, EAD and LGD models for Wholesale Banking and Retail Banking portfolios. PD, EAD and LGD models are subject to CRC (or in some delegated cases: MDC) approval and changes which significantly impact the results require approval from the regulator before implementation. By nature, the above described exposure classes have different, specific characteristics. To capture these specific characteristics and to have suitable valuations and analyses in place, CR is continuously updating and developing models within each exposure class. In total, CR makes use of around 80 different internal models.
More information on securitisations is included in the Pillar III section.
Guiding principles regarding data elements The guiding principles are that each data element should only be input once, and should have a clear ‘home’ system or database which is leading throughout all uses of that data element. From the data ‘home’, the data may then be redistributed to other systems or databases that may require that data in an automated Straight through Processing (STP) method. Depending on the need, the data may be transferred in real time, near real time, daily, weekly or monthly. This frequency of underlying data transfer is independent from the data transfer that may take place for consolidation purposes.
Past due for 61–90 days 83 109 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.
Aging analysis (past due but not non-performing): ING Bank consumer lending portfolio, outstandings1
As such, other than the arrear driven approach at Retail Banking, Wholesale Banking has a much more individual name approach, using Early Warnings indicators to signal probable, upcoming, redemption breaches. As a general rule, in line with the Regulatory definition (CRR/CRDIV), ING Bank considers all business loans as non-performing if they are 90 days past due.
Watch list, Restructuring and Recovery are discussed at least on a quarterly basis between Front Office, respective Credit Risk Management executives and GCR, at which time it may be decided to change the status of an account from Watch list to Restructuring or Recovery or vice versa. Furthermore, all three categories Watch list, Restructuring and Recovery are in scope for forbearance. For further details on forbearance we refer to the Forbearance section.
1 Economic sectors not in the top 5 are not shown separately but grouped in Other.
• 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 4,6,7,8,9 or 12 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.
Growth Markets Total ING Bank 2015 2014 2015 2014 2015 2014 2015 2014
Increase/(decrease) in loan loss provision 478 500 602 857 267 237 1,347 1,594
The total risk costs in 2015 were just above EUR 1.3 billion confirming the downward trend since 2014. In 2015 the average risk costs were close to EUR 300 million per quarter, compared to almost EUR 400 average quarterly risk costs in 2014, displaying the improving risk cost trend on the back of economic recovery. In relation to the average RWA, total risk costs were approximately 44 basis points, within the range of the pre-crisis 40-45 basis point ‘expected loss’ benchmark. The total stock of provisions decreased to EUR 5.8 billion from EUR 6.0 billion. While these signs are encouraging, ING Bank remains vigilant for any potential impact that imbalances in emerging economies and financial markets could have on clients and business units.
General guidelines on cover valuation General guidelines for cover valuation are established to ensure consistency of the application within ING Bank. These general guidelines also require that the value of the cover needs to be monitored on a regular basis, in principle at least annually. Covers shall be revalued accordingly and whenever there is reason to believe that the market is subject to significant changes in conditions. The frequency of monitoring and revaluation depends on the type of covers.
Pre-settlement3 52,574 1 Including loans to ING Group. 2 Excluding intercompany positions. 3 More information on the credit risk mitigants of the Pre-settlement exposure can be found in the Pre-settlement section.
Non-performing 1 Including loans to ING Group. 2 Excluding intercompany positions.
House prices in the Netherlands continued to show an improvement in 2015. This helped to increase the total residential mortgages cover values whilst overall mortgage outstandings remained stable. As the Netherlands is the biggest market for mortgages for ING Bank, this had a significant impact on the coverage quality of the portfolio.
1 Including loans to ING Group and NN Group. 2 Excluding intercompany positions.
Investment and Money Market portfolio Investment and Money Market exposure per region 2015 Cover type 2014 Cover type
Total Investment and Money Market 114,116 0 6 0 3,113 35 118,198 16 298 3,454 16 of which Non-performing 171 0 0 0 0 0 104 6 1 Including loans to ING Group (and NN Group in 2014). 2 Excluding intercompany positions.
The use of Central Clearing Parties (CCPs) is becoming more important for the derivatives business and as a consequence the credit risk is shifting from Counterparties to CCPs. In 2015, the notional Pre-Settlement exposure that was cleared via CCPs formed 51.2% of the total notional (49.1% in 2014). For more information on ING Bank’s exposure to CCPs, please refer to the ‘Counterparty Credit Risk’ section in the Pillar III section.
Cover values including guarantees received – Investment and Money Market Portfolio1,2
Total Pre-settlement 167,522 62,261 48,675 52,562 183,651 62,313 48,846 51,593 of which Non-performing 52 52 52 55 101 101 101 100 1 Including transactions with ING Group (and NN Group in 2014). 2 Excluding intercompany positions.
The Balance Sheet Risk (BSR) department and the Credit & Trading Risk (C&TR) department are the designated independent departments that are responsible for the design and execution of the bank’s market risk management functions in support of the ALCO function. Balance Sheet Risk focuses on the market risks in the banking books, Capital Management department and the Bank Treasury department, whereas Credit & Trading Risk is responsible for the market risks resulting from the Financial Market trading books. The organisational 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.
BSR and C&TR are responsible for determining adequate policies and procedures for managing market risk and for monitoring the compliance with these guidelines. An important element of the risk management function is the assessment of market risk in new products and businesses. Furthermore the two departments maintain an adequate limit framework in line with ING Bank’s Risk Appetite Framework. The businesses are responsible for adhering to the limits that ultimately are approved by ALCO Bank. Limit excesses are reported to senior management on a timely basis and the business is required to take appropriate actions to reduce the risk position.
Embedded options, e.g. the prepayment option and offered rate option in mortgages in the banking books, result in non-linear interest rate risk in the banking books. The embedded options are economically hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk. For the calculation of economic capital for this non-linear interest rate risk ING Bank performs a Monte Carlo simulation.
Year-on-year variance analysis During 2015, market risk economic capital increased from EUR 7.4 billion to EUR 8.6 billion. The main driver of the increase is the increased value of the Bank of Beijing equity stake which increased both the Equity Investments exposure as well as increased FX risk due to the enlarged CNY mismatch position. The decrease in Real Estate is mainly resulting from the run-off exposure of Real Estate Development. The reported risk figures for the other risk types remained stable.
Risk transferring An important element of the management of market risks in the banking books is the process of risk transfer. In this process the interest rate, FX, funding and liquidity risks are transferred from the commercial books through matched funding to Bank Treasury, where it is centrally managed. The scheme below presents the transfer and management process of market risks in the banking books: Model disclosure of banking risk measures See Risk model governance and model validation section.
Convexity risk is defined as the sensitivity towards interest rate movements and captures the second order changes in the interest rate. Convexity risk is a result of products that contain embedded options, like mortgages. In some cases, convexity risk is transferred from the commercial books to treasury books using swaption and cap/floor contracts.
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. Note that the interest rate risk exposures do not include pension risks. Also corrective management actions are not taken into account in these figures.
Year-on-year variance analysis In line with previous year, the earnings with a one year horizon as per 2015 year end are relatively insensitive to rate changes, if compared to the net interest income. The earnings sensitivity for an upward shock has a positive impact. Positive earnings sensitivity implies that when rates increase, the positive impact on interest received on assets is larger than the negative impact of interest paid on liabilities. The change of the Earnings sensitivity of the +100 bps scenario within Wholesale Banking is mainly the result of investments done by the Bank Treasury function, which is reported under Wholesale Banking.
Foreign exchange (FX) risk in banking books FX exposures in banking books result from core banking business activities (business units doing business in other currencies than their base currency), foreign currency investments in subsidiaries (including realised net profit and loss) and strategic equity stakes in foreign currencies. The policy regarding these exposures is briefly explained below.
Notes to the Consolidated annual accounts of ING Group - continued cTaR Stress Scenario 2015 2014 2015 2014 Currency US Dollar 0.13% 0.12% 15% 15% Pound Sterling 0.01% 0.00% –15% 15% Polish Zloty 0.00% 0.00% 15% –15% Australian Dollar 0.00% 0.00% 20% 20% Turkish Lira 0.07% 0.06% –25% –25% Chinese Yuan 0.09% 0.08% –15% –15% Korean Won 0.01% 0.01% –15% –15% Indian Rupee 0.05% 0.04% –20% –20% Brazilian Real 0.01% 0.02% –25% –25% Russian Rouble 0.01% 0.01% –20% –20%
Risk profile ING Bank has two main different categories of real estate exposure on its banking books: first, the own buildings ING Bank occupies, and second, development assets, which mostly consists of former Real Estate Development and Real Estate Investment Management activities. The total real estate exposure amounts to EUR 1.3 billion (excluding property from foreclosures and third party interest). ING Bank has EUR 0.2 billion recognised at fair value through profit and loss and EUR 1. 1 billion is recognised at cost or revalued through equity (with impairments going through profit and loss). A split on the real estate exposure per continent and sector based on the risk management view is shown below.
2015 2014 2015 2014 Continent Sector Europe 1,136 1,352 Residential 115 270 Americas 45 142 Office 1,045 1,102 Australia 0 0 Retail 68 181 Asia 35 101 Industrial 16 22 Other 118 91 Other 91 111 Total 1,334 1,686 Total 1,334 1,686
Year-on-year variance analysis In total, real estate market risk exposure in the banking books decreased by EUR 0.3 billion mainly as a result of divestments. The remainder is due to impairments and negative fair value changes.
Fair values of financial assets and liabilities Fair values of financial assets and liabilities that are quoted in active markets are determined by using quoted market prices. Where quoted prices are not available, other pricing sources and valuation techniques are used to determine fair value.
Other pricing sources can be independent market vendors, brokers or market makers, or recent transactions. The range of prices obtained from these pricing sources can diverge. The choice for one or the other pricing source can therefore result in different estimates of fair value. Selecting the most appropriate price within this range requires expertise and judgement. The selection of the pricing sources used is subject to internal approval and review.
Model disclosure of trading risk measures Value at Risk Credit & Trading Risk uses the historical simulation Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, equity prices, foreign exchange rates, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. Next to general market movements in these risk factors, VaR also takes into account market data movements for specific moves in e.g. the underlying issuer of securities. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital.