Consolidated balance sheet 90 Consolidated profit and loss account 91 Consolidated statement of comprehensive income 93 Consolidated statement of cash flows 94 Consolidated statement of changes in equity 96 Notes to the consolidated annual accounts 98 – Notes to the accounting policies 98 – Notes to the consolidated balance sheet 120
Our role as a bank and insurance company goes beyond our primary function of providing financial services. We are part of society, and as such we are committed to help build a financially healthy and sustainable society for citizens, businesses and other organisations. We are committed to be part of the communities we operate in and believe that through the sustainable choices we make today, we can help shape the society of the future.
Over the past few years, ING Group has made a huge effort to restructure and change, and we continue to do so. This transformation was pursued vigorously by my predecessor, Jan Hommen, whom I succeeded in October.
We have made great headway in 2013 and are well positioned for 2014 and onwards. ING Bank is a major player in its European domestic markets, such as the Netherlands, Belgium, Luxembourg, Germany, Poland, Romania and Turkey, and in Asia. We have a presence in more than 40 countries, allowing us to support global businesses. NN Group today is a leading, predominantly European insurance and investment management company with a strong presence in 18 countries.
Today’s ING is different from yesterday’s ING. The future will bring even more change. That change and our future are in our own hands. With a refined and sharpened strategy for ING Bank to be presented in the first half of 2014 and a scheduled IPO base case for the insurance and investment management business, 2014 is set to be an important year for ING and all our stakeholders.
OUR CORPORATE RESPONSIBILITY ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders. Our Business
• ING received EUR 10 billion in state aid in November 2008. Including the latest repayment in November 2013, ING has so far repaid EUR 11.3 billion, including EUR 8.5 billion in principal and EUR 2.8 billion in interest and premiums. The final tranches are scheduled to be paid by March 2014 and by May 2015. The total annualised return for the Dutch State is expected to be 12.5%.
The total contribution to the Dutch State to date of EUR 4.9 billion includes premiums and interest on the repayment of core Tier 1 securities, the unwinding of the IABF, guarantee fees paid on the government guaranteed bonds issued in 2009 and bank levies.
OUR FUTURE The ING of tomorrow will definitely be different from the ING of today. With a refined and sharpenend strategy for ING Bank to be presented in the first half of 2014 and a scheduled IPO for the insurance business, 2014 is set to be an important year for ING and all our stakeholders.
Total Staff expenses and Other operating expenses 10,712 11,688 12,118 11,662 12,279
Addition to loan loss provision Banking operations 2,289 2,125 1,670 1,751 2,973
(1) Historic underlying and operating results have been restated for divestments in order to create a comparable sequence (i.e. 2013, 2012 and 2011 results exclude the results of divestments completed in 2013).
Improved environmental footprint – C02 emissions per FTE (in kilotonne) Bank (2)
(4) Targets have been set to raise adequate funds between 2005-2015 to facilitate access to education by one million children through our partnership with UNICEF.
Audit Committee J.C.L. (Joost) Kuiper, chairman J.P. (Tineke) Bahlmann I. (Isabel) Martín Castellá C.W. (Carin) Gorter J.H. (Jan) Holsboer R.W.P. (Robert) Reibestein L.A.C.P. (Luc) Vandewalle
Insurance Europe(2) Committee J.H. (Jan) Holsboer, chairman Y.C.M.T. (Yvonne) van Rooy J.C.L. (Joost) Kuiper, temporary member R.W.P. (Robert) Reibestein, temporary member
(1) The current composition of the Supervisory Board Committees can be found on the Company’s website (www.ing.com).
EUR 50 million, will be used to increase the next repayment of core Tier 1 securities to the Dutch State, scheduled for March 2014. The final payment to the Dutch State, scheduled for May 2015 will be lowered by the same amount. The total amount of the repayment to the Dutch State remains unchanged.
LISTINGS Depositary receipts for ING Group ordinary shares are listed on the stock exchanges of Amsterdam, Brussels and New York (NYSE). Options on ING Group ordinary shares (or the depositary receipts thereof) are traded on the NYSE Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,840.9 3,831.6 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 4.0 30.1 (Depositary receipts for) ordinary shares 3,836.9 3,801.5
CORE TIER 1 SECURITIES In October 2008, to support its capital position, ING Group made use of capital support facilities from the Dutch State by issuing EUR 10 billion of core Tier 1 securities to the Dutch State with a coupon of 8.5%. The core Tier 1 securities rank pari passu with common equity.
d d itio n al in fo rm atio n * Year-end 2013 figures, estimated on information provided by NASDAQ OMX Corporate Solutions.
ING’s short and long-term credit ratings are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgment, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings.
REVIEWS OF ING’S SUSTAINABILITY PERFORMANCE ING Group’s approach to sustainability is shaped by our specific skills and expertise as a financial company, our vision of the future and the expectations of our stakeholders. Reviews of our performance by sustainability research and rating agencies help us to improve our strategy and policies. ING’s 2013 scores and assessments for some of the key sustainability benchmarks and service providers are as follows: For more details on ING’s sustainability performance and assessments please refer to ING’s Sustainability Report 2013.
Publication results 3Q 2014 Wednesday, 5 November 2014, 7:00 am * All dates shown are provisional.
The 21.6% increase at ING Bank mainly reflects a strengthening of the interest margin, a positive swing in credit and debt valuation adjustments and the absence of de-risking losses in 2013. This was partly offset by 7.9% higher underlying risk costs, while underlying expenses were almost flat despite higher pension costs and additional restructuring charges.
• The 2013 special items predominantly reflected costs for restructuring programmes, which are essential to reduce our future annual expenses. In 2013, special items amounted to EUR -182 million, compared with EUR -949 million in 2012.
Shareholders’ equity decreased by EUR 5.8 billion, from EUR 51.8 billion at the end of 2012 to EUR 45.9 billion at the end of 2013. Equity was negatively impacted by revaluations of debt securities, net of deferred interest crediting to life policyholders, due to higher interest rates (EUR -3.2 billion), exchange rate differences reflecting the appreciation of the euro against most currencies (EUR -1.9 billion), the impact of the sale of 43% ING U.S. (EUR -2.5 billion) and the decrease in the net pension asset (EUR -0.9 billion). These negative impacts were partly offset by the addition of the net result (EUR 3.2 billion). Underlying net return on equity, calculated as underlying net result divided by average IFRS-EU equity, increased to 6.4% from 5.5% in 2012.
IMPORTANT DEVELOPMENTS IN REGULATION AND SUPERVISION The most prominent development in 2013 was the agreement on the Single Supervisory Mechanism, which will result in a transfer of prudential regulatory powers from eurozone national authorities to the ECB. This will become effective in November 2014 and constitutes an important first step in creating a European banking union. In general, progress was made with a wide range of other regulatory initiatives. Nevertheless, ING is concerned that several agreements that were made in 2013 are compromises that hamper the realisation in the short term of a true level playing field. As a consequence, the single European banking market will remain fragmented, which will continue to limit the ability of cross-border banks to support the recovery of the European economy.
Bank Recovery and Resolution Directive (“BRRD”) In December 2013, the BRRD was agreed upon which needs to be transposed into national law by 1 January 2015. It requires banks to create recovery and resolution plans, and for an ex-ante (“before the event”) financed resolution mechanism to be set up. Moreover, the BRRD requires member states’ legislation to allow for resolution authorities to use the bail-in tool in case of bank failure. ING has had its recovery plan in place since November 2012 and work on resolution planning is in progress in cooperation with DNB and the Dutch Ministry of Finance. The bail-in tool is an important mechanism in any future resolution scheme as it gives resolution authorities the power to write down claims of unsecured creditors of a failing institution and to convert these claims into equity. The instrument applies to unsecured liabilities with a number of exceptions, such as guaranteed deposits and secured liabilities (including covered bonds). The precise modalities of the bail-in rules are still under discussion. ING supports the bail-in rules as they are an important component of the new regulatory framework, aimed at reducing the possibility that tax payer money will be needed to bail-out institutions in future crises. Although it was originally foreseen that bail-in rules would apply from 2018, the EU agreed in December 2013 that they will take effect on 1 January 2016.
derivatives market as a whole. This EU regulation on OTC derivatives, central counterparties and trade repositories came into force in August 2012 and began to be phased in during 2013. Delegated acts for the Regulation entered into force in March 2013, requiring trade repositories to apply for recognition under EMIR and also requiring central counterparty clearinghouses to apply for authorisation under EMIR. ING has worked hard to comply with increased reporting requirements on outstanding derivative contracts. In addition, ING has helped clients meet EMIR’s requirements.
Benchmarks In 2013, financial benchmarks such as LIBOR were at the centre of attention due to manipulation by banks of the submissions to these benchmarks. In 2013, the International Organisation of Securities Commissions (“IOSCO”) and the European Securities and Markets Authority (“ESMA”) issued principles for the benchmark setting process that ING fully underwrites. ING has been compliant with the IOSCO and ESMA principles in its submissions to benchmark panels such as “EURIBOR” and ”EONIA”. In September 2013, the EC published a legislative proposal for a Regulation on benchmarks which aims to address concerns about the integrity and accuracy of benchmarks by regulating administrators of benchmarks, contributors to benchmarks and benchmark users.
Bank structural reform Throughout 2013, discussions on further structural reforms to the EU’s banking market continued. In the summer, the EC held a consultation on the main options under consideration as a followup to the Liikanen report. The focus of the consultation was on the structural separation of certain trading activities in case the size of these activities compared to a bank’s total activities exceeded certain thresholds. The EC is expected to come up with a legislative proposal in early 2014. Based on the Liikanen report (October 2012), the separation proposal should not negatively affect ING’s business model. ING believes in the strength of the universal banking model, combining retail and commercial banking activities. The universal banking model brings major benefits in terms of risk diversification, capital and liquidity management and consumer choice, while fulfilling the needs of long-term customer banking relationships. In June 2013, a Committee of Experts (“Commissie Wijffels”) advised the Dutch government on the future structure of Dutch banking sector. The Committee presented recommendations on
RETAIL BANKING REGULATION Mortgage lending In early 2013, the Council of the European Union approved the Mortgage Credit Directive, which aims at preventing irresponsible lending and maintaining financial stability. The measure also standardises how loans are advertised to help borrowers compare them but allows member states to keep existing national regulation intact. The final text of the Directive was published in December 2013. The deadline for EU member states to transpose it into national law is expected to be mid-2015. ING offers mortgages in several European countries and will therefore have to comply with different regulations in each.
The European supervisory authority for insurers, “EIOPA”, published “interim measures” for member states, explaining to national supervisors how they can translate certain elements of Solvency II into their national laws in 2014. The measures include requirements on the system of governance, an annual assessment of own risks, extensive supervisory reporting requirements and guidelines for a formalised process for internal model applications. As the interim measures are generally aligned with Solvency II requirements, implementation of these measures is part of our broader efforts to become Solvency II compliant.
As ING is an IAIG, it is closely monitoring the development of ComFrame and ICS.
Dutch solvency rules During 2013, the Dutch Ministry of Finance developed legislation which adapts local capital adequacy rules for life insurance companies. The legislation, the so-called “Besluit Prudentiële Regels” (“BPR“) 2014, became effective on 1 January 2014. BPR 2014 will leave the current calculation method of the Solvency I Wft (“Wet op het financieel toezicht’) with the Ultimate Forward Rate (“UFR”) ratio untouched, but introduces a new metric for discussion with the supervisor which will not be disclosed. This Theoretical Solvency Criterion (“TSC”) needs to be met by the insurer. If the solvency position of the relevant NN Group life insurance entity is below the TSC, DNB is entitled to require that a declaration of no objection be obtained from DNB before making any distributions of capital (including dividends) and reserves to the Issuer and DNB is also entitled to require that the relevant entity submit a recovery plan.
STRATEGIC PRIORITIES AT THREE LEVELS ING has strategic priorities at the Group, Bank and Insurance levels. All are ultimately in line with our mission: To set the standard in helping our customers manage their financial future. ING aims to deliver financial products and services in the way our customers want them: with exemplary service, convenience and at competitive prices.
On the insurance side, the focus is on service to customers, generating capital, growing profitability and improving efficiency. NN Group’s strategy is therefore about offering appealing and easy to understand products and services, multi-access distribution and efficient and effective operations in the 18 countries in which it is active.
Results at NN Group showed significant improvement in 2013, on an operating basis. The improvement reflects a higher investment margin following the partial transfer of assets and liabilities from WestlandUtrecht Bank to Nationale-Nederlanden Bank, lower expenses resulting from the transformation programme in the Benelux, improved results in the non-life business and lower funding costs.
DELIVERING ON RESTRUCTURING ING continued to make strong progress on its restructuring programme in 2013, entering the end-phase of its transformation.
Strengths Weaknesses • Positive recognition from customers in many countries for its banking and insurance services.
• Solid financial position. • Multi-channel distribution strategy. • International network. • Sustainability leader in its sector.
STRENGTHENING THE BUSINESSES On the surface, the business of a financial institution such as ING may seem to be principally about money. In reality, ING’s business is centred on people and trust. Only by acting with professionalism and integrity can we maintain our stakeholders’ confidence and build the company’s reputation. At the heart of our values are the ING Business Principles, which are the global standard for the behaviour expected of every employee at ING: > We act with integrity.
Company Ltd. (KB Life). • ING’s investment management business in South Korea. • ING Life Korea, which was ING’s wholly-owned life insurance business in South Korea. • ING’s 70% stake in the Malaysian investment management business.
Two examples show how this translates into business practice: • In the first quarter of 2013, ING took another step towards greater transparency by publishing its Environmental and Social Risk (ESR) Framework online. ING has applied its ESR policies to its business activities since 2003. ING’s ESR Framework is applied at both the client and transaction levels at ING Bank. For NN Group the framework includes two policies that specifically address responsible investing: the ING Voting Policy and the ING Defence Policy. This ensures informed decision-making that is compliant with ING’s Business Principles.
ING’s efforts were publicly recognised in 2013. ING was included in the DJSI World Index and the DJSI Europe Index. The DJSI World Index lists the top 10% of companies within the ordinary Dow Jones Index in terms of best-in-class performance across economic, environmental and social criteria. ING’s inclusion in these indexes underscores its standing as one of the leading sustainable companies within the diversified financial sector. ING’s 2013 score of 76 is 32 points higher than the sector average of 44 points, placing ING in the 99th percentile for the sector. This implies that only 1% of diversified financials score higher than ING. The improvement demonstrates ING’s increased performance in integrating sustainability into its business activities.
BANK The essence of our strategy is built around the customer. In our view customers basically want a solid bank they can trust. ING Bank focuses on the safety of depositors’ money. We believe that ING Bank has strong deposit gathering capabilities and a good funding mix. ING aims to maintain a solid capital base, smooth and low-cost deposit raising and a careful, environmentally and socially responsible investment selection.
ING’s 5 Customer Golden Rules 1. We strive to meet customers’ needs throughout their life cycle.
5. We work only with professional and licensed distributors. Our partners and distributors are a reflection of us. We will make sure that anyone selling our products is properly trained, qualified and licensed.
• ING Bank also received external recognition as a top employer in France, Poland, Belgium and Italy.
In November 2013, it was announced that the base case IPO of ING’s European insurance and investment management activities, will include ING Life Japan. More information is provided in the Insurance chapters in this Annual Report.
NN Group’s focus is on customers, on generating capital, on growing profitability and on improving efficiency. NN Group’s strategy will therefore be about offering appealing and easy to understand products and services, multi-access distribution and efficient and effective operations in the 18 countries in which it is active.
CAPITAL MANAGEMENT DEVELOPMENTS AT ING GROUP The current focus areas at ING Group Capital Management are to repay the core Tier 1 securities to the Dutch State and to eliminate core debt. Repayment of the core Tier 1 securities will primarily be funded out of capital generated by ING Bank. The proceeds from divestments of insurance businesses will be used to eliminate core debt.
During 2013 core debt decreased by EUR 2.1 billion to EUR 5.0 billion. ING Bank N.V. paid a dividend to ING Group of EUR 1.5 billion to facilitate a reduction in the core debt. The proceeds of EUR 0.8 billion related to the partial sell-down of our stakes in ING U.S. and SulAmérica were also used to reduce core debt. This was offset by a conversion of EUR 1.0 billion of Insurance debt taken up from ING Group into equity, in preparation of the base case IPO.
At the end of 2013, another tranche of the SulAmérica stake was sold by ING Group. The proceeds of EUR 110 million were upstreamed to ING Group as a dividend payment to further reduce core debt. Early 2014, ING closed the sale of a subsequent tranche of the SulAmérica stake to Swiss Re. The proceeds of EUR 180 million brought ING’s stake to 9.7%.
CAPITAL MANAGEMENT DEVELOPMENTS AT NN GROUP The most important development during 2013 was the successful IPO of 28.8% of Voya in May and the subsequent sell-down to 57% in October. Total proceeds of these transactions amount to EUR 1,433 million and were used to reduce core debt at ING Group. Since the initial IPO price of USD 19.50, the share price has seen a strong performance ending the year at USD 35.15. The value of the remaining stake is EUR 3.8 billion. From 30 September the remaining stake has been directly held at the Group level.
CAPITAL MANAGEMENT DEVELOPMENTS AT ING BANK ING Bank manages its capital position primarily based on its published core Tier 1 ratio, which is the main constraining factor and the most widely used variable to assess the capitalisation of banks. The published ratio up till now was the Basel 2.5 ratio, but at the start of 2014 it moved to the Basel III ratio. ING Bank has set an ambitious target for its core Tier 1 ratio of 10% under Basel III, based on ING’s risk appetite and which compares well to its peer group. In 2013 it achieved that ratio on a fully loaded pro-forma basis.
Over the coming years the guiding principles for ING’s capital management will be cash capital generation, optimising the capital structure and financial flexibility. ING Bank believes that it will enter the Basel III era well-prepared with a strong capital position to withstand financial market challenges, new regulations and weak economic conditions.
of this taskforce, which consists of a collaboration between users and preparers of financial reports, such as global financial institutions, investors, rating agencies and external auditors. In addition, ING increasingly conducts company-wide and portfoliospecific stress tests as a supplementary tool to assess resilience to adverse market conditions and to act upon if mitigating actions are deemed necessary. Customer behaviour and demographics have an important bearing on risk management and are consequently modelled and incorporated in our risk appetite framework. Given the continuously changing environment, the underlying assumptions are regularly reviewed, as are all relevant metrics.
The new strategy is in line with ING’s vision that technology and innovation play a crucial role in the future of ING Bank.
ING began a programme involving outside experts and ING resources to further strengthen ING’s resilience to cybercrime attacks and will bring this to a higher level and make it a continuous point of attention. In 2013, in the Netherlands, ING Bank came under a serious Distributed Denial of Service (“DDoS”) attack, causing service outage and hindering access to online banking for customers. ING Bank regretted the temporary loss of service and worked intensively to defend its infrastructure and to 25ING Group Annual Report 2013 1 W h o w e are 2 R
The IT department worked towards laying the foundation for Insurance’s independent future. The IT strategy (excellent technology products and services, collaboration across the value chain and efficient and effective operations) was refined during 2013 and a multi-year IT transformation programme has been launched to support the strategy. The programme’s aim is to restructure the IT environment so it becomes even more effective and efficient in support of the NN Group businesses and their customers into the future.
In 2013, Investment Management successfully completed its two-year programme to establish a standardised global platform for front, mid and back office operations. Most investment centres across three continents now use this platform. It has led to a significant simplification of the IT landscape for Investment Management. In 2014, Investment Management intends to introduce direct execution, where customers can make buy/sell transactions and view their portfolios online.
Within Nationale-Nederlanden Bank, NN Group invested in portals to enable more straight-through processing and to also streamline their use. It also invested in Customer Relationship Management tooling and analytics, to among other things, personalise the customer experience.
Total underlying income 15,305 14,313 Underlying operating expenses 8,694 8,638 Underlying additions to loan loss provisions 2,288 2,121 Underlying result before tax 4,323 3,554 Underlying interest margin 1.42% 1.32% Underlying cost/income ratio 56.8% 60.3% Client balances: net production funds entrusted (EUR billion) 27 23 Client balances: net production lending (EUR billion) 6 0 Underlying risk costs in bp of average RWA 83 74 Risk-weighted assets (year-end, in EUR billion, adjusted for divestments) 283 276 Underlying return on equity based on IFRS-EU equity 9.0% 7.0% Underlying return on equity based on 10% core Tier 1** 11.7% 8.8% Employees (FTEs, year-end, adjusted for divestments) 63,805 65,173 * Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items ** Underlying after tax return divided by average equity based on 10% core Tier 1 ratio
Retail Banking 10,162 9,090 Commercial Banking 4,994 4,963 Corporate Line Banking 149 260 Total Banking 15,305 14,313
Retail Banking 2,603 1,963 Commercial Banking 1,817 1,635 Corporate Line Banking -97 -44 Total Banking 4,323 3,554
Commercial Banking provides services to a customer base of large corporations, organisations and governments through an international branch network covering more than 40 countries.
Important steps were also taken by the European authorities in crisis management regulation, in particular on the “bail-in” proposals. The bail-in tool gives resolution authorities the power to write down the claims of unsecured creditors of a failing institution and to convert those claims into equity. This applies to unsecured liabilities with a number of exceptions, such as guaranteed deposits and secured liabilities (including covered bonds). Although it was originally foreseen that bail-in rules would apply from 2018, we anticipate they could be introduced as early as 2016.
Some of our products help relieve social and environmental problems. For example, we offer retail customers in the Netherlands an ING Savings Account for UNICEF which supports UNICEF, the UN children’s charity; and in India we offer farmers products to cover their credit needs before, during and after harvest time.
In our lending and saving activities, ING’s Groenbank helps businesses make their activities more sustainable. ING Groenbank is the number two green bank in the Netherlands and was the lead arranger of a record EUR 100 million green loan to a Dutch energy company in 2013. ING has also created a Sustainable Lending team to identify and support sustainable business opportunities within commercial banking. The team has a global mandate, to identify and promote growth areas in the sustainability arena.
Customers in Belgium have been embracing new technologies faster than anticipated, leading to greater use of digital services and prompting further process automation. In the Netherlands, the number of mobile log-ons at ING exceeded online banking log-ons for the first time in the third quarter of 2013.
Customer-led change is at the heart of ING Bank. In Retail Banking, our full service franchises in the Netherlands and Belgium are evolving as online and mobile channels grow in importance. And in our direct franchises we are expanding our product range.
We are becoming the primary bank for more customers. ING Spain, for instance, started 14 years ago only with savings; now it is well on the way to becoming the primary bank for many customers, and a multi-product bank.
ING applied 10 simple principles for each operational process, such as “never ask the customer for information we already have”. In Belgium, customers can now request business loans online. ING Turkey in 2013 became the first bank in the country to offer an electronic invoicing solution which reduces paper and other costs. ING Romania launched Fast Track Light Automation, an application to handle loan applications for new Mid Corporate Business customers within 48 hours.
Top Employer teams are organised in each business line, with responsibility for executing at a local level the bank-wide Top Employer action plan.
Across the banking businesses, best practices are shared in the three global priorities identified to bring more focus and consistency to the Top Employer programme: performance management, development, and efficient & effective collaboration.
ING France, ING Italy, ING Poland, ING Belgium and ING Spain received local Top Employer Awards. ING Luxembourg, Interhyp, ING-DiBa and ING Spain have also received European “Great Place to Work Awards”, placing them in the top-25 of Best Multinational Workplaces in Europe. ING is the only financial institution in this European ranking. This success strengthens our employer branding and demonstrates that we are on track with our Top Employer programme.
We kept a steady course, and serving customers’ needs remained at the heart of our business. ING will continue to pursue technological innovation to support retail customers’ needs, and we will use our expertise and international network as a leading commercial banking for our corporate clients, both inside and outside Europe.
The underlying return on equity, based on a 10% core Tier 1 ratio, rose to 13.2% from 9.5% in 2012 due to higher results, while
Customer First, Digital First > Continued focus on customer needs with easy and fair products at low costs > Providing fast and innovative responses in a rapidly changing banking environment > Digital innovation a top priority
Retail Netherlands 4,079 3,897 Retail Belgium 2,321 2,194 Retail Germany 1,388 1,193 Retail Rest of World 2,374 1,807 Total Retail Banking 10,162 9,090
average risk-weighted assets remained stable. In 2013, however, total risk-weighted assets increased by EUR 9 billion to EUR 152 billion at year-end, mainly caused by adjusted parameters to reflect the ongoing weakness of the Dutch economy and its impact on the mortgage and business lending portfolio, and despite early signs of an improvement in the Dutch housing market in the last quarter.
ING’s retail banks have different roots: some have their origins in traditional, universal banks, while others were set up as new businesses, such as the former ING Direct units. In 2013, ING continued to combine these two retail models, with all business units following the same strategy and converging to the same model: easy and fair, and at low costs. The product and service range is thereby tailored to local customers and circumstances, with a focus on “digital first”. Around the world, customers are increasingly interacting with ING through digital channels, with mobile taking the lead. We think that mobile banking is the future of retail banking. Therefore, we are sharing mobile banking best practices across business units, so we can respond quickly to changing needs and bring new solutions to our customers as fast as possible, shorten the time to market and be more efficient. Consumers worldwide are also increasingly self-directed and empowered. They look for fair pricing and transparent terms and conditions from their bank and compare these with what other banks offer. They also want a seamless experience, whether they use a mobile, tablet, PC, phone or visit a branch. All business units therefore continued to invest in IT in order to respond rapidly to recent innovations.
a year-long recession, with a pickup in externally-orientated sectors such as industry and transport helping to offset continued weak domestic demand.
The overall performance of Retail Netherlands (Retail NL) was good, despite the ongoing adverse economic circumstances. Income has improved despite the current low interest rate environment in combination with a weak demand for business loans and a still fragile housing market. Underlying expenses were slightly down, when not taking into account the strong increase in pension costs. The poor economic climate, however, is also reflected by higher risk costs.
Retail NL has a top two market position in the Netherlands, serving almost eight million retail and private banking customers and nearly 700,000 SME and Mid-Corporate customers. Although customer demand for digital banking services continued to increase, ING maintained a substantial physical presence with 268 branches and 375 ING Service Points.
Retail NL’s mortgage market share declined by 1.4%-point, mainly due to the transfer and sale of part of the WUB portfolio. The full-year net production in mortgages (excluding transfers and sales) was EUR -0.4 billion (2012: EUR 1.8 billion). The non-performing loans ratio increased to 1.9% (2012: 1.4%) of total mortgage loans, which is still relatively low.
In recent years we have substantially reduced, among other things, the number of savings and related products from over 60 to a much smaller and more convenient product range. We kept improving our product range by screening and review product processes, making them simpler and more customer-friendly.
We have to constantly adapt to changing market circumstances and control costs in order to remain efficient. Following the measures announced, the number of full-time employees (FTEs) will be reduced by 4,400 by the end of 2015. So far, the headcount has been reduced by 2,900 FTEs.
Customer centricity We make daily banking easy and stand by customers at decisive moments in their lives by providing personal, active and serviceoriented solutions. To this end, we have launched a new campaign, “Orange Banking” (Orange is ING), illustrating our engagement with Dutch society. This campaign, which is driven by the needs of our customers, was rolled out in 2013 and will be continued in 2014.
In October, ING introduced the ING Savings Account for UNICEF. ING donates 0.10% per annum calculated over the total average savings balance on these accounts. This money is used to support a UNICEF-led education project in Madagascar.
Our efforts have been recognised by various organisations, confirming that we are well on the way to become our customers’ preferred bank. ING won several awards in 2013, including three “Bank of the Year” awards for the Netherlands, Belgium and Western Europe from The Banker, part of the Financial Times Group; the “Best Bank in the Netherlands” award from Global Finance; the Mobile Banking Campaign “Penny for your thoughts” won the SAN Accent 2012 Award in the category Financial Service Industry; the “Gouden Oor Erkenning” for complaints management; and the “Complain Online”award for the fastest and best handling of complaints. ING achieved second position in the Social Media Monitor’s “Best Bank in the Netherlands”. ING Private Banking was “highly commended” by the Financial Times.
Operational excellence We have improved customer service since 2012 by focusing on easy-to-use operational processes and making it easier for customers to change their personal data. We apply 10 simple principles for each operational customer process, such as: “never ask the customer for information we already have”. Furthermore, customers should always receive confirmation of changes made in their data and customer satisfaction has to be measured for all processes. These principles force us to improve and to introduce our solutions as easy as possible, from the customer point of view. In 2013, we realised the first results of simplifying our customer operational processs. For example, the child and youth account opening process is now shortened from 28 questions to 4 clicks.
BUSINESS DEVELOPMENTS Following the 2012 recession, economic growth picked up in Belgium in 2013, with gross domestic product increasing by 0.2%. Private consumption started to recover in 2013, increasing by 0.6% in real terms, and house price growth stabilised just above the inflation rate. The improvement in household confidence implied a slightly higher risk appetite. As a result, savings deposits increased, but at a lower pace than in the years before 2013. The ING investor barometer showed improved confidence among retail investors throughout the year.
The Bank continually responds to the fast-changing customer behaviours and expectations and adopts new technologies to meet their needs. It improved its direct channels, both for private and business customers. It launched, for example, a new app for tablets and, in September, ING BE became the first bank in Belgium where business customers can sign and activate their business lending contract online. ING BE’s specialist advisers were equipped with a new computer device that enables customers to sign for advicerelated products such as investment or lending products outside the branch, for example at home. This project, which started in 2013, will be further rolled out in 2014. Over the past four years, direct sales of simple online products have more than doubled, accounting for more than 40% of ING BE’s total simple product sales. Coupled with the increasing number of cumulated downloads of its mobile application since 2011 (448,000), this confirms the increasing use of direct banking by its customers. Daily mobile transactions more than tripled year-on-year in 2013.
The Bank’s continuous efforts to make banking easy paid off. For the 7th year in a row, ING Belgium experienced a net year-on-year growth of its customer base. The net growth of active customers amounted to 62,000, to a total of nearly 500,000 active customers since the introduction in 2007 of its “direct if possible, advice when needed” strategy.
Moreover, for the first time, more than 100,000 ING Lion accounts, the Bank’s free online current account, were opened in one year.
The new Collective Labour Agreement, which was signed at the end of 2013, aims to moderate the rise in salaries until 2016.
The Bank invested in new customer intelligence and leadmanagement solutions, enabling it to offer the right product to the right customer, at the right moment, and through the right channel.
ING BE’s employees participated in various initiatives enabling to raise funds for children and education (ING Run for UNICEF, Special Olympics and Ekiden Run). The ING Solidarity Award represented one of ING BE’s strongest CSR initiatives throughout the year. More than 1,400 organisations participated in this contest, with over 200,000 voters on the Award platform. In total, 70 non-profit organisations throughout the country were rewarded with financial support from ING BE.
Operational excellence ING BE launched a new version of Home’Bank, the Bank’s online banking service, which is fully integrated with the ing.be website. It provides easier navigation, more product information and a clear overview of the different functions. Business customers were also given a more complete online banking service during the year. From 2013, legal entities have been able to open accounts and manage mandates within the Home’Bank Plus and Telelink Online. Business customers can also manage a more complete range of professional accounts on Smart Banking for smartphones and tablets.
Top Employer In a fast-changing world, ING BE strives to give its employees the means to develop themselves, and to create a working environment that favours well-being, performance, mobility, flexibility and growth. The local Top Employer programme implemented a new induction course for newly recruited staff. It also rejuvenated its Performance Management Approach to ensure continuous constructive feedback. This new approach supports employees in developing their employability and managers in their people-coaching role while reinforcing the role of HR as a strategic business partner. For the seventh year in a row, ING BE received a Top Employer Certification from the CRF institute. It also won the Corporate HR Award at the annual HR Excellence Awards ceremony, in recognition of its efforts to increase its employees’ employability. ING BE created the ING Mobility Centre in 2013. It helps employees whose positions were made redundant find other jobs in ING BE or elsewhere. The Bank organised an ING Day in October for all employees to celebrate success, prepare for future challenges and reinforce company pride.
Record Bank Retail Belgium includes Record Bank, the fourth-largest retail savings institution in the country, with close to 730,000 customers (up from 700,000 in 2012). Record Bank serves retail, professional and small business customers with safe, simple and transparent savings and lending products. Its strength is the personal approach taken by its network of around 1,500 independent agents, credit brokers and vendors. Its funds entrusted volumes went up by 8% compared with 2012, with a strong increase in savings and deposits of EUR 1.3 billion, as a result of its excellent position in the Belgian savings market. The Bank continues to invest in online facilities to support its various distribution channels. In December, it launched its Mobile App for smartphones – Record Bank Mobile – giving customers the ability to check account balances and make bank transfers. Under the Belgian government’s Bank Switch Service (Bankoverstapdienst) customers should be able to switch banks within eight working days. The service has proved to be a great success for Record Bank, which has welcomed about 11% of the people switching in 2013. They have been attracted by Record’s free current account, competitive savings rates, and personal contact with a local banking agent.
ING Luxembourg reduced by 80% the time it takes for corporate customers to access the Bank’s website and improved the online account opening process for retail customers with “First time right”. The bank also launched an improved version (2.0) of ING Mobile, ING Luxembourg’s mobile app for mobile devices. As for its Top Employer ambitions, ING Luxembourg was in 2013 again included in the “Great Place to Work” ranking for Luxembourg. The Bank was awarded “Best Multinational Workplace in Europe” in the ranking of 100 Best Companies to Work for in Europe. ING Private Banking was awarded “Best Private Bank” in Luxembourg.
Underlying income increased by 16.3% to EUR 1,388 million, compared with EUR 1,193 million in 2012. The increase reflects higher interest results stemming from higher lending and savings balances and increased margins on savings supported by a reduction of the core savings rate in the beginning of 2013. Commission income rose by EUR 27 million from 2012, reflecting higher income from security brokerage. Investment and other income was slightly down, as the absence of de-risking losses in 2013 was offset by increased negative hedge ineffectiveness. Funds entrusted grew by EUR 9.2 billion in 2013. Lending growth was EUR 2.7 billion, of which EUR 2.2 billion was in mortgages.
The economic picture in the “rest of the world” is mixed. Activity in most of the remaining big eurozone countries, is now firming. Spain is showing promising signs of leaving the crisis behind, thanks to a strong export performance, and Italy is also slowly turning up. The recovery in France is also expected to moderately gain pace during 2014. In emerging markets, the picture is also mixed. The Chinese authorities are focusing on stability, and are prepared to tolerate a slightly slower pace of activity as this goal is achieved. Australia has been buffeted by volatile markets, but has been helped by central bank easing, and should deliver robust growth in 2014/15. Meanwhile, political developments in Turkey and Thailand have coloured a deteriorating investor sentiment towards emerging markets, with rate increases in Turkey likely to weigh on growth. In contrast India’s central bank response to market unrest has been far better received and is likely to generate less of a drag on growth. Both Poland and Romania are on track for reasonable growth in 2014, though market sentiment to Central and Eastern Europe has been tempered by political unrest elsewhere in the region.
ING Italy launched BitBumBam, a contest aimed at supporting projects and ideas that help new generations learn and develop through the innovative use of technology. ING France launched a programme to manage money during the “back to school” period and ING Turkey started “Orange Drops”, a programme for eight to nine-year-olds to educate them about the importance of saving. This helps to build the case for including financial education in the nation’s school curriculum.
Security and anti-cybercrime efforts remained an important priority in all business units. In 2013, ING’s Cybercrime Taskforce was launched, creating a common framework and implementing best practices for combatting cybercrime and e-banking fraud.
Despite the weak global economy, Commercial Banking posted a solid financial result while further developing its sustainable business model. We continued building our franchises by strengthening our capabilities to deliver a superior client service. Throughout our businesses, we have maintained strong client relationships. We have made significant progress in refocusing and streamlining our activities, maintaining tight cost discipline and advancing initiatives to further optimise our balance sheet. During 2013 we continued towards our objective of transforming ourselves into a simpler, stronger and more sustainable bank.
Included within Transaction Services is Bank Mendes Gans (BMG) and Trade Finance Services (TFS). BMG is a market-leading provider of specialist liquidity management solutions, including global cash-pooling and netting, to multi-national corporations. TFS finances, settles and mitigates risks of international trade for clients in all markets globally, but primarily in Asia, Central and Eastern Europe, Latin America, Africa and the Middle East.
BUSINESS DEVELOPMENTS Commercial Banking is a strong European bank with a market leading franchise in the Benelux and a good position in the rest of Europe, in particular in Central and Eastern Europe. We have a global franchise and market leading positions in selected areas in Industry Lending and in liquidity management, as well as focused and efficient global Trade Finance Services and Financial Markets businesses.
We are a relationship bank for clients around the world and serve a range of organisations, including multinational corporations, governments, financial institutions and supranational organisations, through an extensive network of offices in more than 40 countries. We provide a range of products and services to support our clients’ needs. Our lending capabilities anchor most of our client relationships. Transaction Services products, such as International Payments & Cash Management, Trade Banking and Working Capital Solutions are tailored, through integrated solutions and advice, to meet our clients’ short- and long-term banking and liquidity requirements. Financial Markets, as the Bank’s gateway to the professional markets of the world, services our client’s every day needs in treasury services through to capital markets, risk management and structured financial products.
Credit exposure of derivatives are revalued for counterparties and for notes issued by ING and these elements, referred to as CVA/DVA, are included in the trading results of FM. As the results of these movements are not actively managed, these CVA/DVA results are not considered in the core results of the underlying trading and sales business. In 2013 these non-core results were positive, against negative non-core results in 2012.
During 2013, FM enhanced its offering through the introduction of new specialised services, the introduction of a sales trading function, renewed focus on technological automation for client execution and the introduction of a global sales Client Relationship Management system.
BANK TREASURY, REAL ESTATE & OTHER BANK TREASURY To adapt to new regulations and to execute ING’s balance sheet optimisation strategy, ING has been coordinating treasury activities across all business lines within the Bank. This has been made possible through significant asset transfers across countries to guarantee an optimal use of our internal funding.
Finally, BT continues to closely monitor developments concerning the future European banking union and other regulatory changes that will affect the Bank’s liquidity profile. Balance sheet optimisation will remain a priority for ING in the coming years.
REAL ESTATE & OTHER Commercial Banking has a separate unit involved in the run-off and closure of non-core activities. The Real Estate & Other (“RE&O”) division consists of the residual assets of the legacy businesses sold or discontinued within the former Real Estate Development and Real Estate Investment Management businesses. It also includes General Lease operations outside ING’s home markets which have been placed in run-off. A dedicated organisation was established to oversee the discontinuation of operations ensuring the necessary control and management oversight.
International Trade and Export Finance supports international trade in basic commodities such as oil, oil products, metals, grain, sugar and cotton. We also finance the export of capital goods and offer services to clients with long-term financing supported by export credit agencies. ING maintained its consistent support and high service levels in the commodity finance business, and continued to grow the Structured Export Finance hub in Germany. ING has become the leading bank in the syndicated loan market for companies in the commodities business.
In 2013, the Sustainable Lending team worked with various experts and clients to facilitate a better understanding of the potential business opportunities in sustainable markets and build the necessary capacity to partner with clients in financing their sustainability needs.
FINANCIAL MARKETS FM is a well-diversified business exposed to developed markets and fast-growing economies and focused on rates and currencies more than credit. In this business unit we offer a broad range of global solutions to assist our clients in the management of their exposures to foreign exchange, interest rate, equity, commodity or credit movements. FM also acts as ING’s interface to these markets.
The increase in the volume of sustainable business across our Commercial Banking activities echoes the global trend for an increase in sustainable investments, lending and finance. We strive to meet the growing demand from clients for products with clear social and environmental objectives. From our financing and lending activities to payroll and cash management, we witness first-hand how trends can impact our business and that of our clients. “Financing Sustainability” was the theme of ING Commercial Banking’s marketing campaign, highlighting environmentally friendly transactions in 2013, such as the above- mentioned Butendiek transaction, that helped finance the transformation towards a more sustainable economy.
OPERATIONAL EXCELLENCE Commercial Banking is now in the execution phase of a strategic investment programme to improve the client experience, enhance product delivery and achieve business efficiency by creating a robust, cost-effective operating model that will support the business and streamline technology across all product lines and countries over the coming years. The initiative includes greater investment in mobile solutions and global IT applications and a move to more hub-based booking and processing of Commercial Banking business.
We also retained our number one position in key areas such as Mandated Lead Arranger (MLA) for syndicated loans in the Netherlands by number of deals and number one MLA and bookrunner in the Benelux by number of deals. For the fourth consecutive year ING Commercial Banking received recognition as the “Best Equity Broker in the Benelux” in the Extel Survey.
While market conditions have been challenging, ING executed major benchmark transactions for our clients, strengthening our relationships through our consistent support and by excelling in high value-added advice and creative financing solutions.
One example was the development of international learning curriculums, offered through global learning portals. We combined this with the launch of our “Heart of Orange Leadership” programme, in which leaders take time to reflect on what drives them, learn to mobilise competent teams and share experiences. These initiatives are contributing to a strong and agile workforce. We remain a people business.
CONCLUSIONS AND AMBITIONS Despite the weak global economy, Commercial Banking posted a solid financial result, deepened its client relationships and strengthened its capabilities.
We are transforming into a simpler, stronger and more sustainable bank. We continued to refocus and streamline our activities, maintained cost discipline and pursued our initiatives on balance sheet optimisation.
* Underlying numbers are derived from IFRS-EU, excluding the impact of divestments, discontinued operations and special items.
*** Excluding the results of the discontinued operations of ING U.S. and the results of Insurance Other.
ING made significant progress restructuring its insurance and investment management businesses in 2013. In Europe, NN Group progressed towards becoming a standalone business, significantly transforming its operations. ING U.S. was listed on the New York Stock Exchange and the divestment of the Asian insurance and investment management businesses was largely completed. In all its businesses, ING continued to work towards improving the customer experience.
The loss from non-operating items related to ongoing business improved to EUR 229 million in 2013 from EUR 779 million in 2012. Revaluations, which amounted to a loss of EUR 319 million in 2012 due to the impact of negative revaluations of equity hedges and real estate investments of Netherlands Life, improved to a gain of EUR 3 million in 2013. The provision for guarantees on separate account pension contracts (net of hedging) in the Netherlands had a EUR 202 million lower adverse impact as reflected in market and other impacts.
Its strategy is to deliver an excellent customer experience by offering appealing and transparent products and services, multiaccess distribution, efficient and effective operations, and to maintain a solid balance sheet that keeps customers’ money safe and delivers shareholder value.
* Outside Europe and Japan, Investment Management has offices in New York, Atlanta, Singapore and Dubai.
The restructuring has resulted in stronger governance, better integrated support functions, and three distinct Dutch business lines: Netherlands Life, Netherlands Non-life and NationaleNederlanden Bank. Supporting employees through this transition was a key priority for the company.
A three-year collective labour agreement was signed, which included the goal of stabilising labour costs as well as integrating WestlandUtrecht employees into Nationale-Nederlanden Bank. Despite the turbulence of the past few years, employee engagement remained high. This was also reflected in employees’ willingness to involve themselves in community activities outside the company in many countries.
In the field of responsible investing, Investment Management has taken significant steps in integrating environmental, social and governance (“ESG”) aspects into the investment process. Sustainable assets under management increased by 8.3% to EUR 3.5 billion. In line with being an active investor, Investment Management also attends shareholder meetings of its investee companies. In 2013 it introduced the publication of quarterly Active Ownership reports on its voting and engagement activities.
ING became one of the founding signatories of the United Nations Principles for Sustainable Insurance (PSI) in 2012, which underlines its commitment to embedding ESG considerations into strategy and decision making. In 2013, the PSI strategy for the coming years was written and approved by all PSI members.
NN Group takes its role in society seriously. Activities range from financial education to health and wellbeing initiatives. They involve raising funds and employees volunteering their time for special projects.
Result on divestment was a gain of EUR 6 million in 2013, compared with a loss of EUR 25 million in 2012. The loss in 2012 was related to the final settlement of the divestment of group pension contracts which were transferred to an industry wide pension fund.
The individual life insurance market is going through major change, driven in part by the economic downturn which is affecting consumer confidence and spending patterns, and by new regulations related to commissions on how individual life insurance products are sold. A major shift towards bank annuity products is taking place. In response to these developments, Netherlands Life is lowering costs by streamlining its processes and systems, and improving the customer experience. Netherlands Life is focused on providing excellent service to clients who have purchased individual contracts in previous years. It will continue to provide simple solutions by offering term life and direct annuities to prospective retail customers.
CUSTOMER EXPERIENCE Netherlands Life measures and analyses its Net Promoter Score (NPS) results and complaints. It adjusts processes in line with customers’ feedback and expectations.
Operating income was EUR 1,729 million in 2013, a 6.2% decrease compared with EUR 1,844 million in 2012. This decrease was largely driven by lower earned premiums in the SME P&C and D&A segments due to the challenging economic conditions and an underwriting focus on value and return over volume. Other income comprising commission income earned by NN Group’s whollyowned insurance brokers, Mandema and Zicht, showed a decrease as a result of the new legislation prohibiting insurance companies to pay commissions to brokers, which became effective in 2013.
PRODUCTS AND SERVICES Netherlands Non-life broadened its non-life insurance package for companies in 2013. It introduced, for example, cover for disruption to web shops such as cybercrime, and launched an insurance package to protect employers and their businesses against illness and disability. The broadened range of insurance also supports intermediaries who are able to offer their business customers more insurance options. In the retail space, Netherlands Non-life began to offer online travel insurance and cover against unexpected legal expenses. A new website was launched for intermediaries (www.adviseur. nn.nl) which includes a tool to select customers for mailing promotions.
Netherlands Non-life is constantly improving its processes by implementing straight-through-processing (STP). This not only enhances the customer experience but reduces manual work, errors and costs.
CONCLUSIONS AND AMBITIONS The weak economic environment continued to affect the business, but Netherlands Non-life is on track with profit recovery. It continues to improve its products and processes, enhance the customer experience and to lower expenses.
Non-operating items increased to a gain of EUR 53 million in 2013 from a loss of EUR 66 million in 2012. This increase reflects a EUR 48 million gain on the sale of Dutch and German government bonds in Belgium in 2013, as compared with capital losses and impairments on financial and government bonds in Belgium and Spain in 2012.
DISTRIBUTION Insurance Europe is building a multi-channel distribution platform to serve customers across all channels. It continues to invest in tied agents via the Tangerine programme which pools ING’s regional know-how and provides a best-practice template on how to run a tied agent sales force. Tangerine is being introduced country-bycountry and is already increasing tied agent productivity. Insurance Europe is also investing in the broker channel, especially in Turkey.
CONCLUSIONS AND AMBITIONS Insurance Europe made clear progress in improving the customer experience and broadening its distribution base in 2013. New products and value propositions were introduced. Its customer focus approach resulted in increasing NPS scores and several awards.
In 2012, Japan Life was Japan’s third largest provider of COLI products measured by Annual Premium Equivalent (APE). Japan Life believes that customer centricity is crucial to its success. Continuously improving the customer experience is one of its priorities. Key improvements in 2013 included the redesign of approximately 200 application and request forms, and the improvement of the interactive voice response process at the call centre.
BUSINESS DEVELOPMENTS Investment Management offers a wide variety of actively managed investment products and advisory services to retail and institutional customers in all major asset classes and investment styles. In addition, it manages the assets of NN Group’s businesses.
Investment Management offers its products and services globally through regional centres in several countries across Europe, the United States, the Middle East and Asia, with the Netherlands as its main investment hub. As at 31 December 2013, Investment Management had EUR 174 billion of AuM, of which EUR 104 billion was managed for third party retail and institutional customers and the remaining EUR 70 billion for the general account of NN Group’s businesses.
“Other” comprises the business of Nationale-Nederlanden Bank and ING Re (NN Group’s internal reinsurer), the results of the holding and other results.
FINANCIAL DEVELOPMENTS The operating result for the Other segment was a loss of EUR 371 million in 2013, compared with a loss of EUR 398 million in 2012. The improvement largely reflects lower funding costs offset by a lower result from the reinsurance business.
Fees and premium based revenues were EUR 136 million in 2013, a decrease of 8.1% compared with EUR 148 million in 2012, due to the 27% depreciation of the Japanese yen against the euro during 2013. Excluding currency effects, operating income increased by 15.0% due to the strong performance of the Japanese equity markets which boosted the account value of the closed-block annuity portfolio.
It distributes these products through intermediaries, NationaleNederlanden ’s direct channel and ING Bank. NationaleNederlanden Bank aims to build a high quality mortgage book and it has a strong and well-capitalised balance sheet.
ING RE ING Re is NN Group’s internal reinsurer located in the Netherlands. ING Re primarily offers reinsurance to NN Group’s businesses. It manages its risks through ceding excess insurance risk to external reinsurers and hedging (a major part of) its market risks. ING Re also reinsures the minimum guarantee obligations of the Japan Closed Block VA. In the segment reporting, the results from this reinsurance agreement are reported by ING Re under the Japan Closed Block VA segment (whilst the rest of ING Re results are reported under the Other segment).
In 2013, ING Re reviewed its key processes and strengthened its governance in preparation for Solvency II and to increase efficiency. Solvency II provides ING Re with new opportunities to improve NN Group’s capital allocation. By reinsuring risks from NN Group’s business lines and pooling them centrally at ING Re, diversification benefits can be achieved, resulting in capital efficiencies for NN Group.
Over 90% of the portfolio is projected to run off by 2019, due to the short-term maturity profile of the SPVA products.
The Supervisory Board and the Executive Board held eight regular meetings and two additional meetings in 2013. The progress in executing the Restructuring Plan of the European Commission including the progress on the divestment of various insurance and investment management businesses of ING in Asia, as well as the preparation of the initial public offerings (IPOs) for ING U.S. and NN Group were important topics on the agenda.
The Committees of the Supervisory Board discussed a range of subjects on which the Supervisory Board received information, the main ones being the quarterly results, risk management, corporate governance and human resources.
GENERAL SUPERVISORY BOARD MEETINGS The Supervisory Board met ten times in 2013 of which eight meetings were regular meetings. On average, 96% of the Supervisory Board members were present at the scheduled meetings. For the two ad hoc meetings the average presence was 91%. Apart from closely monitoring the financial results in 2013, the Supervisory Board also monitored the progress in executing the Restructuring Plan of the European Commission (EC), including the progress on the divestment of various insurance and investment management businesses of ING in Asia, the preparation of the initial public offerings (IPOs) for ING U.S. and NN Group as well as the repayment of the outstanding core Tier 1 securities to the Dutch State and the intended unwinding of the Illiquid Asset Back-up Facility.
At the annual Supervisory Board Knowledge Day in January 2013, presentations were given on ING’s Customer Golden Rules & customer-centric regulations, internal audit landscape, integrity and its role in building sustainability in the finance sector, as well as a workshop on ING’s product approval process. Several other educational sessions on specific topics were organised for the Supervisory Board during the year.
review in June and August, whereby the composition of the Management Board Insurance was discussed in great depth given the intended IPO of NN Group.
In August, the Supervisory Board approved the appointment of Lard Friese as vice-chairman of the Management Board NN Group as per 1 October 2013. An adjusted mandate for the Remuneration Committee regarding remuneration proposals for Identified staff was approved.
Audit Committee meetings In 2013 the Audit Committee met five times with no absentees to discuss the quarterly results, the Annual Report, the Form 20-F and the reports from the external auditor.
Given the new legislation which required ING to change its external auditor as of January 2016, the Audit Committee selected a small Audit Committee delegation to advise the Supervisory Board further on the external auditor tender process. The Audit Committee discussed and confirmed the topics mentioned in the management letter by Ernst & Young in the March 2014 meeting. Directly following the Audit Committee meetings, the members of
The Supervisory Board was further updated in November on the preparation for the NN Group IPO, including the proposal to include Japan Life in the scope of the IPO, which the Supervisory Board approved.
discussed the variable remuneration pool and reviewed the performance assessment and variable remuneration proposal for the Executive Board and Management Boards.
The proposed hurdles for the 2013 capital test were discussed. The remuneration proposals for Identified Staff were reviewed in February and March, including potential cases for holdback of deferred compensation by way of malus. In February and April the remuneration package for the future CEO was discussed.
In February, March and April the remuneration policy for ING U.S. was discussed and supported in light of the post IPO situation and taking into account the CRD III remuneration regulation. In August an adjusted governance mandate for the Remuneration Committee was positively advised. The regulatory developments, including the proposed legislation regarding a 20% bonus constraint in the Netherlands and the possible implications for ING were discussed several times as well. The annual review of the remuneration frameworks for ING Bank, NN Group, ING Group and ING U.S. took place as well as the annual risk analyses of the remuneration policy. The Identified staff selection criteria and the list of Identified staff for ING Bank, ING Group and ING U.S. were reviewed and approved.
Insurance Europe Committee The Supervisory Board decided to set up an additional Insurance Europe Committee to advise and assist the Supervisory Board on the preparation of the proposed IPO of NN Group. Jan Holsboer and Yvonne van Rooy became respectively chairman and member of this committee. For their coordination and experience as chairmen of the Audit and Risk Committees respectively, Joost Kuiper and Robert Reibestein became members of the Insurance Europe Committee on a temporary basis. The committee met formally on a monthly basis from November, as well as many individual meetings.
COMPOSITION OF THE EXECUTIVE AND THE MANAGEMENT BOARDS At the General Meeting of Shareholders in May, Ralph Hamers became a member of the Executive Board, Management Board Banking and Management Board NN Group (formerly called ING Insurance Topholding N.V.) and Management Board ING Verzekeringen N.V. as per AGM of 13 May 2013 and CEO of ING Bank, NN Group, ING Group and ING Verzekeringen N.V. as per 1 October 2013. Jan Hommen remained as CEO until 1 October 2013. Patrick Flynn was appointed as a member of the Executive Board for a consecutive period of four years. On 1 October 2013, Ralph Hamers succeeded Jan Hommen as CEO.
the Audit Committee met with the internal and external auditors to confirm that all relevant topics were discussed in the Audit Committee meeting.
Risk Committee meetings The Risk Committee met four times in 2013 with no absentees. At each Risk Committee meeting the financial risk and the nonfinancial risk reports for banking and insurance were discussed in detail. In May the Risk Committee discussed the ING Bank Recovery Report and was updated on the draft resolution plan for banking. An outline of the NN Group Recovery Plan was provided. In May and September the IT issues (DDoS attacks) and issues with the payment infrastructure were discussed in detail. Various stress test scenarios for ING Bank as well as NN Group were discussed in August and a presentation on the risk costs of the business lending portfolio was given followed by a presentation on the smaller accounts and the SME segment in November. The annual risk appetite statements for Bank and NN Group were supported. In November a risk management function review for the Bank and for NN Group was presented to the Risk Committee. During the year the Risk Committee closely monitored the progress of various projects regarding control risk within NN Group. As part of the 2013 permanent education programme, the Risk Committee was informed in depth on new risks in the financial sector. Each meeting ended with a general discussion on possible future risks.
The Nomination Committee also advised on the re-appointment of various Supervisory Board members, the nomination of three Supervisory Board candidates as well as on the future composition of the Supervisory Board including a future independent Supervisory Board for NN Group. The Nomination Committee requested an executive search firm to search for possible NN Group Supervisory Board candidates with financial expertise, preferably in the field of insurance, while also aiming to meet the ambition to have at least 30% female Supervisory Board members. Several candidates were interviewed by members of the Nomination Committee and the Supervisory Board. The Nomination Committee advised the Supervisory Board on the nomination of external candidates for the future Supervisory Board for NN Group.
Remuneration Committee meetings In 2013, the Remuneration Committee met seven times with one absentee at one meeting. Throughout the year the Remuneration Committee approved Identified Staff related remuneration matters, based upon the governance framework. The functioning of the Executive Board and the Management Boards was discussed regularly. The proposed 2013 performance objectives for the Board were reviewed and positively advised in January. In February, the Remuneration Committee approved the thresholds over which the pool for variable remuneration becomes available. It 60 ING Group Annual Report 2013
ING Group’s depositary-receipts structure was evaluated by the Executive Board and the Supervisory Board in 2010. On the basis of this evaluation, the Executive Board and the Supervisory Board concluded that it would be premature to change or abolish ING Group’s depositary-receipts structure in 2010 and that it would be appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring of ING Group and the completion of the divestments approved by the 2009 extraordinary General Meeting. The outcome of the aforementioned evaluation was discussed in the 2010 annual General Meeting.
CORPORATE GOVERNANCE CODES COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE For its corporate governance structure and practices, ING Group uses the Corporate Governance Code as reference. The Corporate Governance Code can be downloaded from the website of the Dutch Corporate Governance Code Monitoring Committee (www.commissiecorporategovernance.nl).
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 74-76.
INVESTOR RELATIONS AND BILATERAL CONTACTS WITH INVESTORS ING Group encourages and recognises the importance of bilateral communication with the investment community. Communications with current and potential shareholders, holders of depositary receipts, bondholders, and industry analysts is actively managed by the Investor Relations department.
General Meetings are convened by public notice via the website of ING Group (www.ing.com) no later than on the forty-second day before the day of the General Meeting. As of the date of convening a General Meeting, all information relevant for shareholders and holders of depositary receipts is made available to them on this website and at the ING Group head office.
DIALOGUE WITH SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS In 2013, shareholders and holders of depositary receipts were allowed to ask questions about items on the agenda for the annual General Meeting and they will similarly be allowed to do so in 2014. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions.
In 2013, ING Group did not host any Investor Days. However, ING Group provided an update on the preparations for an IPO of NN Groep N.V. at a meeting with investors and analysts in London, on 19 September 2013.
General Meetings are webcasted 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 by internet webcast.
VOTING RIGHTS ON SHARES Each share entitles the holder to cast one vote at the General Meeting. The Articles of Association do not restrict the voting rights on any class of shares. ING Group is not aware of any agreement pursuant to which voting rights on any class of its shares are restricted.
• the relevant holder of depositary receipts may delegate the powers conferred upon him or her by means of the voting proxy, provided that the relevant holder of depositary receipts has announced his or her intention to do so to ING Trust Office observing a term before the commencement of the General Meeting, which term will be determined by ING Trust Office.
accountable for the performance of these duties to the Supervisory Board and the General Meeting. The responsibility for the management of ING Group is vested in the Executive Board collectively. The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board. The Executive Board Charter is available on the website of ING Group (www.ing.com). 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 an indemnity statement. ING Group has also taken out liability insurance for the members of the Executive Board.
Moreover, the approval of the General Meeting is required for Executive Board decisions that would be considered to greatly 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.
FUNCTION OF THE EXECUTIVE BOARD The Executive Board is charged with the management of ING Group, which means, among other things, that it is responsible for the setting and achieving of ING Group’s objectives, strategy and policies, as well as the ensuing delivery of results. It also includes the day-to-day management of ING Group. The Executive Board is 68 ING Group Annual Report 2013
Significant conflicting interests are considered to be absent and are not reported if a member of the Executive Board obtains financial products and services, other than loans, which are provided by ING Group subsidiaries in the ordinary course of their business on terms that apply to all employees. In connection with the foregoing, ‘loans’ does not include financial products in which the granting of credit is of a subordinated nature, e.g. credit cards and overdrafts in current account, because of a lack of materiality. For an overview of loans granted to members of the Executive Board, see page 83.
P.G. (PATRICK) FLYNN, CHIEF FINANCIAL OFFICER (Born 1960, Irish nationality, male; appointed in 2009, term expires in 2017) Patrick Flynn is a Chartered Accountant and a member of the Association of Corporate Treasurers in the UK. He also holds a bachelor’s degree in Business Studies from Trinity College Dublin. He was appointed a member of the Executive Board of ING Group on 27 April 2009. He is responsible for ING’s finance departments and Investor Relations.
SUPERVISORY BOARD 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 non-binding if a resolution of the 69ING Group Annual Report 2013 1 W h o w e are 2 R
TERM OF APPOINTMENT OF MEMBERS OF THE SUPERVISORY BOARD A member of the Supervisory Board retires no later than at the end of the first General Meeting held four years after his or her last appointment or reappointment. In accordance with the Corporate Governance Code, members of the Supervisory Board may as a general rule be reappointed for two additional four-year terms. Under special circumstances however, the Supervisory Board may deviate from this general rule, among others 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. 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 positions. 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.
Members of the Supervisory Board are to disclose material conflicts of interest and potential conflicts of interest and to provide all information relevant thereto. Thereupon the Supervisory Board – without the member concerned taking part – decides whether a conflict of interest exists.
due to his relevant knowledge and experience. Joost Kuiper was appointed as the chairman of the Audit Committee on 9 May 2011.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting and advises the Supervisory Board on improvements. On 31 December 2013, the members of the Corporate Governance Committee were: Henk Breukink (chairman), Carin Gorter and Jeroen van der Veer.
The current composition of the Supervisory Board Committees can be found on ING Group’s website (www.ing.com), which is updated on a regular basis.
INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD 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.
C.W. (CARIN) GORTER (Born 1963, Dutch nationality, female; appointed in 2013, term expires in 2017) Former member of the Monitoring Committee Dutch Banking Code and Senior Executive Vice-President Compliance, Legal and Security ABN AMRO Bank N.V. Other business activities: member of the Supervisory Board Cooperation of VGZ and Cooperation TVM. Member of the Supervisory Council of CBR (driving license agency).
staatsgesteunde ondernemingen) prohibits financial institutions to grant severance payments to members of the Executive Board in case of state aid to such financial institution.
OBJECT Pursuant to its articles of association (the “Articles of Association”), the object of Stichting ING Aandelen, a foundation organised under the laws of the Netherlands, with its registered seat in Amsterdam (“ING Trust Office”) is: a. to acquire and administer for the purpose of management registered shares in the capital of ING Groep N.V., a public limited company with its registered office in Amsterdam (“ING Group”) and any bonus shares which may be distributed thereon or shares acquired as stock dividend or by the exercise of subscription rights and to issue exchangeable depositary receipts for these shares, to exercise voting rights and all other rights attaching to the shares, to exercise subscription rights and to receive dividends and other distributions, including proceeds of liquidation, subject to the obligation to distribute the income to the holders of depositary receipts, save that depositary receipts shall be issued for bonus shares, shares acquired as stock dividend and shares acquired on behalf of holders of depositary receipts by virtue of the exercise of subscription rights; b. to promote the exchange of information between ING Group on the one hand and the holders of depositary receipts and shareholders in ING Group on the other; c. to promote the solicitation of proxies of shareholders other than the foundation itself and of specific proxies and/or voting instructions of holders of depositary receipts, and further to engage in any activity which may be related to the foregoing in the widest sense, whereby all activities which entail commercial risk shall be excluded from the foundation’s object.
MEETING OF HOLDERS OF DEPOSITARY RECEIPTS 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% of the total number of depositary receipts issued by ING Trust Office, may 75ING Group Annual Report 2013 1 W h o w e are 2 R
COSTS In 2013, the costs of the activities of ING Trust Office amounted to EUR 456,204.78
OTHER The activities involved in the administration of shares are performed by Administratiekantoor van het Algemeen Administratie- en Trustkantoor B.V., Amsterdam.
Stichting Continuïteit ING (“ING Continuity Foundation”), a foundation organized under the laws of the Netherlands, established in Amsterdam, was founded on 22 January 1991.
A call-option agreement concluded between ING Continuity Foundation and ING Groep N.V. (“ING Group”) vests ING Continuity Foundation with the right to acquire cumulative preference shares in the share capital of ING Group up to a maximum of 4.5 billion cumulative preference shares. The acquisition of cumulative preference shares by ING Continuity Foundation is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one-third of the total issued share capital of ING Group. If new shares other than cumulative preference shares are subsequently issued, ING Continuity Foundation may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid on said shares.
REPORT OF THE EXECUTIVE BOARD ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Executive Board is responsible for establishing and maintaining adequate internal control over financial reporting. ING’s internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
79ING Group Annual Report 2013 1 W h o w e are 2 R
SUPERVISORY BOARD DISCRETION TO REVIEW THE POLICY AND THE REMUNERATION PAID ING is expected to undergo significant changes during the coming years. Also, the regulatory environment is still in a state of flux
2013 REMUNERATION The Executive Board remuneration for 2013 is based on the remuneration policy approved by the 2010 AGM and amended by the 2011 AGM. It is the responsibility of ING’s Remuneration Committee to take into account the interests of all stakeholders, including shareholders and employees, as well as business continuity and sustainable growth, when overseeing the company’s remuneration policy.
(2) Jan Hommen retired on 1 October 2013 and did not participate in the pension plan.
(2) Jan Hommen retired on 1 October 2013. (3) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The figures for him reflect compensation earned in the capacity as an Executive Board member. Thus the figure for 2012 reflects a partial year as an Executive Board member.
83ING Group Annual Report 2013 1 W h o w e are 2 R
Performance or deferred shares vested for the Executive Board during 2013 number of shares Performance or deferred shares Granting date Vesting date Nr. Of shares granted Nr. of shares vested (1) Vesting price
(1) Performance shares are shares conditionally granted with the final shares awarded based on ING’s performance at the end of each performance cycle. (2) Shares granted to Wilfred Nagel in May 2012 and 2013 were awarded for his performance in positions previous to his appointment to the Executive Board.
Wilfred Nagel 70,027 15,246 2014 REMUNERATION STRUCTURE EXECUTIVE BOARD 2014 EXECUTIVE BOARD BASE SALARY In line with the Executive Board decision not to accept a base salary increase in 2011 as the repayment of core Tier 1 securities that were issued to the Dutch State has not been completed and the Dutch Bonus Prohibition Act applicable as per 2012, the base salary of the Executive Board will not increase with respect to performance year 2014.
2014 EXECUTIVE BOARD VARIABLE REMUNERATION As long as the Dutch Bonus Prohibition is applicable for ING, the Executive Board will not receive variable remuneration.
FOCUS ON LONG-TERM VALUE CREATION, RISK AND NON-FINANCIAL PERFORMANCE Variable remuneration is linked to long-term value creation and risk. It is based on individual, business line and company performance criteria. Performance measurement will increasingly account for estimated risks and costs of capital. There is a clear emphasis on long-term value creation by means of long-term incentives, deferral and claw back mechanisms.
2013 REMUNERATION STRUCTURE SENIOR MANAGEMENT Given the differences in the regulatory requirements for banking and insurance and the separation of ING’s banking and insurance activities, the remuneration structures for senior management in ING’s banking and insurance operations were determined separately in 2013 based on internal strategy and external regulatory developments.
The remuneration policy for the Executive Board, which permits a combination of fixed compensation (base salary) and variable remuneration (together “total direct compensation”), pension arrangements and benefits applies in full to members of the Management Board Banking. For senior management in banking, ING has gradually shifted to a more balanced mix of fixed and variable remuneration in line with the remuneration policy for the Executive Board and to put more emphasis on value creation.
(2) The remuneration amounts of 2012 are excluding VAT. In 2011 and 2012 compensation was voluntarily capped at EUR 100,000 and EUR 90,000 for the chairman and vice-chairman respectively. The amounts in excess of the aforementioned cap of 2011 amounting to EUR 13,000 for Peter Elverding and EUR 14,000 for Jeroen van der Veer are deducted from their remuneration relating to 2012.
(5) Robert Reibestein is a member of the Supervisory Board as of January 2013. Carin Gorter, Isabel Martín Castellá and Hermann-Josef Lamberti are members of the Supervisory Board as of May 2013. The compensation figures for 2013 reflect a partial year as a member of the Supervisory Board.
(6) Piet Klaver, Lodewijk de Waal and Sjoerd van Keulen retired in May 2013. The compensation figure for 2013 reflects a partial year as a member of the Supervisory Board.
LOANS AND ADVANCES TO SUPERVISORY BOARD MEMBERS Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The table on the next page presents the loans and advances to Supervisory Board members outstanding on 31 December 2013, 2012 and 2011.
2013 REMUNERATION SUPERVISORY BOARD The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2013 and previous years.
(2) The ING depositary receipts held by Luc Vandewalle are currently held in usufruct.
(2) Luc Vandewalle was appointed to the Supervisory Board in May 2011. No options expired since his appointment to the Supervisory Board until 31 December 2011.
A. (Aad) Kant, chairman Insurance, the Netherlands R. (Reinoud) Rijpkema, secretary Insurance, the Netherlands H. (Havva) Tasgil, secretary Insurance, the Netherlands
Reinsurance contracts 149 19 Amounts due to banks 152 20 Customer deposits and other funds on deposit 152 21 Financial liabilities at fair value through profit and loss 153 22 Other liabilities 154
Notes to the consolidated statement of cash flows 39 Net cash flow from investing activities 170 40 Interest and dividend included in net cash flow 170 41 Cash and cash equivalents 171 5 Parent company annual accounts
Consolidated balance sheet of ING Group as at 31 December 90 ING Group Annual Report 2013
Continuing operations Interest income banking operations 51,394 60,003 64,649 Interest expense banking operations –39,693 –48,119 –51,200 Interest result banking operations 23 11,701 11,884 13,449
Net result from continuing operations attributable to: Equityholders of the parent 2,998 2,970 4,971
Consolidated statement of cash flows of ING Group for the years ended 31 December amounts in millions of euros 2013 2012 2011
– non-trading derivatives –2,151 –1,779 1,988 – other financial assets at fair value through profit and loss 1,899 –2,417 474 – loans and advances to customers 6,090 531 –25,085 – other assets 2,542 –596 –59 – amounts due to banks, not payable on demand –10,266 –26,459 –6,731 – customer deposits and other funds on deposit 25,585 27,718 27,019 – trading liabilities –10,172 –24,031 –369 – other financial liabilities at fair value through profit and loss –3,429 –1,376 –207 – other liabilities –11,772 –2,246 –3,931
Repayments of subordinated loans –1,470 –10 –2,356 Proceeds from borrowed funds and debt securities 156,663 332,492 428,381 Repayments of borrowed funds and debt securities –164,738 –333,165 –429,997 Repayment of non-voting equity securities –750 –750 –2,000 Repurchase premium (2) –375 –375 –1,000 Payments to acquire treasury shares –17 Sales of treasury shares 119 160 41 Proceeds of ING U.S. 14 1,848 Net cash flow from financing activities –8,703 –1,665 –6,931
Cash and cash equivalents at beginning of year 24,150 34,280 20,768 Effect of exchange rate changes on cash and cash equivalents 882 219 –200 Cash and cash equivalents at end of year 41 17,180 24,150 34,280
95ING Group Annual Report 2013 1 W h o w e are 2 R
Employee stock option and share plans 115 115 115 Repayment of non-voting equity securities –2,000 –2,000 Repurchase premium –1,000 –1,000 –1,000 Changes in the composition of the group and other –1 –1 Dividend –34 –34 Purchase/sale of treasury shares 50 50 50
97ING Group Annual Report 2013 1 W h o w e are 2 R
IFRS-EU provides several options in accounting policies. The key areas in which IFRS-EU allows accounting policy choices, and the related ING accounting policy, are summarised as follows: • As explained in the section ‘Principles of valuation and determination of results’ and in Note 47 ‘Derivatives and hedge accounting’ ING
Net result from continuing operations (before change in accounting policy) 2,806 5,038 Impact on staff expenses - Pension and other staff-related benefit costs 354 19 Tax effect –87 –4 Discontinued operations after tax (after change in accounting policy) 1,197 815 Net result from continuing and discontinued operations (after change in accounting policy) 4,270 5,868
Total amount recognised directly in equity (before change in accounting policy) 3,995 824 Remeasurement of the net defined benefit asset/liability –3,577 452 Tax effect 716 –91 Total amount recognised directly in equity (after change in accounting policy) 1,134 1,185
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Amendments to IFRS 7 ‘Financial instruments: Disclosures’ The amendments to IFRS 7 ‘Financial instruments: Disclosures’ introduced additional disclosures on offsetting (netting) of financial instruments in the balance sheet and on the potential effect of netting arrangements. There is no impact on Total equity, Net result and/or Other comprehensive income. Reference is made to Note 52 ‘Offsetting financial assets and liabilities’.
The merged entity NN Group N.V. is in substance a continuation of ING Insurance. As of 2013, NN Group prepares consolidated financial statements under IFRS-EU in which all assets and liabilities of ING Insurance and its subsidiaries are included at their existing carrying values. The parent company financial statements are those of NN Group N.V. As ING Topholding was a holding company with no other assets, liabilities and activities than its 100% holding ING Insurance, the financial position and results of NN Group are not significantly different from what these would have been for ING Insurance.
Notes to the consolidated annual accounts of ING Group continued 102 ING Group Annual Report 2013
Reference is made to Note 46 ‘Fair value of assets and liabilities’ for more disclosure on fair values of real estate investments.
Notes to the consolidated annual accounts of ING Group continued 103ING Group Annual Report 2013 1 W h o w e are 2 R
Impairments Impairment evaluation is a complex process that inherently involves significant judgements and uncertainties that may have a significant impact on ING Group’s consolidated financial statements. Impairments are especially relevant in two areas: Available-for-sale debt and equity securities and Goodwill/Intangible assets.
Notes to the consolidated annual accounts of ING Group continued 104 ING Group Annual Report 2013
Upon classification as held for sale, the carrying amount of the disposal group (or group of assets) is compared to their fair value less cost to sell. If the fair value less cost to sell is lower than the carrying value, this expected loss is recognised through a reduction of the carrying value of any goodwill related to the disposal group or the carrying value of certain other non-current non-financial assets to the extent that the carrying value of those assets exceeds their fair value. Any excess of the expected loss over the reduction of the carrying amount of these relevant assets is not recognised upon classification as held for sale, but is recognised as part of the result on disposal if and when a divestment transaction occurs.
When a group of assets that is classified as held for sale represents a major line of business or geographical area the disposal group classifies as discontinued operations. In the consolidated profit and loss account, the income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of result after tax for both the current and for comparative years.
Notes to the consolidated annual accounts of ING Group continued 106 ING Group Annual Report 2013
Notes to the consolidated annual accounts of ING Group continued 107ING Group Annual Report 2013 1 W h o w e are 2 R
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 53 ‘Contingent liabilities and commitments’ for these off-balance sheet items. Collateral received is not taken into account when determining the maximum credit risk exposure.
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.
In most Retail portfolios, ING Bank has a write-off policy that requires 100% provision for all retail exposure after 2 years (3 years for mortgages) following the last default date.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless they provide evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. The reporting dates of all significant associates are consistent with the reporting date of the Group.
Property obtained from foreclosures Property obtained from foreclosures is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property obtained from foreclosures is included in Other assets - Property development and obtained from foreclosures.
Notes to the consolidated annual accounts of ING Group continued 112 ING Group Annual Report 2013
supervision expenses less any impairment losses. Profit is recognised using the completed contract method (on sale date of the property). Impairment is recognised if the estimated selling price in the ordinary course of business, less applicable variable selling expenses is lower than carrying value.
Assets under operating leases Assets leased out under operating leases in which ING Group is the lessor are stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over the lease term.
Notes to the consolidated annual accounts of ING Group continued 113ING Group Annual Report 2013 1 W h o w e are 2 R
For certain products DAC is adjusted for the impact of unrealised results on allocated investments through equity.
Taxation Income tax on the result for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account but it is recognised directly in equity if the tax relates to items that are recognised directly in equity.
Changes in those local accounting standards (including Dutch GAAP and US GAAP) subsequent to the adoption of IFRS-EU are considered for adoption on a case-by-case basis. If adopted, the impact thereof is accounted for as a change in accounting policy under IFRS-EU.
Notes to the consolidated annual accounts of ING Group continued 115ING Group Annual Report 2013 1 W h o w e are 2 R
Income recognition Gross premium income Premiums from life insurance policies are recognised as income when due from the policyholder. For non-life insurance policies, gross premium income is recognised on a pro-rata basis over the term of the related policy coverage. Receipts under investment contracts are not recognised as gross premium income.
Notes to the consolidated annual accounts of ING Group continued 118 ING Group Annual Report 2013
Notes to the consolidated annual accounts of ING Group continued 122 ING Group Annual Report 2013
The revaluation reserve on debt securities includes EUR 4,354 million (before tax) related to Government bonds. This amount comprises EUR 109 million positive revaluation reserve for Government bonds from Greece, Italy, Ireland, Portugal, Spain and Cyprus and EUR 4,289 million positive revaluation reserves for Government bonds from other countries.
Further information on ING Group’s risk exposure with regard to Greece, Italy, Ireland, Portugal, Spain and Cyprus is provided in the ‘Risk management’ section.
Disposals and redemptions –1,599 –4,737 –118,718 –132,681 –3,439 –2,308 –123,756 –139,726 Exchange rate differences –48 2 –4,365 –1,104 –4,413 –1,102 Changes in the composition of the group and other changes 405 –1,327 –47,421 –30,920 –1 –47,017 –32,247
In 2013, To/from loans and advances to customers/amounts due from banks in relation to Available-for-sale debt securities relates to a debt security that was reclassified to Loans and advances to customers because there is no active market.
Carrying value as at 31 December 3,057 14,419 633 Fair value as at 31 December 2,883 13,250 648 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –307 –446 –8 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –174 –1,169 15 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (mainly interest income) 90 390 28 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil 127ING Group Annual Report 2013 1 W h o w e are 2 R
Borrowed debt securities are not recognised in the balance sheet and amount to nil (2012: nil).
Investments in connection with the insurance operations with a combined carrying value of nil (2012: nil) did not produce any income for the year ended 31 December 2013.
Unearned future finance income on finance leases –2,364 –2,996 Net investment in finance leases 13,748 16,396
Included in Amounts due from banks 73 133 Included in Loans and advances to customers 13,675 16,263
Notes to the consolidated annual accounts of ING Group continued 131ING Group Annual Report 2013 1 W h o w e are 2 R
Revaluations In 2013, Revaluations includes EUR –2 million (2012: nil) relating to TMB, EUR –2 million (2012: nil) relating to SulAmérica S.A. and the remainder to individually not significant associates.
Transfers to and from Other assets –61 –8 Fair value gains/(losses) –5 –59 Disposals –265 –290 Exchange rate differences –2 7 Changes in the composition of the group and other changes –13 –92 Closing balance 1,142 1,288
Notes to the consolidated annual accounts of ING Group continued 132 ING Group Annual Report 2013
Real estate investments by year of most recent appraisal by independent qualified valuers in percentages 2013 2012
Most recent appraisal in the current year 100 99 Most recent appraisal two years ago 1
Disposals –18 –7 –9 –15 –27 –22 Depreciation –161 –181 –215 –226 –376 –407 Impairments –1 –1 –2 Exchange rate differences –10 4 –14 6 –24 10 Changes in the composition of the group and other changes –10 –27 –19 –44 –29 –71
In 2013, Changes in the composition of the group and other changes includes EUR –894 million as a result of the classification of ING U.S. as held for sale and EUR 5 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 135ING Group Annual Report 2013 1 W h o w e are 2 R
Amortisation and unlocking –1,885 –1,051 –7 –15 –1,892 –1,066 Effect of unrealised revaluations in equity 660 –251 660 –251 Exchange rate differences –494 –244 –494 –244 Changes in the composition of the group and other changes –2,094 –5,765 –3 –2,094 –5,768
In 2013, Changes in the composition of the group and other changes includes EUR –4,416 million as a result of the classification of ING U.S. as held for sale and EUR 2,409 million as a result of the classification to continuing operations of ING Japan.
The separate reporting of the Japan Closed Block VA business line triggered a write-off of all deferred acquisition costs (DAC) related to the Japan Closed Block VA business of EUR 1,405 million, partly compensated by a release of the Life insurance provision related to
Notes to the consolidated annual accounts of ING Group continued 136 ING Group Annual Report 2013
After carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that ING Life Japan will be included with ING’s European insurance and investment management businesses in the base case IPO of NN Group in 2014. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’) are no longer classified as held for sale as at 31 December 2013. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 137ING Group Annual Report 2013 1 W h o w e are 2 R
Goodwill Intangible assets under Assets held for sale includes goodwill that relates to businesses that are classified as held for sale (2013: nil; 2012: EUR 485 million). In 2012, EUR 485 million goodwill was reclassified to Assets held for sale. This related to Insurance Korea (EUR 200 million), Investment Management Korea (EUR 180 million), Insurance India (EUR 41 million) and Investment Management Taiwan (EUR 48 million) for the insurance operations and ING Direct UK (EUR 16 million) for the banking operations.
Property under development 14 163 Property developed 857 927 Property obtained from foreclosures 74 130
Gross carrying amount as at 31 December 1,800 2,297 Accumulated impairments as at 31 December –855 –1,077 Net carrying value 945 1,220
The total amount of borrowing costs relating to Property development and obtained from foreclosures, capitalised in 2013 is nil (2012: EUR 2 million).
Impact of ING U.S. relates to the IPO and second tranche sale of ING U.S. as explained in Note 59 ‘Other events’.
Unrealised revaluations –22 7,183 7,161 Realised gains/losses transferred to profit and loss –772 –772 Changes in cash flow hedge reserve 718 718 Transfer to insurance liabilities/DAC –2,181 –2,181
Unrealised revaluations –12 967 955 Realised gains/losses transferred to profit and loss 723 723 Changes in cash flow hedge reserve 1,124 1,124 Transfer to insurance liabilities/DAC –2,004 –2,004
Opening balance –841 93 79 Unrealised revaluations 335 –142 167 Realised gains/losses transferred to profit and loss 213 –68 Exchange rate differences –1,868 –724 –153 Closing balance –2,161 –841 93
Result for the year 4,161 4,161 Unrealised revaluations –360 281 –79 Changes in treasury shares 255 255 Transfer to share of associates reserve –236 236 Employee stock options and share plans 7 7 Repurchase premium –375 –375
Notes to the consolidated annual accounts of ING Group continued 142 ING Group Annual Report 2013
Result for the year 5,781 5,781 Unrealised revaluations –306 –40 –346 Changes in treasury shares 50 50 Transfer to share of associates reserve –423 423 Employee stock options and share plans 115 115 Repurchase premium –1,000 –1,000
Further coupons are to be paid on 12 May of each year (the coupon date) in cash if the dividend on ordinary shares is paid in cash or to be paid in scrip securities in the event of a scrip dividend on ordinary shares. Coupons are only due and payable, on a non-cumulative basis and if a dividend is paid on ordinary shares over the financial year preceding the coupon date, either on an interim or a final dividend basis, provided that ING Group’s capital adequacy position is and remains satisfactory both before and after payment in the opinion of the Dutch central bank (DNB).
Notes to the consolidated annual accounts of ING Group continued 143ING Group Annual Report 2013 1 W h o w e are 2 R
Non-distributable reserves 4,007 7,253 11,260 2011 ING Bank NN Group Other Total
Notes to the consolidated annual accounts of ING Group continued 144 ING Group Annual Report 2013
Notes to the consolidated annual accounts of ING Group continued 145ING Group Annual Report 2013 1 W h o w e are 2 R
Notes to the consolidated annual accounts of ING Group continued 146 ING Group Annual Report 2013
The change in Debt securities in issue includes EUR –2,600 million as a result of the classification of ING U.S. as held for sale. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 147ING Group Annual Report 2013 1 W h o w e are 2 R
Furthermore in 2013, ING Bank repurchased an additional EUR 1.1 billion and USD 500 million of Dutch government guaranteed notes. These repurchases resulted in an additional charge of EUR 11 million (EUR 8 million after tax) and is recognised in Other income - Other.
Notes to the consolidated annual accounts of ING Group continued 148 ING Group Annual Report 2013
The deferred profit sharing amount on unrealised revaluation is included in Provision for (deferred) profit sharing and rebates and amounts to EUR 3,488 million as at 31 December 2013 (2012: EUR 6,304 million).
Prior year provisions – benefit payments to policyholders –17,361 –16,074 –15,466 –14,919 –756 –668 –33,583 –31,661 – interest accrual and changes in
Notes to the consolidated annual accounts of ING Group continued 149ING Group Annual Report 2013 1 W h o w e are 2 R
Where discounting is used in the calculation of life insurance provisions, the rate is within the range 2.3% to 4.0% (2012: 3.0% to 5.1%) based on weighted averages. The change is mainly due to a change in the composition of the portfolio.
Insurance provisions include a provision for the estimated cost of the agreement with regard to unit-linked policies. For more information reference is made to Note 54 ‘Legal proceedings’.
In 2013, Changes in the composition of the group and other changes includes EUR –136,541 million as a result of the classification of ING U.S. as held for sale and EUR 29,445 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 150 ING Group Annual Report 2013
Opening balance 12,628 13,198 Changes in the composition of the group and other changes –9,504 53
Notes to the consolidated annual accounts of ING Group continued 151ING Group Annual Report 2013 1 W h o w e are 2 R
19 AMOUNTS DUE TO BANKS Amounts due to banks includes non-subordinated debt due to banks, other than amounts in the form of debt securities.
Notes to the consolidated annual accounts of ING Group continued 152 ING Group Annual Report 2013
The decrease in Financial liabilities at fair value through profit and loss is mainly due to a decrease in the fair value of derivatives (as longterm interest rates increased) and by optimising the trading derivatives portfolio which is partly offset by increased repurchase funding.
Derivatives used in: – fair value hedges 4,555 9,037 – cash flow hedges 4,385 6,439 – hedges of net investments in foreign operations 52 71 Other non-trading derivatives 2,163 3,205
The change in Other liabilities includes is EUR –4,451 million as a result of the classification of ING U.S. as held for sale and is EUR 1,093 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Disclosures in respect of Net defined benefit liabilities are provided in Note 44 ‘Pension and other post-employment benefits’ and deferred tax liabilities are provided in Note 45 ‘Taxation’.
The provision for the estimated cost of the agreement with regard to unit-linked policies is included in Note 18 ‘Insurance and investment contracts, reinsurance contracts’.
In 2013, a reorganisation provision of EUR 167 million is recognised in the segment Retail Netherlands and Commercial Banking as a result of further measures that have been taken to accelerate the cost savings program. These measures are expected to result in a further reduction of the workforce of around 300 FTEs.
Each of these initiatives will be implemented over a period of several years and the estimate of the reorganisation provisions is inherently uncertain. The provision at balance sheet date represent the best estimate of the expected redundancy costs and are expected to be sufficient to cover these costs.
Releases –40 –27 –26 –38 –66 –65 Charges –6 –40 –254 –33 –260 –73 Exchange rate differences –6 –1 –16 –7 –22 –8 Changes in the composition of the group and other changes –9 –18 60 –105 51 –123
In 2013, the decrease in total average assets, partly attributable to the disposal of ING Direct Canada and ING Direct UK, and the sale and transfer of assets of WestlandUtrecht Bank to NN Group, leads to a decrease of EUR 1,070 million in the interest result. In addition, an improvement of the interest margin of 11 basis points led to an EUR 888 million increase in the interest result.
Other includes commission fees of EUR 215 million (2012: EUR 230 million; 2011: EUR 183 million) in respect of bank guarantees and commission fees of EUR 27 million (2012: EUR 17 million; 2011: EUR 26 million) in respect of underwriting syndication loans.
Change in fair value of assets and liabilities (hedged items) –963 536 989 3 –6 4 –960 530 993 Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) –53 –1,101 504 –276 –277 –1 –329 –1,378 503
Valuation results on non-trading derivatives are reflected in the Consolidated statement of cash flows in the line ‘Result before tax - Adjusted for: other’.
In 2013, for the Banking operations, Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) includes fair value adjustments on own issued notes amounting to EUR 136 negative (2012: EUR 1,067 million negative), of which DVA adjustment on own issued notes in 2013 amounted to EUR 129 million negative (2012: EUR 633 million negative).
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 Bank 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 Bank 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 Bank as part of its own regular treasury activities, but also relate to the role that ING Bank 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 21 ‘Financial liabilities at fair value through profit and loss’ for information on trading liabilities.
In 2013, for the Banking operations, Net trading income - Derivatives trading results includes EUR 243 million positive CVA/DVA adjustments on trading derivatives, compared with EUR 64 million positive CVA/DVA adjustment in 2012.
Net operating lease income comprises income of EUR 18 million (2012: EUR 2 million; 2011: EUR 772 million) and depreciation of EUR 17 million (2012: EUR 1 million; 2011: EUR 596 million).
In 2013, Other income - Other includes EUR 100 million result (before tax) on the unwinding of the Illiquid Assets Back-up Facility. Reference is made to Note 58 ‘Related parties’.
In 2011, Other income - Other included a gain of EUR 955 million on the repurchase of subordinated loans as disclosed in Note 15 ‘Subordinated loans’.
Expenditure from investment contracts Costs of acquiring investment contracts 1 2 3 Other changes in investment contract liabilities –47 –108 20
The total Cost of acquiring insurance business (life and non-life) and investment contracts amounted to EUR 2,122 million (2012: EUR 761 million; 2011: EUR 738 million). This includes amortisation and unlocking of DAC of EUR 1,892 million (2012: EUR 1,066 million; 2011: EUR 1,702 million) and the net amount of commissions paid of EUR 854 million (2012: EUR 1,369 million; 2011: EUR 622 million) and commissions capitalised in DAC of EUR 624 million (2012: EUR 1,674 million; 2011: EUR 1,586 million). In 2013, Cost of acquiring insurance business includes the reduction of DAC of EUR 1,405 million for Japan Closed Block VA as explained below.
As set out in the section ‘Principles of valuation and determination of results – Insurance, investment and reinsurance contracts’, ING applies, for certain specific products or components thereof, the option in IFRS 4 to measure (components of) the provisions for liabilities under insurance contracts using market-consistent interest rates and other current estimates and assumptions. This relates mainly to certain guarantees embedded in insurance contracts in Japan. The impact of these market-consistent assumptions is reflected in ‘Underwriting expenditure – Change in life insurance provisions’.
The ‘Change in life insurance provision’ in 2013 includes a larger release from Insurance provisions compared to 2012 following an increase in benefit payments and lower premium income. ‘Underwriting expenditure – Gross benefits’ increased by EUR 716 million in 2013 compared to 2012, which was largely offset by lower ‘Changes in life insurance provisions’. Gross premium income in 2013 was EUR 1,175 million lower compared to 2012. Furthermore, ‘Change in life insurance provision’ in 2013 includes a release of EUR 867 million related to Japan Closed block VA as explained below.
Remuneration of senior management, Executive Board and Supervisory Board Reference is made to Note 58 ‘Related parties’.
The information presented below on stock options and share plans includes personnel employed by entities that are presented as continuing operations as well as held for sale and discontinued operations.
Changes in share awards Share awards (in numbers) Weighted average grant date fair value (in euros)
In 2012, Other operating expenses – Other included the settlement with US authorities of EUR 473 million as disclosed in Note 54 ‘Legal proceedings’ and the Netherlands bank tax of EUR 175 million.
ING Japan After carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that ING Life Japan will be included with ING’s European insurance and investment management businesses in the base case IPO of NN Group in 2014. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’) are no longer classified as discontinued operations. All references to Asia in this disclosure therefore, refer to ING’s Insurance and investment management businesses in Asia other than ING Japan. Reference is made to Note 59 ‘Other events’.
As at 31 December 2011, ING’s pension, life insurance and investment management activities in Latin America (‘Latin America’) were classified as discontinued operations. The divestment of Latin America was completed in December 2011.
Net result from discontinued operations In 2013, 2012 and 2011, Net result from discontinued operations includes the net result (after tax) of the businesses classified as discontinued operations and is presented separately in the profit and loss account. Result from discontinued operations was as follows: Result from discontinued operations
Sales proceeds in cash are presented in the consolidated statement of cash flows under ‘Net cash flow from investment activities - Disposals and redemptions: group companies’. The proceeds relating to the IPO and second tranche sale of ING U.S. are presented in the Consolidated statement of cash flows under ‘Proceeds of ING U.S.’. These proceeds are not included in the table above.
Segmentation prior to classification as discontinued operations The activities of ING U.S. were previously included respectively in the segments Insurance United States (US), Investment Management US, Insurance US Closed Block VA and in the Corporate Line US before they were classified as discontinued operations and held for sale. These segments ceased to exist, following the classification of ING U.S. business as discontinued operations, as all activities previously included in these segment are now discontinued operations.
Treasury bills and other eligible bills 574 518 2,610 Amounts due from/to banks 1,015 4,633 –4,504 Cash and balances with central banks 13,316 17,657 31,194 Cash and cash equivalents classified as Assets held for sale 2,275 1,342 4,980 Cash and cash equivalents at end of year 17,180 24,150 34,280
The new reporting segments for ING Group are as follows: Segments of ING Group Banking Insurance
In addition to these segments, ING Group reconciles the total segment results to the total result of Banking and Insurance using the Corporate Lines Banking, and Insurance Other. The Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in. Insurance Other reflects NN Group’s share in the result of the Brazilian insurer SulAmérica S.A. and overhead expenses of ING Group allocated to NN Group. As of 2014, Insurance Other will cease to exist.
– Other interest expenses 592 –130 462 – Additions to loan loss provision 2,288 2,288
– Total investment and other income 122 4,569 –342 4,349 Total underlying income 14,285 16,498 –350 30,433
Divestments in 2011 reflected the results on the sale of ING Real Estate Investment Management (REIM) and ING Car Lease as well as the operating result of the divested units.
Special items in 2011 included costs for the Retail Netherlands change programme and strategic repositioning initiatives at Commercial Banking, additional costs for the combining of ING Bank and Postbank in the Netherlands, the transformation programme in Belgium, further restructuring at ING Real Estate following the sale of ING REIM, and costs related to the separation of Banking and Insurance, as well as an adjustment of the Illiquid Assets Back-up Facility based on higher prepayment behaviour in the underlying Alt-A securities and the result on the repurchase of subordinated loans executed in December 2011 as disclosed in Note 30 ‘Other income’ and Note 15 ‘Subordinated loans’.
Divestments –43 –43 Special items –107 25 –82 * Analysed as a part of operating expenses.
• Total net result from discontinued operations. Reference is made to Note 36 ‘Discontinued operations’.
Non-life operating result 79 5 84 Operating result Other –373 32 –341
Special items before tax –225 –140 –38 –6 –43 –10 –462 Result on divestments –25 13 –12 Result before tax from continuing operations –335 –51 115 209 105 –452 105 33 –272
Special items before tax –83 –53 –90 –10 22 –214 Result on divestments –9 –9 Result before tax from continuing operations 683 93 –439 126 118 –333 138 56 443
Fair value of plan assets 21,919 22,869 20,078 Defined benefit obligation 21,249 22,079 16,212 Funded status (Net defined benefit asset/(liability)) 670 790 3,866
Opening balance 22,869 20,078 Interest income 824 1,020 Remeasurements: Return on plan assets excluding amounts included in interest income –1,020 1,640 Employer’s contribution 1,088 746 Participants' contributions 10 18 Benefits paid –586 –613 Effect of settlement –97 Exchange rate differences –50 13 Changes in the composition of the group and other changes –1,119 –33 Closing balance 21,919 22,869
Remeasurement of plan assets –885 1,640 Actuarial gains and losses arising from changes in demographic assumptions 21 –2 Actuarial gains and losses arising from changes in financial assumptions –208 –5,919
In 2012, the discount rate changed from 5.3% to 3.7%, resulting in an increase of the defined benefit obligation of approximately EUR 6 billion.
Sensitivity analysis – financial impact of changes in significant actuarial assumptions on the defined benefit obligation
For 2014 the expected contributions to pension plans are EUR 444 million.
The table above relates to the defined benefit pension fund in the Netherlands that is closed for new pension rights as of 1 January 2014.
Pension and post-employment benefits 585 –1,058 247 11 39 –176 Other provisions –256 346 20 –129 –19 Receivables –74 –7 –6 –87 Loans and advances to customers 884 –82 155 3 3 963 Unused tax losses carried forward –1,297 –186 -7 37 –1,453
In 2011, Changes in the composition of the group and other changes related mainly to the classification of ING Direct USA as a disposal group held for sale.
More than 1 year but less than 5 years 392 426 86 199 More than 5 years but less than 10 years 124 158 1,313 3,227 More than 10 years but less than 20 years 338 2,398 295 12
This can be specified by jurisdiction as follows: Breakdown by jurisdiction Banking operations Insurance operations Total
Recognition is based on the fact that it is probable that the entity will have taxable profits and/or can utilise tax planning opportunities before expiration of the deferred tax assets. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred tax assets.
Tax exempt income (Associates exemption) includes non-taxable income on divestments. In 2013, this amount includes the divestment gain of EUR 944 million on the Hong Kong, Macau and Thailand divestment, which is largely offset by the divestment loss of EUR 989 million on the ING Life Korea transaction. In 2012, tax exempt profit on divestments included mainly the results on the following transactions: • ING Direct Canada (transaction gain EUR 1,124 million); • ING Direct USA (transaction gain EUR 743 million) and the related sale of shares in Capital One (transaction gain EUR 323 million); and • ING’s investment management business in Malaysia (transaction gain EUR 745 million).
Financial assets designated as at fair value through profit and loss 571 2,021 198 2,790 Available-for-sale investments 111,273 23,474 3,151 137,897
Financial assets designated as at fair value through profit and loss 220 2,419 2,121 4,760 Available-for-sale investments 115,883 73,513 4,188 193,584
Transfers out of Level 1 into Level 2 occur when ING Group establishes that markets are no longer active and therefore (unadjusted) quoted prices no longer provide reliable pricing information.
Transfers out of Level 3 –202 –6 –21 –2 –462 –693 Exchange rate differences –1 –5 –2 –18 –21 –47 Changes in the composition of the group and other changes 3 –116 2 84 –254 –281
Amounts recognised in the profit and loss account during the year 232 –850 96 –522 Issue of liabilities 1,378 239 2,614 12 4,243 Early repayment of liabilities –348 –49 –1,067 –6 –1,470 Maturity/settlement –535 –3 –1,174 –1,712
Transfers out of Level 3 –223 –19 –30 –6 –278 Exchange rate differences –8 –22 –4 –31
Investments for risk of policyholders 3 –1 2 Non-trading derivatives –379 4 –375 Financial assets designated as at fair value through profit and loss –204 –42 –246 Available-for-sale investments –92 42 –50
The remaining EUR 0.8 billion of the fair value classified in Level 3 financial assets is established using valuation techniques that incorporates certain inputs that are unobservable. This relates mainly to assets that are classified as Available-for-sale investments, for which changes in fair value are recognised in shareholders’ equity and do not directly impact profit and loss.
At fair value through profit and loss Debt securities 341 26 Price based Price (%) 0% 150%
Structured notes 343 Price based Price (%) 65% 110% Net asset value Price (%) 118% 118% Option pricing model Equity volatility (%) 17% 74%
– FX 462 384 Present value techniques Inflation rate (%) –1% 3%
Equity securities Level 3 equity securities mainly include corporate investments, fund investments, real estate positions and other equity securities which are not traded in active markets. In the absence of an active market, fair values are estimated on the basis of the analysis of fund managers reports, company’s financial position, future prospects and other factors, considering valuations of similar positions or by the reference to acquisition cost of the position. Given the bespoke nature of the analysis in respect to most significant positions, it is not practical to quote a range of key unobservable inputs.
Credit spreads Credit spread is the premium above a benchmark interest rate, typically LIBOR or relevant Treasury instrument, required by the market participant to accept a lower credit quality. Higher credit spreads indicate lower credit quality and a lower value of an asset.
Volatility Volatility is a measure for variation of the price of a financial instrument or other valuation input over time. Volatility is one of the key inputs in option pricing models. Typically, the higher the volatility, the higher value of the option. Volatility varies by the underlying reference (equity, commodity, foreign currency and interest rates), by strike and maturity of the option.
Other financial instruments The fair values of the financial instruments carried at amortised cost in the balance sheet, but for which fair values are disclosed are determined as follows: Methods applied in determining fair values of financial assets and liabilities 2013 Level 1 Level 2 Level 3 Total
Financial assets Cash and balances with central banks 13,316 13,316 Amounts due from banks 4,830 30,343 8,000 43,173 Held-to-maturity investments 1,225 1,928 3,153 Loans and advances to customers 5,148 40,798 494,986 540,932
The fair values of the non-financial assets carried at fair value were determined as follows: Methods applied in determining fair values of non-financial assets 2013 Level 1 Level 2 Level 3 Total
Fair value hierarchy of Greek, Italian, Irish, Portuguese, Spanish and Cyprian bonds at fair value 2013 Level 1 Level 2 Level 3 Total
To qualify for hedge accounting under IFRS-EU, strict criteria must be met. Certain hedges that are economically effective from a risk management perspective do not qualify for hedge accounting under IFRS-EU. The fair value changes of derivatives relating to such non-qualifying hedges are taken to the profit and loss account. However, in certain cases, the Group mitigates the profit and loss account volatility by designating hedged assets and liabilities at fair value through profit and loss. If hedge accounting is applied under IFRS-EU, it is possible that during the hedge a hedge relationship no longer qualifies for hedge accounting and hedge accounting cannot be continued, even if the hedge remains economically effective. As a result, the volatility arising from undertaking economic hedging in the profit and loss account may be higher than would be expected from an economic point of view.
Hedges of net investments in foreign operations ING Group’s net investment hedges principally consist of derivatives (including currency forwards and swaps) and non-derivative financial instruments such as foreign currency denominated funding that are used to protect against foreign currency exposures on foreign subsidiaries.
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2013 on derivatives and nonderivatives designated under net investment hedge accounting was nil (2012: nil).
Customer deposits and other funds on deposit 380,810 27,364 38,098 6,239 2,034 458 455,003 Financial liabilities at fair value through profit and loss
50 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: Assets not freely disposable
Loans and advances to customers that have been pledged as collateral for Debt securities in issue and for liquidity purposes, amount in the Netherlands to EUR 45.9 billion (2012: EUR 46.7 billion), in Germany to EUR 8.4 billion (2012: EUR 2.8 billion), in Belgium EUR 2.5 billion (2012: nil) and in Spain to nil (2012: EUR 1 billion).
Transferred assets at carrying amount Amounts due from banks 5,482 Financial assets at fair value through profit and loss (1) 1,238 102 13,880 38,211
Repurchase, securities lending and similar agreements 34,298 –6,111 28,187 695 15,854 11,638
On 19 November 2012, ING Group and the EC announced that the EC had approved amendments to the 2009 Restructuring Plan (the ‘2012 Amended Restructuring Plan’). With the approval, the Commission has closed its Investigation as announced on 11 May 2012 and ING has withdrawn its appeal at the General Court of the European Union that it filed in July 2012. For principal legal reasons the European Commission will continue with its appeal against the General Court ruling of March 2012. However, the outcome of this Appeal will not affect the EC approval of the 2012 Amended Restructuring plan. It is expected that this judgment will be rendered in April 2014.
In January 2011 the Association of Stockholders (Vereniging van Effectenbezitters, ‘VEB’) has issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now: Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank, and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB states that the impact and the risks of the subprime crisis for Fortis and Fortis’ liquidity position have been reflected incorrectly in the prospectus. The VEB requests a declaratory decision stating that the summoned parties have acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. The amount of damages of EUR 18 billion has not been substantiated yet. ING is defending itself against this claim; at this time ING is not able to assess the outcome of the court proceeding. Therefore, at this moment it is not practicable to provide an estimate of the (potential) financial effect of such action.
In April 2013, the ING Pension Fund started arbitration proceedings to adjudicate a dispute with ING concerning the adjusted mortality tables used in the calculation of premiums and provisions. In 2013 ING decided to lower its contributions by 1.7% as a result of ING not accepting the adjustments made by the ING Pension Fund resulting from the mortality tables used. In February 2014 the ING Pension Fund and ING agreed that the ING Pension Fund will remain using a surcharge of 1.7% and the ING Pension Fund and ING will share the costs of the 1.7% surcharge over 2013. The payment of 50% of the surcharge 2013 by ING is included in the payment by ING of the one-time lump sum to the ING Pension Fund, which was closed for the accrual of new pension benefits as of 1 January 2014, of EUR 379 million to release ING from future financial obligations. More information is provided in Note 60 of the Annual Accounts.
ING Life Korea In August 2013, ING announced that it has 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.
ING Direct Canada In August 2012, ING reached an agreement to sell ING Direct Canada for a total consideration of approximately EUR 2.4 billion (CAD 3.1 billion) to Scotiabank, a leading Canadian financial services company. ING Direct Canada had approximately CAD 40 billion in assets. The sale of ING Direct Canada lead to a transaction gain of EUR 1.1 billion after tax. Under the terms of the sale agreement, Scotiabank paid CAD 3.1 billion in cash for all of the shares in ING Bank of Canada, which is the formal name of ING Direct Canada. In addition to this, Scotiabank assumed the responsibility to redeem on the 5 March 2013 (which is the first eligible call date after closing) a locally issued lower tier 2 bond (ISIN CA 456847AA01) with a total outstanding amount of CAD 321 million, which carries a guarantee from ING Bank. ING Direct Canada was included in the segment Retail Rest of World. The transaction closed in November 2012.
ING Direct USA In June 2011, ING reached an agreement to sell ING Direct USA to Capital One Financial Corporation, a leading US-based financial holding company. In February 2012, ING announced that the transaction closed. Total proceeds of the transaction were approximately EUR 6.9 billion (USD 9.0 billion), including USD 6.3 billion in cash and USD 2.7 billion in the form of 54.0 million shares in Capital One, based on the share price of USD 49.29 at closing on 16 February 2012. These shares represented a 9.7% stake in Capital One at closing. The transaction resulted in a positive result after tax of EUR 489 million and had a positive impact on ING Bank’s core Tier 1 ratio of approximately 80 basis points at closing. This result included the release of the currency translation reserve and the available-for-sale reserve. The net negative cash proceeds from the divestment of ING Direct USA of EUR 10.3 billion (being the net amount of cash received of EUR 4.8 billion and cash included in the divestment of EUR 15.1 billion) is included in the cash flow statement in ‘Disposals and redemptions – group companies’. ING Direct USA was previously included in the segment Retail Rest of World (ING Direct). In September 2012, ING sold all of its shares in Capital One Financial Corporation as disclosed in Note 25 ‘Investment income’.
Divestments effective in 2011 Pacific Antai Life Insurance Company Ltd. In June 2011, ING completed the sale of its entire stake in China’s Pacific Antai Life Insurance Company Ltd. (PALIC) to China Construction Bank for a consideration of EUR 82 million, and a net profit of EUR 28 million. The stake in PALIC was previously included in the former segment Insurance Asia/Pacific.
ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES) In July 2011, ING completed the sale of Clarion Real Estate Securities (CRES) to CB Richard Ellis. The sale resulted in a net gain on divestment of EUR 182 million. CRES was previously included in the former segment ING Real Estate.
ING Investment Management Australia In October 2011, ING completed the sale of ING Investment Management (ING IM) Australia to UBS AG. ING IM Australia’s business provided a number of investment strategies and products directly to the Australian institutional and wholesale markets. ING IM Australia was previously included in the segment ING Investment Management.
The Latin American operations were previously included in the segments Insurance Latin America and ING Investment Management before they were classified as discontinued operations. The segment Insurance Latin America ceased to exist following this transaction as the majority of assets and liabilities have been sold. The net result from discontinued operations is presented separately in the consolidated profit and loss account. Reference is made to Note 36 ‘Discontinued operations’ for more detailed disclosures.
Financial assets at fair value through profit and loss 5 10 679 694 Real estate investments Property and equipment 3,275 3,275
1) Consolidated ING originated Credit management securitisation programmes ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING Group enters into a credit default swap (‘CDS’) with securitisation Special Purpose Entities (’SPEs’), in relation to which ING Group purchases credit protection in respect of residential mortgage loans and loans to corporates and small and medium-sized enterprises. The SPEs have hedged their exposure with investors through the issue of credit-linked notes or credit-linked commercial paper. As a result of these transactions, ING Group has transferred a part of its credit risk related to these loan portfolios to third-party investors.
2) Consolidated ING originated Liquidity management securitisation programmes (Lions) ING Group enters into liquidity management securitisation programmes in order to obtain funding and improve liquidity. Within the programme ING Group sells ING originated assets to a structured entity. The underlying exposures include residential mortgages in the Netherlands, Germany, Belgium, Spain, Italy and Australia.
ING Bank originated various securitisations with at 31 December 2013 approximately EUR 76 billion (2012: EUR 90 billion) of AAA rated notes and subordinated notes, of which approximately EUR 6.7 billion (2012: EUR 3.5 billion) are held by third parties. The underlying exposures are residential mortgages and SME loans. Apart from the third party funding, these securitisations did not impact ING Bank’s consolidated balance sheet and profit and loss.
Structured entity ING Covered Bond Company B.V. ('CBC') 43,173 42,820 2,282 1,270
5) Unconsolidated Securitisation programme In 2013 ING transferred financial assets (mortgages loans) for an amount of approximately EUR 2 billion to a newly established special purpose entity (SPE). The transaction resulted in full derecognition of the financial assets from ING’s balance sheet. The derecognition did not have a significant impact on net result. Following this transfer ING continues to have two types of on-going involvement in the transferred assets: as counterparty to the SPE of a non-standard interest rate swap and as servicer of the transferred assets. ING has an option to unwind the transaction by redeeming all notes at their principal outstanding amount, in the unlikely event of changes in accounting and/or regulatory requirements that significantly impact the transaction. The fair value of the swap as at 31 December 2013 amounted to EUR 62 million; fair value changes on this swap recognised in the profit and loss account in 2013 were EUR 5 million. Fee income recognised in the profit and loss account in 2013 amounted to EUR 1 million.
(2) Excluding members that are also members of the Executive Board of ING Groep N.V. (3) In 2013 the compensation of the Management Board NN Group reflects the extension of the Board by two members. (4) In 2013 the Named Executive Officers ING U.S. consisted of five persons (in 2012 three Executive Officers). (5) In 2011, the Named Executive Officers of ING U.S. were granted a one-time incentive award of EUR 8.4 million contingent upon successfully executing the IPO of ING U.S. The awards consist of EUR 2.0 million in cash and EUR 6.4 million in deferred shares.
(1) Next to compensation in his capacity as Board member, one of the new Management Board members received a ‘buy-out’ for the loss of compensation that he would have received had he not resigned from his former employer. The buy-out consists of a cash amount and shares with a total value of EUR 500,000 at the grant date, which vests in the years 2012–2015.
(2) Excluding members that are also members of the Executive Board of ING Groep N.V. (3) After publication of the 2012 Annual accounts, a variable reward of EUR 168,750 was awarded to one board member (of which 50% in each of ING Bank and NN Group), which was pending final approval. The 2012 figures were updated for this award.
Key management personnel compensation is generally included in Staff expenses in the profit and loss account, except for Key management personnel employed by entities that are presented as held for sale and discontinued operations in which case their compensation is included in the Total net result from discontinued operations.
ING has indicated that it remains its ambition to repay the remaining support as quickly as possible and ING intends to accelerate repayments if possible and prudent under the prevailing economic circumstances. All actual repayments are conditional upon the approval of the Dutch central bank at the time ING decides to propose such payment.
Under the terms of the original Restructuring Plan, ING was required to divest WestlandUtrecht Bank. However, due to market circumstances and changing regulatory requirements, a divestment of WestlandUtrecht has not occurred. Instead, under the amended Restructuring Plan, the commercial operations of WestlandUtrecht Bank were combined with the retail banking activities of NationaleNederlanden, which is to be divested as part of ING’s insurance and investment management operations in Europe. The result has to be that Nationale-Nederlanden Bank is a viable and competitive business, which stands alone and is separate from the businesses retained by ING. To this end ING already needs to ring-fence Nationale-Nederlanden Bank up to the divestment of more than 50% of NN Group.
The price leadership restrictions in Europe have been amended to reflect specific conditions in various local markets. Under the amendments, the constraint no longer applies in the Netherlands, and ING Direct in the EU will 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.
Credit Guarantee Scheme As part of the measures adopted to protect the financial sector, the Dutch State introduced a EUR 200 billion credit guarantee scheme for the issuance of medium term debt instruments by banks (the Credit Guarantee Scheme). ING Bank N.V. issued government guaranteed debt instruments under this Credit Guarantee Scheme (‘Government Guaranteed Bonds’) as part of its regular medium-term funding operations. The relevant Rules of the Credit Guarantee Scheme set forth the rules applicable to any issues under the Credit Guarantee Scheme and include information such as scope, denomination, tenor and fees payable by the banks. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme. Reference is made to Note 16 ‘Debt securities in issue’.
In the framework of the transactions with the Dutch State disclosed in this note, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which were in place until the Illiquid Assets Back-up Facility was unwound. The State Nominees will stay in office for the term for which they were appointed.
The total net proceeds of these transactions were EUR 1,061 million (USD 1,385 million). The IPO reduced the ownership of ING in ING U.S. from 100% to 71.25%.
Second tranche sale in October 2013 In October 2013, ING sold approximately 33 million ordinary shares in ING U.S. at a price of USD 29.50 per share. Furthermore, the underwriters exercised in full their option to purchase approximately 4.95 million additional shares of ING U.S. from ING Group. These transactions closed on 29 October 2013. ING Group is subject to a lock-up period of 90 days from 24 October 2013.
The total net proceeds of these transactions were EUR 786 million (USD 944 million). As a result, ING’s ownership interest in Insurance ING U.S. was further reduced from approximately 71.25% to 56.7%.
The total proceeds of the transactions in May and October was EUR 1,847 million (USD 2,329 million). These transactions did not impact the profit and loss account of ING Group. These transactions had a negative impact of EUR 2,526 million on Shareholders’ equity (parent) of ING Group that was recognised in ‘Other reserves’. Minority interests increased with EUR 4,348 million due to these transactions. This amount represents 43.3% of the net asset value under IFRS-EU of ING U.S. Reference is made to Note 14 ‘Equity’.
As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’) are no longer classified as held for sale and discontinued operations. The individual assets and liabilities of ING Japan are therefore classified out of Assets and liabilities 234 ING Group Annual Report 2013
The comparative periods for the balance sheet have not been restated and therefore the assets and liabilities of ING Japan are still included in Assets and liabilities held for sale for the year 2012. All comparative periods in the Consolidated profit and loss account have been restated for this decision and therefore income and expenses of ING Japan are included in the continuing operations part of the statement for the years 2012 and 2011.
SNS Reaal nationalisation In 2013, the nationalisation of SNS Reaal, a Dutch financial institution, was announced. As a consequence of the arrangements made by the Dutch government, ING Bank and other Dutch banks will be required to pay a one-time levy of EUR 1 billion in 2014. For ING this will result in a charge of EUR 304 million in 2014. There is no impact from this 2014 levy on the result of 2013.
ING U.S. On 10 March 2014, ING Group announced that ING U.S., Inc., the U.S.-based retirement, investment and insurance businesses subsidiary, has filed a registration statement with the U.S. Securities and Exchange Commission (SEC) which is required to accommodate possible future transactions to further reduce the current 56% interest of ING Group in ING U.S. The final structure, timing, size and offer price for the possible transactions have not yet been determined at the date of this Annual Report and remain subject to market and other conditions. If the possible transaction would result in deconsolidation of ING U.S. by ING Group, a divestment loss will be recognised in the profit and loss account. This loss will reflect ING Group’s currently remaining share in the difference between the carrying value of ING U.S. and the fair value (based on the transaction price), plus ING Group’s share in unrealised revaluations in equity plus the net currency translation reserve related to ING U.S. Based on the quoted share price of ING U.S. and the reserves in equity (both as at 31 December 2013) such divestment loss is estimated to be approximately EUR 2 billion (before tax). The actual divestment loss may differ from this estimate due to changes between 31 December 2013 and the date of deconsolidation.
Mission 238 Group risk management function 238 Risk developments in 2013 239
Both ING Bank and NN Group need to prepare for significant changes in the regulatory requirements. For ING Bank the most important one is the implementation of Basel III (for European banks as ING implemented via Capital Requirements Directive (CRD) IV which is effective per 1 January 2014), while NN Group runs an extensive programme to allow the implementation of Solvency II (which is the fundamental reform of European insurance solvency and risk governance legislation; announced to be effective as of 1 January 2014 but delays in legislation imply that it will not be effective before 1 January 2016). Additionally, both in Bank and Insurance, ING continued its stress testing efforts, with stress testing becoming more important and more embedded in the risk culture.
ING Group uses an integrated risk management approach for both its banking activities and for its insurance activities. With the operational separation of ING Bank and NN Group, the focus of ING’s risk management practices is now located in the bank and insurance companies. The remainder of this Risk paragraph discusses these practices for ING Group, ING Bank and NN Group, respectively.
Despite the ECB efforts and weak signs of recovery, the Eurozone is not yet out of the doldrums, as many of the fundamental problems still remain. There is no guarantee that the weaker countries will succeed in making their economies more competitive, which is a prerequisite for long-term debt sustainability. Risks and concerns remain with respect to Europe and, given a potential prolonged slowdown scenario, could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in Europe and the financial condition of European financial institutions, including ING.
Greece, Italy, Ireland, Portugal, Spain and Cyprus (GIIPSC) Since 2010 concerns arose regarding the creditworthiness of certain European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures are being monitored more closely. With regard to the sovereign debt crisis, ING’s main focus has been on Greece, Italy, Ireland, Portugal, Spain and Cyprus as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the ECB via government bond purchases in the secondary market. Further details on exposure to Government bonds and Unsecured Financial institutions’ bonds are included in Note 5 ‘Investments’.
Greece, Italy, Ireland, Portugal, Spain and Cyprus - Total risk exposures (1)
Finance, which is reflected in Total Lending and Total Debt Securities. (5) Pre-settlement exposure is exposure to dealing room products such as options, swaps, and securities financing transactions. This exposure is based on the replacement value (Marked-To-Market) of each product plus potential future volatility.
(3) At the end of 2012 ING Bank holds CDS protection (notional value) on the Spanish government, Financial Institutions and covered bonds. (4) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate
Finance, which is reflected in Total Lending and Total Debt Securities. (5) Pre-settlement exposure is exposure to dealing room products such as options, swaps, and securities financing transactions. This exposure is based on the replacement value (Marked-To-Market) of each product plus potential future volatility
ING Bank does not have a bank operation in Greece but does serve a limited number of mostly international companies which have their domicile in Greece. Many of these companies are dependent on cash flows that are based outside Greece. NN Group has direct Greek exposure given the Greek based insurance entity.
The lending exposure decreased with EUR 377 million which was driven by a EUR 730 million reduction in corporate lending partially offset by an increase in residential mortgages and other consumer lending of EUR 300 million.
Portugal Total exposure to Portugal declined by EUR 249 million in 2013 mainly in debt securities by EUR 271 million. The decrease was mainly in the government bonds of EUR 142 million.
Spain ING’s total exposure to Spain was reduced by EUR 4,147 million in 2013 to EUR 32,537 million. The debt securities portfolio decreased by EUR 2,654 million mainly due to covered bonds maturing by EUR 2,567 million and a decrease in RMBS by EUR 428 million.
Cyprus Total exposure to Cyprus decreased by EUR 398 million in 2013 mainly due to a decrease in corporate lending of EUR 258 million. The reduction is driven by the repayment of loans.
Impact of low interest rate environment Interest rates in the Eurozone but also in the other main home countries decreased from already low levels to unprecedented low levels. Central bank rates are still at very low levels as well, thereby negatively impacting the short term money market rates, and also long term rates decreased to very low levels in 2013. The on-going Eurozone crisis in combination with uncertainty on the growth potential of the world economy were the main reasons for this development.
The NN Group entities have an asset liability management (ALM) process in place where investments are bought that largely match the duration profile of the liabilities. The remaining interest rate exposure is mitigated through derivative portfolios. In several currencies, asset durations matching the liabilities are not available. In these cases ING runs non-hedgeable interest rate risks. Options embedded in the products, which are difficult to hedge, expose ING to further risks.
RISK MANAGEMENT ING bANK Introduction Taking measured risks is the core of ING Bank’s business. ING Bank operates through a comprehensive risk management framework to ensure the risks are identified, well understood, accurately measured, controlled and pro-actively managed at all levels of the organisation so that ING Bank’s financial strength is safeguarded.
The risk management section describes the ING Bank business model, and the key risks that arise from it. It explains how the risk management function is embedded within the organisation based on the ‘three lines of defence’. This includes front office as ‘first line of defence’, risk management as independent observer in the ‘second line of defence’ and the internal audit function in the ‘third line’. The key risks resulting from the bank’s business model are managed by dedicated and specific risk management departments that each covers their own area of expertise. Each of these departments explains the respective governance framework, relevant risks and how they are expressed on a qualitative and quantitative basis within this report.
Enhanced disclosure task force Although ING Bank strives towards a reporting basis that is consistent over time, the risk management section is subject to enhancements and improvements. These are needed to reflect the continuous developments that take place in ING Bank’s risk function and on-going (macro-) economic developments that require additional disclosures. Also the continuing changes in the environment in which ING Bank operates like new regulations but also voluntary initiatives from the banks themselves need to be reflected. ING is a member of the ‘Enhanced Disclosure Task Force’ (EDTF), a private sector group established by the Financial Stability Board (‘FSB’) and composed of members representing both the users and preparers of financial reports, which released a report with recommendations for improving bank risk disclosures in the areas of among others usability, risk governance and risk management, capital adequacy, liquidity and funding, market risk, credit risk.
For 2013 ING Bank reaffirms its commitment to the EDTF report by implementing additional recommendations. Although it is ING Bank’s ambition to disclose all risk related items in one comprehensive section, this is in practice not always possible. Therefore, a global overview of our approach on risk management is provided to ensure transparent and easily navigable disclosures. The table below provides clear cross-referencing between the Risk management and Pillar 3 sections within the Annual Report. This navigation table enables users to locate and navigate across the different risk topics and disclosures. The sequence in which the risk disclosures are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.
Next to the inclusion of this navigation map, ING Bank improved its liquidity & funding disclosure by including a break-down of the liquid assets buffer and an overview of encumbered assets in the Pillar 3 section. Other EDTF driven improvements are the extension of the description of our Risk Management function via separate sections on risk assessment and risk culture. Further, already included sections (as risk governance, stress testing) were thoroughly reviewed and extended or refined (capital requirements, credit risk and market risk disclosures). Regarding new regulatory requirements, the Basel III Core Tier 1 ratio will be disclosed in the Pillar 3 section. The Basel III liquidity and funding requirements Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) will not be disclosed until discussions on EBA Technical Standards are finalised.
Credit risk tools 273 Credit risk portfolio 276 Credit quality 277 398 Credit restructuring 278 Forbearance 281 Credit risk mitigation 283 403
Governance 305 Liquidity risk management framework 306 Liquidity risk appetite 306 Funding 306 Liquidity buffers 307 410 Liquidity risk transfer and pricing 307 Contingency funding plan 308 Regulatory developments 308 245ING Group Annual Report 2013 1 W h o w e are 2 R
• The SB is responsible for supervising the policy of the MBB, the general course of affairs of the Company and its business (including its financial policies and corporate structure). For risk management purposes the SB is assisted by two sub-committees: – The Audit Committee, which assists the SB in monitoring the integrity of the financial statements of ING Bank, in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING’s internal and external auditors; and
– The Risk Committee, which assists the SB on matters related to risk governance, risk policies and risk appetite setting. • The MBB is responsible for managing risks associated with the activities of ING Bank. The MBB’s responsibilities include ensuring that internal risk management and control systems are effective and that ING Bank complies with relevant legislation and regulations. On a regular basis, the MBB reports on these issues and discusses the internal risk management and control systems with the SB. On a quarterly basis, the MBB reports on the Bank’s risk profile versus its risk appetite to the Risk Committee, explaining changes in the risk profile.
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.
Executive Level The ING Bank Finance and Risk Committee (BF&RC) is a platform for the CRO and the Chief Financial Officer (CFO), along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. The primary responsibility of the BF&RC is to co-ordinate, on a high level, the finance and risk decisions that have an impact on internal and/or external reporting.
In addition two staff departments report to the CRO: • Risk & Capital Integration (R&CI), which is responsible for inter-risk aggregation processes and for providing bank-wide risk information to the CRO and MBB, reports functionally to the CRO; and • Model Validation (MV), which carries out periodic validations of all significant risk models used by ING Bank. To ensure independence from the business and other risk departments, the department head reports directly to the CRO.
Risk model governance and model validation All risk models are built according to the internal risk modelling methodology standards and model life cycle, in line with regulatory requirements. After thorough review of the documentation by model development departments and MV, specific model risk committees for each risk type approve the models. After approval by the dedicated risk committee, a risk model is implemented and entitled for usage. In addition, MV validates each model on a regular basis. The validation results and its capital impact are reported on a quarterly basis to senior management and to De Nederlandsche Bank (DNB).
bUSINESS MODEL AND RISK PROFILE business Model ING Bank is a large European retail bank with a strong world-class commercial banking franchise operating an extensive network with presence in over 40 countries. Next to the operations in its historic markets of the Benelux, ING has developed a strong (internet) banking franchise in a number of European countries and in Asia and Australia.
• Build on the ambition to be a predominantly European Bank with growth options elsewhere to strengthen leadership positions in ING’s home markets.
As explained in the risk governance, the risk function at the regional and business units is independent from the commercial departments which allow its criteria and opinions to be heard and taken into account. At the Bank level it is represented by the CRO in the MBB which ensures sufficient countervailing power in the decision-making processes to prevent excessive risks.
Definition Risk culture and risk awareness are not only issues for senior management during their strategy decisions, but something that every employee has to be aware of and consider in his daily business. It is promoting and being aware of collectively shared values, ideas and goals towards the organisational objectives and mitigating opportunities for unfavourable events to occur that can impact the ability of the organisation to achieve its objectives. Risk awareness is to be alert on potential threats which can occur in day-to-day business, which can be specific to the sector, the region or the clients ING is doing business with.
Commonly seen as norms and traditions of behaviour of individuals and of groups within an organisation, risk culture determines the way in which employees identify, understand, discuss, and act on the risks the organisation confronts and the risks it takes. This is a long term commitment and journey which cannot be reached overnight. Therefore, ING initiated different programmes and manuals have been issued within the organisation as statement of what the organisation objectives are.
Accountability In 2009 ING Bank introduced the Promoting Integrity Programme (PIP) a long term, global, educational and behavioural change programme for the ING employees. The PIP has been developed to support integrity by focusing on ING values and is fully supported by the ING Group Executive Board. The role of the Board in the oversight of corporate culture and successful implementation of the risk culture change is essential in this process.
Monitoring and reporting With the monitoring of the risk control measures, ING continuously checks if they are executed, complied with, have the expected mitigating effects and follow the development of the risks and their risk levels. Adequate risk reporting provides senior and local management with the information they need to manage risk.
The Executive Board and the Supervisory Board of ING Group have approved the ING Whistleblower Procedure. The ING Whistleblower Procedure provides the opportunity for every ING employee to make his or her complaint, including anonymous complaints, to an independent Reporting Officer in order for the responsible management to take appropriate and adequate action in case of alleged breaches of internal or external regulation or other irregularities.
Step 1. Define ING Bank’s risk ambition ING Bank defines a Bank Risk Appetite Framework in line with its business model and risk ambition, which is currently formulated as following: ING bank risk appetite: ING bank has the ambition to be and remain a strong bank, resilient to possible adverse events on a standalone basis and able to address such developments based on its own strengths and resources.
Step 4. Monitoring and management of underlying risk limits In order to verify that it remains within the risk appetite framework as it is executing its budget, ING reports monthly through regular reporting towards senior management committees as ALCO Bank. The Risk and Capital Management Report reflecting the exposure of ING Bank against the risk appetite targets is submitted to the MBB and to the (Risk Committee of the) SB.
As for the previous steps, the calculated impacts of the scenario are first discussed and approved 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.
Net interest income Trading income Other income Credit risk costs CDA / DVA Expenses Revaluation reserves Risk Weighted Assets Liquid asset buffer Inflow / outflow Etc.
Correlation factors between risk types used for diversification are based on best estimate assumptions supported by statistical analysis of historical data, ING Bank risk expert judgement, external benchmark studies and common logic. As shown in the flow-chart, the correlation factors are stressed upwards where necessary to account for potential measurement inaccuracy in extreme events due to limited historic data observations. Expert opinion is used for aggregating business and operational risk.
The main changes in ING Bank’s economic capital and regulatory capital are: • Economic capital for credit risk increased in 2013, as model updates and deterioration of risk profiles more than offset a decrease of the book. Several methodological updates have been incorporated in the credit risk EC model, including the use of downturn LGDs, ING based correlations, capital for CVA and capital for ONCOA. Part of the updates were already reflected in the 2012 reporting via the EUR 4.2 billion add-on which now has been allocated over the business lines. The other part of the methodological updates is reflected in the EUR 6.4 billion add-on which is unallocated and therefore reported separately.
RC no diversification is taken into account. • The credit risk EC is lower than RC due to the fact that EC is defined as ING’s own methodology for credit risk. It is the amount of capital that is needed at a minimum to cover for unexpected losses within a certain confidence level and a certain time horizon. Furthermore, credit risk EC includes transfer risk while RC does not; • The market risk EC is higher than the RC primarily due to the inclusion of the interest rate, equity real estate risk in banking books in EC. In RC, only market risk in trading books is in scope; • The EC figures include business risk, while RC does not; • The operational risk EC is lower than the RC mainly due to the application of inter-risk diversification, whilst RC does not encompass inter-risk diversification; and • A 99.95% confidence level is used for EC, while the confidence level is 99.9% for RC. This shows in all risk types, but more pronounced in risk types with fatter tails like operational risk.
• Liquidity and funding requirements via the so-called Liquidity Coverage Ratio and the Net Stable Funding Ratio. The aim of the first metric is to monitor a bank’s capability to survive a short-term liquidity stress, where the latter aims to ensure that long term asset activities are similarly funded.
Separate from, but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum credit risk bank subsidiaries and branches are allowed to have on their holding companies. In the absence of a supranational harmonisation this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that cannot merely be transferred (unsecured) to a central treasury in another country.
The Bank improved its funding profile and ensured its liquidity position stayed within regulatory and internal targets. The full-year 2013 long term debt issuance totalled EUR 25.7 billion compared with EUR 33.1 billion issued in 2012. The issuance volume was lower due to a combination of an asset growth slowdown and increasing funds entrusted. As a result, ING Bank’s loan-to-deposit ratio, excluding securities that are recognised at amortised costs in loans and advances and excluding the IABF government receivable, improved in 2013 from 1.13 at 2012 year-end to 1.04, thereby already complying with ING’s 2015 Ambition of below 1.10.
Real estate finance Real Estate Finance (REF) is the ING Bank’s commercial real estate financer with a global portfolio. It is active in all the core real estate sectors: offices, retail, residential, industrial and logistics. REF financing policy is based on cash flow generating prime real estate portfolio, senior secured facilities, relatively low starting Loan-to-Value (LTV) and conservative covenant setting.
• Settlement risk: is the risk that a counterparty will fail to deliver on financial markets (PS or MM) transaction/contract at settlement and ING Bank could lose up to 100% of the value expected to be delivered. Settlement Risk arises when there is an exchange of value (funds or instruments) for the same value date or different value dates and receipt is not verified or expected until after ING has given irrevocable instructions to pay or has paid or delivered its side of the trade. The risk is that ING Bank delivers but does not receive delivery from ING Bank’s counterparty. ING manages settlement risk in the same way as other risks including a per borrower risk limit structure. However, because of the short term nature and per definition double count of settlement risk, ING Bank does not hold provisions or capital for specific settlement risk. Although a relatively low risk, ING increasingly uses DVP (Delivery versus Payment) and FITO (First in then Out) payment techniques to reduce settlement risk.
Risk governance per business activity There is a split between commercial banking and retail banking. In practice, CRM consists of the following units; Commercial Banking CRM (CB), Global Credit Restructuring (GCR), Credit Capitals and Retail Risk Management CRM (CC&RRM), Information Management Services (IMS) and Strategy and Business Management (S&BM).
A range of committees are in place at CRM level both at transactional and policy level. The Global Credit Committee for Transaction Approval (GCC(TA)) is the highest approval authority level within ING Bank (with the exception of MBB and ING Bank Supervisory Board), and is mandated to discuss and approve transactions entailing taking of credit risks. Next to that is the Global Credit Risk Committee Policy. GCC(P) is the highest level ING Bank body (with the exception of MBB), which is authorised to discuss and approve policies, methodologies and procedures related to credit risks within ING Bank. The Credit Risk Committee (CRC) is the next highest level ING Bank body, authorised to discuss and approve policies, methodologies and procedures related to Credit Risk within ING Bank. The Models Development Committee (MDC) serves as a technical advisor to CRC and is a planning body for future model development. The Credit Portfolio Committee is a committee advising Bank ALCO and GCC(P) on ING Credit Risk Appetite. CPC can also advise the MBB, GCC(P) or the Line of Business (LoB) to update the appetite for risk and/or to take specific actions on ING’s own assets. The ING Bank Provisioning Committee (IPC) is the sole Approval Authority that can approve Loan Loss Provisions (LLP) amounts for all ING Bank entities. The Group Impairment Committee (GIM) decides on the quarterly impairments. The IPC and GIM are executed in connection with the Finance department.
Integrity Specific training on ‘good banker-ship’ is obligatory. These courses, approximately three per year are known as the Personal Integrity Programme. Each CRM employee, senior managers included, needs to pass these courses within defined time frames. For specific roles within CRM, the Insider regulation applies. Those employees are obliged to adhere to certain rulings in trading in shares and confidentially restrictions. All new CCRM staff must attend an ORM/Compliance introduction workshop. Results and involvement are monitored and a quarterly update is provided to the management team in the ORM/Compliance Quarterly Report.
Communication New methods to improve communication are regularly created and implemented. For example, a network of news brokers has been established. These are dedicated employees, who are kept informed of activities and changes within CRM and are responsible for informing their teams. Additionally they provide bottom up information and carry information from the teams back to the management team. CRM also has its own dedicated intranet site, providing Credit Risk Alerts and the Policy House.
the maximum appetite for credit risk, that ING Bank has per country to ensure that exposures and potential future losses do not exceed a certain agreed level. The country reference benchmark is based on the country’s GDP and the funds entrusted locally in that country. In countries where ING Bank is active, the relevant country’s risk profile is regularly evaluated, resulting in a country rating, which is used to set the country reference benchmark. Based on these two components country limits are set and exposures derived from lending, investment, pre-settlement and money market activities are then measured and reported against these country limits on a daily basis.
Next to the periodical pre-determined stress test related to Credit RWA-at-Risk, CRM performs ad-hoc stress tests based on severe but plausible scenarios. These stress tests can be for internal purposes or at the request of the regulators and are input for future credit risk appetite setting. Stress testing is used as an additional safety net within CRM. Through stress tests the impact of severe but plausible downturn scenarios are determined, which might not be captured in the regular rating models (Probability of Default, Loss Given Default and Exposure at Default). Therefore, next to the Pillar 1 and Pillar 2 capital calculations, based on the results of various stress test, ING Bank ensures that adequate levels of capital (and liquidity) are available to sustain such severe but plausible scenarios.
The retail risk portfolio program is defined as a set of policies and processes, which are laid down to manage a retail risk portfolio within a predefined risk appetite statement. A retail risk portfolio is defined as a group of sufficiently homogeneous credit assets, where: • A consistent set of credit policies and processes for approving a high volume of counterparties and transactions could be applied, • Exposures could be pooled and managed through a set of standard policies and procedures over its entire life cycle. A risk appetite statement in the context of a retail risk portfolio program is a pre-defined set of minimum performance criteria.
2. Practice-based drivers including approaches to risk management and risk measurement 3. Regulating environment such as supervisory practices, implementing laws and regulations including national discretion and accounting standards.
From the table, it is also clear that ING has relatively less exposure in the Corporate exposure class than European peers and consequently higher exposure in other classes especially mortgages. Within ING, the Corporate exposure class has by far the highest risk weight. Therefore, it would be expected that ING has a lower blended risk weight than European peers all other elements being equal. This Business Mix element has an influence on the comparability of RWA across institutions. For further analyses of the ING RWA density, compared to its European peers, we refer to the Pillar 3 section.
EC is an important ingredient for the Risk Adjusted Return On Capital (RAROC) ratio. RAROC is a risk adjusted profitability measure over economic capital and supports transaction decision-making processes (for example through the ING Bank loan pricer tool). RAROC allows measuring the risk adjusted return of different products and structures within different parts of the organisation along one and the same yardstick. Next to the Pillar 2-based RAROC, within Commercial Banking, a Pillar 1 ‘sanity check’ is performed on transaction level. This sanity check is a ‘margin over Credit RWA’ ratio, which should exceed a pre-determined level (hurdle).
The 1.06 Basel 2 scaling-factor is used. No 1.06 Basel 2 scaling-factor is used. Regulatory LGD values including potential downturn adjustment are used. Regulatory LGD values including potential downturn adjustment are used. For non-Sovereign exposures the PD values are floored at 3 BPS. Use of non-floored economic PD. For Securitisations the risk weights are determined by applying the CRR/ CRD IV complaint external rating based look-up tables. For Mont Blanc exposures the Internal Assessment Approach is used.
Under AIRB, for tenors shorter than one year, only those exposures that are on the DNB approved "short term exposure exemption list" the actual remaining maturity is used, all other exposures are floored at one year.
Use of correlations based on Basel formula, scaled up with the 2012 MKMV output per exposure class and country with current concentrations taken into account.
Credit risk measurement There are two broad ways to measure credit risk within ING Bank’s portfolio, depending on whether the exposure is booked under an ING office which is permitted by the DNB to use the Advanced Internal Rating Based (AIRB) approach, or if it falls under the Standardised (SA) approach. ING Bank does not use the Basel Foundation (FIRB) approach for any portfolio.
Exposure at Default (EAD): The second element is the counterparty’s exposure at default. These models are intended to estimate the outstanding amount or obligation at the moment of default in the future. Since the fact that a counterparty will go into default is not known, and the level of outstandings that may occur on that date is also not known, ING Bank uses a combination of statistical, expert and hybrid models to estimate the Exposure at Default. With the exception of guarantees and letters of credit, the EAD is always equal to or higher than the associated credit risk outstandings, under the assumption that counterparties tend to absorb liquidity from available credit resources before financial problems become apparent to the counterparty’s creditors. The EAD is largely a function of the type of credit facility (revolving, overdraft, term) offered to the borrower.
Next to the model choice, the definition of default is an important starting point for model building. ING Bank uses a framework that integrates elements of the regulatory definition of ‘Default’ and the loan loss provisioning indicators under IAS 39. The rationale is that several indicators are very close to the indications of an obligor’s ‘unlikeliness to pay’ under Basel II and similar regulations. Integration of both frameworks makes it possible to use the regulatory risk components PD, LGD and EAD in the collective provisioning process under IAS 39, further enhancing ING Bank’s compliance with the Basel II ‘use test’. Key differences between the parameters used for loan loss provisioning and regulatory capital calculations are that Regulatory Capital parameters are typically through the cycle while Loan Loss parameters tend to be more point in time. Additionally, the LGD for Regulatory Capital calculations is based on a down-turn LGD.
Pre-Settlement measurement models. For regulatory capital the Pre-Settlement (PS) exposure is calculated using a Marked-to-Market (MtM) plus regulatory-based add-on tables. For internal capital purposes ING Bank uses two methodologies to calculate its PS exposures. Ideally, all parts of ING Bank would apply identical methodologies at all times. However, it is recognised that the ability to implement risk measurement methodologies is highly dependent on systems capabilities, and in certain cases the benefits of implementing a methodology may not be justified by the costs. Therefore more than one methodology is presently in use at ING Bank. • MtM plus model based add-on approach: In this approach, the PS risk is calculated as the sum between the MtM of the trade and the model-based Add-on. The MtM fluctuates through the life of the contract. The model-based Add-on is product-specific, and takes into account remaining time to maturity, profiling per time-buckets etc. Add-ons are updated with a frequency that takes into account the major market changes. This methodology is used for pre-deal exposure assessment of all ING Bank financial markets products and for post-deal risk calculations for financial markets portfolios for which computational efforts and costs associated with implementation of Scenario Simulation approach are not justifiable; • Scenario Simulation approach (Monte Carlo approach): Scenario Simulation approach is the most complex of the methods for PS risk calculations. This approach is the only approach that fully takes into account the daily market conditions, including correlations between the risk factors and portfolio benefits. This approach is also referred to as Monte Carlo (MC) approach and is currently used for the largest volume of derivative products such as FX and interest rate derivatives. ING Bank is in the process of implementing this approach for more products. The monitoring of the PS exposures and the limit setting for the products within the scope of the MC approach are based on the exposures resulting from the MC approach, the pre-deal check exposure assessment is based on the MtM plus model add-on approach.
In addition to the two approaches ING recognises that certain trading products that are outside of this scope may be deemed insufficiently accurate. For example, highly structured or exotic derivative transactions may differ significantly from the generic transactions used to calculate the add-ons. For the assessment of risk exposures of such complex products a bespoke calculation is made.
The Pillar 3 disclosure provides detail of the ING portfolio classified by these Exposure Classes. This should be helpful for comparison with other AIRB banks. However, ING Bank does not manage its portfolio according to these exposure classes but based more on geography, customer segment, industry, and product. Therefore, additional portfolio breakdowns are also provided in Pillar 3 that reflects these management classifications of the portfolio.
• LGD models: Loss Given Default is the measure of anticipated economic losses in a given Event of Default, taking into account the time value of money and includes both direct as well as indirect costs. LGD is facility-specific and expressed as a percentage of the EAD. LGD is largely a function of default scenarios, collateral, and guarantees obtained. Unsecured facilities typically have much higher anticipated loss ratios than secured facilities.
Commercial Property Finance portfolio had an update in the PD and LGD models creating a RWA increase. For the Small and Medium Sized entities updates have taken place in the Netherlands PD and LGD models, in the Belgium LGD model and in the Central Eastern Europe PD, LGD and EAD models, leading to an increase in RWA.
Securitisations ING Bank primarily plays three roles in its exposure to securitisations programs which are: ING Bank as Investor ING Direct had been the primary investor in securitisation transactions within ING Bank. Its core strategy was gathering customer deposits and providing lending products to its retail customers. The savings product is typically the first product to be launched in a country followed by mortgages and other retail products (current accounts, unsecured loans, credit cards etc.). The difference between retail liabilities and own originated retail assets is invested in high quality bonds and when appropriate in certain internal assets originated by other ING Bank entities. The ING Bank strategy has evolved to create more universal banks from the retail operations. In addition, the regulatory requirements for liquidity have become clarified over the last couple of years which decreases the attractiveness of securitisations as a form of liquid buffer. Therefore, ING Bank has greatly reduced its securitisation portfolio over the last years and the remaining portfolio is likely to run-off without replacement.
Global relationship database (GRID) One global counterparty database for all incorporated entities throughout the world, GRID is leading for all data related to an organisation, such as ownership (legal and economic), legal name, industry code, town and country of residence, town and country of incorporation, customer type, and customer segment. The data in GRID is static, which implies that it does not change (on average) more than once per year.
The three main purposes of Vortex; • Analysis for decision makers; • Compliance: Vortex is compliant and meets the requirements set by the regulators; • Disclosure: Vortex delivers reports to regulators, external rating agencies and investor relations.
Role of reporting department The credit risk reporting department contributes in the following ways to CRM: • Provides periodic overviews of credit capital, migration of risk weighted assets, concentration overviews by industry/sector/counterparty names required or requested by the DNB and other European regulators; • Participate in the various exercises/simulations conducted by regulators and other policy-makers by being transparent in the data and analysis shared, to allow useful results and work towards more stable and efficient financial markets; • Provides senior management and other risk departments an insight showing trends and quantitative as well as qualitative analysis in significant risk areas within ING Bank in a comprehensive and simplified manner to facilitate informed decision-making; • Addresses ad-hoc requests from regulators, analysts and rating agencies and other external stakeholders which are driven by current market events impacting specific regions, portfolios or counterparties; and • Serves as a control function by analysing various portfolios and comparing them to certain risk policies. In addition, significant monthly portfolio changes are analysed and reviewed.
Credit restructuring Global Credit Restructuring is the dedicated and independent corporate department within CRM that deals with non-performing loans and loans that hold a reasonable probability that ING will end up with a loss, if no specific action is taken. GCR deals with accounts or portfolios requiring an active approach, which may include renegotiation of terms & conditions and business or financial restructuring. The loans are managed by GCR or by the Regional Restructuring Units in the various regions and business units. GCR can approach files in several manners. Plan A generally consists of a consensual restructuring with the present owner and, sometimes, the executive management, based on debt reduction, additional collateral or external equity versus improved conditions and risk / reward profile for the bank. In the work out practice, ING faces a number of situations where the traditional Plan A is not realistic. Other cases demand another arrangement or a Plan B. Plan B is a lender led solution, where the bank(s) temporarily take ownership or take the company through, pre-packaged, insolvency to find a new strategic partner, which can add value in terms of liquidity, synergies and management. Thirdly, there is Plan C – the Recovery. Recovery status of a borrower means that ING Bank is actively seeking an exit from the credit relationship. This status will generally apply to those borrowers that are not likely to successfully turnaround their business, but there may be other reasons for ING Bank to exit from the credit relation. Further, legal remedies for recovery are being considered and liquidation of collateral may become a primary source of repayment. Due to the continuous economic pressure the restructuring of files has become more complicated. However, the average turnaround time of the files at GCR is no longer increasing.
III. Non-performing loans: Non-performing loans are accounts, which are considered unlikely to service their obligations to ING Bank in full. A successful turnaround is unlikely to happen, without a financial loss for the bank. Legal remedies for recovery are being considered and liquidation of Collateral may become the primary source of repayment. The assessment of unlikelihood to pay in full, results in an IFRS-EU impairment and these accounts hold risk rating 20. Also included in the Non-performing loan portfolio are accounts that go into liquidation phase, and from liquidation ING expects to incur no credit loss (rating 21) or a credit loss if there is insufficient collateral (rating 22). All files that are more than 90 days past due are part of the Non-performing loan portfolio.
Watch list, Restructuring and Non-performing loans 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 Non-Performing loans or vice versa. Furthermore, all three are in scope for forbearance. For further details on forbearance please see the ‘Forbearance’ section below.
Possible ratings 1–19 1–19 15–19 20-22 Typical ratings 1–14 15–17 18–19 20-22 Deterioration in risk Not significant Significant Significant Significant Significant intervention Not required Not required Required Required Impaired No No No Yes Account Ownership Front Office Front Office Front Office Front Office Credit Risk Management Regular Regular Credit Restructuring Credit Restructuring Primary Manager Front Office Front Office Credit Restructuring Credit Restructuring Accounting provisioning IBNR IBNR IBNR INSFA/ISFA
ING Bank holds specific and collective provisions of EUR 3,729 million and EUR 1,589 million, respectively (2012: EUR 3,415 million and EUR 1,336 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 835 million (2012: EUR 753 million) in provisions against the performing portfolio.
(1) At the end of 2013, the stock of provisions included provisions for amounts due from banks: EUR 19 million (2012: EUR 28 million)
Next to the EUR 4.7 billion classified as forbearance there were EUR 2.5 billion of loans where ING has made some degree of concession in exchange for acceleration of repayments, increased equity, additional collateral and/or higher margin. These loans are considered as on a commercial basis and not more favourable terms than those available to other debtors with a similar risk profile; therefore, these are not reported as forborn.
In 2013, ING Bank changed the way it reported the Forborn Assets and updated its policy based on the ESMA and EBA recommendations issued in October 2013. In order to ensure compliance with these new recommendations, one of the measures implemented was to include Watchlist clients to the scope. As a result the outstanding amount of Forborn loans in 2013 is not comparable with the 2012 level.
Retail Banking As per end 2013, ING Bank Retail reported a total of EUR 810 million (2012: EUR 291 million) of forbearance exposure.
Poland Mortgages & Other Consumer Lending 3 2 548 327 Romania Mortgages & Other Consumer Lending 13 5 845 316 Spain (1) Mortgages & Other Consumer Lending 56 52 403 304 Turkey Mortgages & Other Consumer Lending 0 0 31 19 UK Mortgages 25 65