Chairman’s statement 61 Report of the Supervisory Board 63 Corporate governance 70 Dutch Corporate Governance Code Statement by the Executive Board 83 Report of the ING Continuity Foundation 84 Conformity statement 85 Section 404 Sarbanes-Oxley Act 86 Report of independent registered public accounting firm 87 Remuneration report 88 Works councils 100
Consolidated statement of financial position 103 Consolidated statement of profit or loss 104 Consolidated statement of comprehensive income 106 Consolidated statement of changes in equity 107 Consolidated statement of cash flows 110 Notes to the consolidated annual accounts 112 Risk management 223 Capital management 289
Market Leaders are our businesses in mature markets in the Benelux where we have strong market positions in retail and wholesale banking. We’re implementing an operational integration of Belgium and the Netherlands as part of our strategy to provide a uniform customer experience based on a digital-first model, enhance operational excellence and create greater cost efficiency.
Wholesale Banking provides corporate and financial institutions with specialised lending, tailored corporate finance and debt and equity market solutions. We also offer working capital solutions, payments and cash management and trade and treasury services to help them achieve their business goals. We support our clients’ international needs with local presence in more than 40 countries.
Net Promoter Score Retail Banking (number of countries with number one ranking, rolling average)1 7 7 7 Total number of Retail Banking primary relationships (in million, year-end)1,2 10.8 9.9 9.2 Climate Finance (lending outstanding in EUR billion, year-end)3 14.6 - Social Impact Finance (lending outstanding in EUR billion, year-end)3 0.5 - Sustainable assets under management (in EUR billion, year-end) 4.8 3.3 2.6 Number of customers that felt financially empowered (in million, year-end)1 25.4 23.9 20.5 Human Capital Return on Investment indicator 2.51 2.59 2.48 Retail Banking system availability in the Netherlands and Belgium (in percentage)1,4 99.7 - Wholesale Banking system availability (in percentage)1,4 100 - -
Common equity Tier 1 ratio fully loaded ING Group > Prevailing fully-loaded requirements 14.7% 14.2% 12.7% Leverage ratio ING Group9 >4% 4.7% 4.8% 4.4% Underlying cost/income ratio 50-52% 55.5% 54.2% 55.9% Underlying return on equity ING Group Will provide more clarity in 1H18 10.2% 10.1% 8.6% Dividend per share (in euros) Progressive dividend 0.67 0.66 0.65
5 For further explanation of non-GAAP measures, see ‘Additional Information’ section of the Annual Report. 6 ING changed its accounting policy for the netting of cash pooling arrangements in the second quarter of 2016. In accordance with IFRS, the comparable amounts for 2015 were adjusted.
Addition to the loan loss provision Risk costs declined to 22 bps of average RWA (which is below ING’s through-the-cycle risk cost average of 40-45 bps), driven by a benign credit environment in most markets where ING is active.
Fully loaded CET1 ratio ING Group The CET1 ratio improved from 14.2% at year-end 2016, due to an increase in CET1 capital combined with lower RWA as positive risk migration and FX impacts more than offset the impact from volume growth and model updates. The increase in CET1 capital was driven by net profit, partly offset by the proposed dividend payments and a decline in reserves.
The cost/income ratio increased from 54.2% in 2016, as income growth was outpaced by higher expenses. This was mainly due to higher expenses to support business growth and increased investments in strategic projects; the related benefits will materialise later. ING remains committed to the Ambition 2020 target of 50-52%.
For businesses, this includes increasing financing for responsible companies while reducing financing for carbon-intensive sectors, continuing our involvement in the circular economy and increasing financing aimed at promoting social progress. For customers, our approach to promoting a self-reliant society includes providing them with tools and insights that improve their financial decision-making and resilience. We do this as well for the general public through the Think Forward initiative, an independent expert platform researching consumer behaviour and developing solutions to help them make better financial choices.
Building the ING of the future ING’s strong 2017 performance came against a backdrop of challenges for the banking sector. Low interest rates are pressuring margins from savings and lending activities. New regulatory rules are increasing capital costs for core activities like mortgages and industry lending. But the most significant development is digitalisation and how it is shaping customer expectations and the competitive landscape.
These ambitious changes aren’t possible without a strong culture of innovation. We foster that through our PACE methodology. It combines elements of Lean, Agile Scrum and Design Thinking and uses fast experimentation and customer validation to cut the time to market for innovations and other improvements. Our innovative approach includes our own internally incubated fintechs. Like Yolt, whose aggregation app is in beta testing in the UK and growing rapidly. And the Payconiq payments app that we launched in Belgium and plan to roll out in the Netherlands and Luxembourg.
Regulation On the regulatory side, there were a number of important developments in 2017. The first is PSD2, the EU payment services directive that is opening Europe’s payments industry to non-banks. This will greatly increase competition and promote innovation in areas like mobile and internet payment services. But in practice non-banks are less strictly regulated than banks, particularly in areas like customer due diligence, fraud and cyber-security risks, as well as the use of commercial and payment data. It’s important to address this lack of a level playing field, both in the interests of customer security and to promote fair competition, especially with the powerful global tech firms.
At a European level, the Single Supervisory Mechanism continued to strengthen its supervisory role through the ECB. This was reflected in the priorities it set for 2017: business models and profitability drivers; credit risk, with a focus on non-performing loans and risk concentrations; and risk management.
The Single Resolution Fund is also showing a steady increase. The size of the fund is now almost EUR 18 billion, aiming to meet the target requirement of EUR 55 billion in 2023. Despite the fact that the discussion on the European Deposit Insurance Scheme (EDIS) didn’t show much progress throughout 2017, the completion of the Banking Union gained political momentum. In the course of 2018, further steps are expected to ensure its completion by 2019. We would also welcome a deepening of the Economic and Monetary Union, which would help to enhance economic and financial stability in the eurozone.
Rates increase, but remain low Longer-term government bond yields rose somewhat compared to their 2016 lows on the back of a strengthening global economy, the Fed’s US rate increases and the anticipated end to exceptionally easy monetary policy elsewhere.
Opportunities • Leverage our customer trust and reputation • Improve the customer experience by accelerating innovation and becoming more agile • Embed data-driven culture • Create scalable cross-border banking platform • Leverage expertise in digital delivery of advice and support aimed at improving customer decisionmaking
Threats • Cybercrime • Potential competition from new entrants to the market • Low interest-rate environment • Expected Basel ‘IV’ impact on our lending franchise • Increasingly complex regulatory environment leading to heightened execution and non-compliance risk • Lack of international level playing field in many relevant areas, like equity buffers, bank taxation, data (PSD2), remuneration
Competitive landscape Technology is removing a number of the barriers to entry that once insulated our business. We face competition from many different directions, with relatively new players providing more segmented offers to our customers. Technology giants, payment specialists, retailers, telecommunication companies, crowd-funding initiatives and aggregators are all entering the market for traditional banking services. Our customers, in turn, are more willing to consider these offers.
Usability and accessibility of products and services were deemed more important in 2017. We aim to keep improving our mobile and online offering as we focus on improving the customer experience. Banking products have become increasingly commoditised – there is little to differentiate one savings account or transactions service from another. Instead, customers choose their bank for the experience it offers. For ING, this means being clear and easy, available anytime and anywhere and most of all empowering – putting customers in the driver’s seat when it comes to their own finances. This topic of ‘usability and accessibility of products and services’ could be a game-changer for ING, given our strategy.
Responsible finance and investment policies, strongly influenced by external developments around topics such as climate change and human rights, gained visibility both inside and outside of ING. Stakeholders expect ING to have a long-term vision on where we can make the biggest impact. We see our purpose – to empower people to stay a step ahead in life and in business – as inherently sustainable. ING focuses on using our position as a global bank to spur environmental and social progress, empowering a low-carbon and self-reliant society.
ING had more than 100 fintech partners by the end of 2017, 21 of which ING invested in.
We set up ethical committees in the ING countries in 2017 as well as a framework for dealing with dilemmas related to how we use data.
Across ING, digital channels account for 98% of contact with retail customers.
We actively manage our interest rate risk exposure and successfully maintained the net interest margin on our core lending in 2017. To manage this challenge moving forward, we are proactively developing new offerings at fair pricing that help empower our customers and generate fee-based income, while our transformation programmes will help us to bring down our cost/income ratio to our target range of 50-52% by 2020.
By end-2017 our total number of retail customers stood at 37.4 million, and primary relationships rose by more than 900,000 during 2017 to 10.8 million. We are on schedule to meet the target of 14 million primary clients by 2020.
* The financial topics are covered by KPMG’s audit of the consolidated annual accounts. See page 309 for the ‘Independent auditor’s report’.
In 2017, we published a detailed breakdown of our entire portfolio, approximately EUR 775 billion (as per 31 December 2016), detailing the amount we finance per sector.
Transparency vs. customer privacy It’s clear to us that our stakeholders want to know more about where and to whom we lend money. Yet there is sometimes a conflict of interest between greater portfolio transparency and customer confidentiality/privacy.
The world is transitioning step by step, but the fact is that the economy (and a number of countries in particular) can’t yet do without fossil fuels, which ING also finances. There is still too little renewable energy, and experts haven’t yet been able to develop an efficient and affordable means of storing sustainable energy.
The world around us – continued used by 35,000 merchants in Belgium and is expanding to multiple countries. Our actions demonstrate our determination to make a real impact for customers in this area by spurring evolution in the industry. However, in other situations we choose to create our own solutions, without partners.
Within financial services, although it may seem like there is a stark choice to be made between cooperation and competition, they sometimes coexist – and feed off each other.
Just as consumers can now easily shop online, they should also have digital access to the full scope of banking services from the comfort of their own homes – from opening a current account to taking out a mortgage loan.
Current local legislation sometimes restricts customer on-boarding and can limit our ability to offer the easy and convenient experience that consumers have grown to expect. This legislation can sometimes inhibit innovation altogether. Fintechs aren’t yet required to adhere to these requirements and can easily on-board customers using ‘derived identification’.
We know our greatest impact is in our financing. ING has financed billions of euros of wind farms, solar energy, and geothermal power production, for example, but also fossil fuels.
We try to find a balance between societal expectations and economic reality. As we assess potential clients and deals, our approach is to have a dialogue and support them in improving their environmental and social impact where possible. Our response to funding requests is often, ‘yes, but…’, outlining improvements that the company will have to make first. Our Environmental and Social Risk policies also guide us. We sharpened our coal policy and will accelerate the reduction of our financing to coal power generation, with the ambition to reduce our exposure to close to zero by 2025.
Culture is crucial to achieving our ambitions. We need a culture that puts the customer at the centre of what we do. And also one that fosters innovation. We accelerate innovation through ING’s own PACE methodology, which combines Lean Start-up, Agile Scrum and Design Thinking methods and encourages fast experimentation based on customer feedback. Our annual Innovation Bootcamps also encourage employees to come up with initiatives to improve the customer experience and compete for seed funding. And we partner with numerous fintechs to improve the customer experience and accelerate our own pace of innovation.
Since the launch of the Think Forward strategy in 2014, ING has achieved strong business growth, increasing customer numbers and robust financial performance. Our progress on these fronts confirms the relevance of our strategic direction.
A healthy increase in customer deposits and strong growth in core lending since the launch of the strategy show the appeal of our proposition to customers. This has also strengthened our business by providing more stable and attractive funding, better returns through own-generated assets and more diversified lending geographically and over segments.
Enablers Four strategic enablers support the implementation of our strategy: simplifying and streamlining our organisation, operational excellence, enhancing our performance culture and diversifying our lending capabilities.
Our strategy and how we create value – continued in different ways. We have a range of initiatives in place to do this, including our global diversity manifesto which applies to all of our more than 54,000 employees. The manifesto sets out what diversity means at ING, why it’s important, and what employees and managers can do to make a difference.
The value creation model on pages 21-22 illustrates what we do to create value with our stakeholders in society through our unique Customer Promise. The framework of the international Integrated Reporting Council and the six capitals defined in it, serve as a basis for this model.
• Retail system availability for the Netherlands and Belgium of 99.7% a
• ING in the healthiest 25% of organisations in the Organisational Health Index
• Jobs may be impacted by the acceleration of the Think Forward strategy
• 1,500 managers trained on Think Forward Leadership Experience to support strategy roll-out
Business transformation We are running several programmes to unite similar businesses and bring us closer to our overall goal of one mobile-first digital platform offering a uniform and superior customer experience. The main business transformation programmes are: • Orange Bridge, to unite Belgium and the Netherlands, combining their strengths for a more consistent experience, with one integrated banking platform and a harmonised business model.
Supporting these programmes are the target operating models (TOMs) uniting support services globally such as HR, Finance, IT, Procurement, and Risk, and the enablers, the so-called foundations: IT, global data management, process management, shared services and ING’s one agile Way of Working (WoW).
Transformation management Managing transformation is the task of the chief transformation officer and the Global Transformation Office. In early 2017, we launched a bank-wide transformation management method with standardised tools and processes. These include quarterly business reviews to improve prioritisation, gated processes and 90-day delivery cycles. All are designed to ensure the execution of our Think Forward strategy and ultimately lead to a better impact on our customers and other stakeholders.
Retaining our full focus on customers while running so many programmes simultaneously is challenging and requires transparency, discipline and a willingness to make hard choices. Prioritising what is best for the bank, rather than for a specific business unit or country, can involve trade-offs in terms of local priorities and autonomy.
For instance, house buyers could arrange a mortgage, insure their home and all its contents, digitally sign the contracts and even connect to a removal company.
Beyond banking offers new revenue opportunities for ING. We are exploring areas such as housing, mobility, data management and storage, the circular economy and the silver economy (ageing population). This has led to initiatives like circular economy leasing platform Papayagogo and TrustX, which uses algorithms to detect fraud at SMEs.
ING is working towards becoming such an open banking platform – the go-to place for all people’s financial needs. To reach this ambition requires an innovative culture and a willingness to connect and cooperate with
Security Our holistic approach to countering the complex and constant threat of cybercrime combines prevention with detection and rapid response. We provide e-banking fraud awareness training for employees and clients, which, in addition to maturing controls, has contributed to stabilising e-banking fraud damages at low levels across our organisation. Advanced analytics capabilities play a key role in combatting criminal activity. Pattern recognition and advanced algorithms help to predict and detect, and thus prevent, fraudulent activity.
Way of Working To respond faster to changing customer demands, encourage an innovative mindset and engage our employees, we introduced ING’s one agile Way of Working (WoW) in 2017. It unites our people in multidisciplinary, cross-functional teams and empowers them to collaborate more easily across the organisation. WoW has been introduced in the Netherlands, followed by Poland, Romania, Austria, and the COO Finance business unit. Belgium started working this way in January 2018 and Germany and Wholesale Banking are preparing to roll it out. Uniting so many different cultures is a challenge that requires a cultural shift, guided by our Orange Code behaviours. We organise monthly bootcamps to train WoW ‘ambassadors’ from the countries and business units. In 2017, these were attended by more than 120 people.
Shared services We’re centralising operational and IT tasks in shared service centres. In 2017, ING set up a fully-owned service company called ING Business Shared Services BV (IBSS). Our shared service centres in Katowice, Bucharest, Bratislava and Manila fall under this new entity. IBSS teams provide deep IT and operations expertise and apply innovations arising from our global technology and processes-based digitalisation, robotics and artificial intelligence. We believe this will allow us to respond faster to customer needs, improve our capabilities and boost the efficiency of our digital-first model, helping it to evolve into a true competitive advantage. IT and Wholesale Banking are among the first business units to transfer activities to these specialist, centralised pools.
Not all our collaborations lead to new products and we have stopped 34 partnerships, mostly after unsuccessful or unsatisfactory proofs of concept.
In 2017, we continued our journey to future-proof our business and bring customers a differentiating experience. This involves harmonising and streamlining our products and processes and using advanced data capabilities to deepen and expand our relationships with customers. We are aiming to create a uniform experience by uniting our businesses on digital platforms to be a place where people can go for all their financerelated needs. And we are innovating and teaming up with others to offer new and different services, both our own and those of others.
We believe we are on the right track. In 2017, ING was named the Best Bank in the World by Global Finance magazine – recognition of our efforts to provide a truly outstanding customer experience.
Challenging environment Persistently low interest rates are threatening the traditional banking business model, making it important to develop new customer propositions that generate new revenue streams.
Who we are ING’s Retail business serves 37.4 million customers. Through the Wholesale Banking business we also serve corporate clients and financial institutions.
Differentiating experience Our Think Forward strategy anticipated the trends shaping our industry. We foresaw that digitalisation would change people’s expectations about the products and services they use. These expectations are based on their frequent interactions online and on their smartphones, where they connect with each other and the brands that they love.
We grew our Wholesale and Retail Banking customer bases in 2017, lent more to customers and they entrusted us with more of their savings. At the same time we made major investments to accelerate our Think Forward strategy and create a differentiating customer experience. One that makes banking clear and easy, anytime, anywhere and puts customers in the driving seat when it comes to their finances.
Retail Banking in 2017 To continue delivering on its strategic priorities and purpose, ING is combining its strengths in its various retail markets and moving towards shared digital banking platforms that will offer customers a uniform differentiating experience and empower them to stay a step ahead in life and in business.
Charging customers a fair price for our products and services increases their accessibility and is important for our competitiveness in the marketplace. To ensure prices are fair, we ask customers to rate our products and services and provide feedback in online communities as part of our global Product Approval and Review Process.
Financial empowerment ING wants to empower people to make the right financial decisions and become self-reliant. This contributes to a healthy economy and helps drive social progress. In addition to clear and easy products and services, anytime and anywhere, it’s about providing the right information and tools at the right time and making an impact in communities by giving people the skills to become financially self-sufficient.
In Australia we launched ING Everyday Round Up – a digital money jar for loose change that makes saving easier and more convenient. It allows customers to round up card purchases to the nearest dollar and moves the difference to their savings account. The tool hit 40,000 activations within the first fortnight. It mirrors the Smart Saver launched in Poland in 2016, an example of sharing best practice between ING businesses.
Market Leaders Retail Netherlands The underlying result before tax of Retail Netherlands rose 31.6 percent to EUR 2,243 million from EUR 1,705 million in 2016. This was due to lower risk costs and the benefits from cost-saving initiatives, while income was slightly up supported by higher commission income.
Underlying income decreased to EUR 2,473 million from EUR 2,573 million in 2016. The interest result declined 4.9 percent to EUR 1,842 million, mainly due to lower margins on savings and current accounts, and lower pre-payment and renegotiation fees on mortgages; this was partly offset by volume growth in lending. The net production in customer lending (excluding Bank Treasury) was EUR 4.7 billion, of which EUR 3.2 billion was in mortgages and EUR 1.5 billion in other lending. The net inflow in customer deposits was EUR 1.4 billion compared with year-end 2016. Commission income rose 6.0 percent, predominantly higher investment product fees. Investment and other income fell by EUR 29 million, as 2016 included a gain on the sale of Visa shares. Operating expenses rose by EUR 146 million, or 10.2 percent to EUR 1,584 million, mainly due to higher external staff expenses related to the transformation programmes and the EUR -95 million one-off expense adjustment in 2016.
The addition to the provision for loan losses was EUR 284 million, or 58 basis points of average riskweighted assets, compared with EUR 278 million, or 57 basis points, in 2016. The slight increase was mainly attributable to higher risk costs in Poland, Spain and (to a lesser extent) Australia, partly offset by declines in Italy and Turkey.
We are also preparing to launch Cobase, an independent ING venture offering companies a multi-bank platform with a single point of access to all their bank accounts and financial services from all their providers, not only ING. It includes a central payments hub, cash management and treasury modules.
In addition to harnessing new technologies, we are also looking at developing services that go beyond banking. For example, we’re working with behavioural scientists in London and Amsterdam to develop a cybersecurity solution for corporate clients. The ING Digital Trust tool aims to modify the behaviour of the client’s employees – usually a key vulnerability when it comes to protecting companies’ digital information – through a series of ‘gamification’ campaigns. It is currently being tested by three clients and will be available in 1Q2018.
Responsible finance Although ING’s own operations have been climate neutral for a decade, we can make our biggest contribution to a sustainable future through financing. We are committed to better understanding the impact of our lending activities and working with our clients to drive progress towards a low-carbon and self-reliant society.
Since it was introduced in April for Philips, the Sustainable Improvement Loan has won several awards and has been used with other clients, such as Belgian post operator bpost.
It has united operational services in two strategic centres in Bratislava and Manila, supporting our ambition to improve and standardise Wholesale Banking. For example, we now offer Financial Markets clients collateral management services from one hub that provides a single unified offering. This consolidation of expertise enables us to test new artificial intelligence and robotics solutions to optimise client services. For example, we are preparing to launch ING’s first Wholesale Banking chatbot – called Bill – on InsideBusiness. And we are working with fintech Axyon.AI on a tool that applies neural networks to make financial predictions. We will invest even more in automation and robotics to make processes faster and smoother in the future.
Migrating certain services to shared service centres is not new to ING, but it is time consuming and can potentially disrupt our service, contrary to our Customer Promise. We do it because, in the long term, it means we keep getting better. We believe it will allow us to respond faster to new client needs, improve IT capabilities and boost the efficiency of our digital-first model, helping it to evolve into a true competitive advantage.
We are also introducing a global operating model for Lending Services. Implementing the advanced funding model in Singapore and Hong Kong in the second half of the year changed the Asian funding model and led to a EUR 3.5 million reduction in funding cost on the Asia portfolio.
How we work Creating a differentiating employee experience starts with ING’s distinctive culture: entrepreneurial, open, collaborative, innovative and energetic. Who we are and how we work are set out in the Orange Code. Putting ‘integrity above all’, it comprises: • Our values. The non-negotiable promises we make to the world no matter what. • We are honest. • We are responsible.
We do this in two ways: by creating a differentiating employee experience, and by developing greater leaders and better managers who will energise and engage others to implement our purpose and strategy.
Who we are ING has over 54,000 employees in more than 40 countries. ING people are diverse and dynamic, adapting and developing in line with the business and our environment. Traditional banking skills are still important, but so is customer intelligence and being data and technology savvy. Our people are creating a differentiating customer experience that doesn’t always depend on face-to-face interaction.
At ING we value diversity and believe we cannot implement our strategy without it. We are committed to accelerating diversity so our employee base mirrors the clients we serve.
ING has a diversity manifesto that applies to all employees worldwide. It sets out our position and aims to foster an inclusive culture.
Our ING Step up Performance Management practice aims to empower employees and make them more personally accountable for their own development and performance. From 1 January 2018, more than 90 percent of employees will have their performance managed according to the new approach.
Global surveys ING regularly measures employee engagement and is committed to acting upon employee suggestions. This is done globally in one of two ways: • The Winning Performance Culture (WPC) survey concentrates on employee engagement, looking at how engaged, enabled and energised employees feel. The next WPC will take place in 2018.
Over 29,000 (53 percent of employees) responded to the OHI. Results were very positive overall with organisational health having improved across all nine ‘health outcomes’. This places ING’s organisational health in the upper quartile of a large cross-industry benchmark. We have improved considerably in innovation and learning, which now scores in the top 10 percent of the benchmark.
At the same time, in line with business strategy, we continually work to improve people planning. We are developing our people analytics and intelligence capabilities to aid business performance and employee well-being. A project to transform HR – HR Unite – (HR TOM) includes introducing a new people services organisation with one global HR system and one standard set of processes for people metrics. This will concentrate on ensuring a differentiating employee experience as well as making it much easier to report strategically on people issues ING-wide.
ING seeks to judge employees only on their merit and skills. Our policy is not to discriminate on social origin, gender, age, background, sexual orientation, physical ability or religious beliefs.
Name: Bella Ozegovic Country: Australia Joined ING: 2015 Role: Customer care specialist.
From day-one, the Orange Code has been at the core of my job. To me it’s about the way teams work together, allowing everyone to participate in meetings without judgment.
As a manager, it’s my responsibility to encourage my team to use the opportunities ING offers to help them achieve a work/life balance.
ING’s most important risks and control measures are regularly reported to and discussed by the Risk Committee of the Supervisory Board. Both financial and non-financial risk reports are reviewed in detail, including the status of ING’s metrics with regard to solvency, liquidity, funding, credit, market risk and non- financial risks. In addition, the design and the operation of the Risk Appetite Framework and the Non-Financial Risk Framework are discussed annually with the Risk Committee and the full Supervisory Board, whereas the design and the operation of internal controls over financial reporting are discussed annually with the Audit Committee and the Supervisory Board. As part of this process shortcomings in Know Your Customer processes were identified in these control systems and discussed with the Risk committee and the full Supervisory Board. Also an area of improvement that was identified in IT risk was discussed. ING is vitally dependent on its IT infrastructure for the reliability and continuity of its operations. Although IT and digitalisation are seen as opportunities for ING to distinguish itself from
In connection with the introduction of the ING Way of Working, Operational Risk Management and Information Risk Management have established new risk governance that adopts the ING Way of Working to ensure effective non-financial risk management within various entities. To enable business lines to manage their risk linked to the increasing sourcing activities within ING, the sourcing policy has been updated to cover generic key control objectives for mitigating and monitoring key
Part of ING’s Think Forward Strategy aims to increase the pace of innovation to serve changing customer needs. To do this, ING is either partnering, investing or building various platforms (e.g., Yolt, Kabbage, Scalable Capital, Payconiq). These innovations empower ING’s clients to stay a step ahead.
competitors, it also imposes risks. The risks imposed by ING’s IT infrastructure are reporting outside the tolerance levels that ING has committed itself to. Therefore actions have been identified to improve IT systems and processes in order to increase the efficiency and effectiveness of the IT infrastructure and the reliability and continuity of the IT processing. These improvements have already lowered IT-related risks, but additional efforts are needed to ensure that the IT infrastructure will report within the defined risk appetite statement.
For more information on non-financial risks, please refer to the ‘Risk Management’ chapter, part of the consolidated annual accounts of this Annual Report.
We believe these three layers in combination are necessary for a strong risk and control environment.
For more information, please refer to the ‘Risk Management’ chapter, part of the consolidated annual accounts of this Annual Report and to Note 45 in the ‘legal proceedings’ part of the consolidated annual accounts.
ING was one of 17 banks financing the Dakota Access Pipeline. When presented with the funding request, ING carefully screened the project according to laws and regulations, as well as ING’s environmental and social risk policy framework. The US government had issued all necessary permits, an independent legal review confirmed the project complied with all laws and regulations, and an independent contractor hired to do further due diligence also gave us a green light. ING’s share in the project was USD 120 million.
ambition to bring it close to zero by 2025, and includes the following commitments: • All existing clients in the utilities sector should have reduced their reliance on thermal coal to close to zero (<5% installed capacity) by the end of 2025 for us to continue the relationship beyond that time.
• New clients in the utilities sector will only be admitted if the client’s reliance on coal is 10 percent installed capacity or less, and the client has a strategy to reduce its coal percentage to close to zero by 2025.
Enhanced human rights due diligence: following regulatory changes in some EU jurisdictions (e.g. UK Modern Slavery Act, the French Plan de Vigilance, etc.), and as part of our strong commitment to respect human rights, we have increased human rights policy and track record checks for all our corporate clients globally. This analysis will help us determine which transactions require further human rights analysis and action. This information will also be used for future reporting and increased transparency on human rights, which we expect will be soon required by more regulators.
• ING and the Equator Principles (EPs): The process for updating the EPs, a risk management framework, currently adopted by 91 financial institutions to determine, assess and manage environmental and social risk in projects, was formally announced in November 2017. ING is an EP steering committee member and will be actively involved in the review of the principles, which are considered market best practice. The process aims for a targeted update of the EPs – ‘EP4’ – that will consider key issues of scope of applicability, such as human rights (including the rights of indigenous peoples), and climate change.
In 2017, 3,354 wholesale engagements were assessed under the ESR policy framework. Engagements categorised as ESR low (78%) and medium risk (14%) were managed by local and regional risk management, whereas engagements categorised as ESR high risk (8%) required specialised advice by the ESR department headquartered in Amsterdam. In 2017, this department issued 358 recommendations following in-depth ESR assessments. Of these, 60.3% were positive, 21.2% negative and 18.5% were positive subject to conditions to improve social and/or environmental performance. These conditions play an important role in helping clients transition towards improved environmental and social performance on the ground.
Key updates to the ESR Framework The framework is reviewed on a regular basis to ensure we adequately identify and manage not only existing but also new environmental and social risks. In 2017, changes to the framework included: Thermal coal policy: two years ago, ING announced its commitment to not finance new coal-fired power plants or thermal coal mines worldwide. We also committed not to finance any new clients whose business is reliant for more than 50 percent on operating coal-fired power plants. In 2017, as part of ING’s efforts to support the transition to a low-carbon economy, ING decided to further sharpen the policy regarding the financing of thermal coal. The policy, which came into effect in December 2017, speeds up the reduction of our financing of thermal-coal power generation, with the
Capital Conservation Buffer (CCB) Pillar 2 Requirement (P2R) Pillar 1 minimum (P1R)
ING Group SREP/CET1 requirement 2017 CET1 Phased-in 2018 CET1 Phased-in 2019 CET1 Fully-loaded
By providing guidelines regarding the Supervisory Review and Evaluation Process (SREP) the EBA is raising the bar for the internal capital adequacy assessment process (ICAAP) and enhancement of the capital management framework.
The EBA published a Q&A on minority interests highlighting the issue of externally placed own funds from a subsidiary and their availability for the purposes of loss absorption at the consolidated level. This recalibration will largely disappear over time as ING will mainly issue capital instruments from the Group in the future.
• Pillar 2 guidance (P2G), which is not legally binding, so a failure to meet P2G does not automatically trigger legal action. Nonetheless, a breach of the P2G may lead to the ECB taking measures based on the individual situation of the bank.
By taking part in the above-mentioned initiatives, we aim to contribute our viewpoint and those of our clients, employees and other stakeholders in order to shape a consensus and develop clear guidelines that can serve as a standard for our industry.
The impact of the implementation of IFRS 9 per 1 January 2018 is limited. It is currently expected that the IFRS 9 impact at transition on ING Group’s CET1 ratio, taking into account the existing regulatory provision shortfall, will be a reduction of approximately 18 basis
The European Central Bank (ECB) decision on the 2016 SREP set the transitional (phased-in) common equity Tier 1 requirement for ING Group at 9.02% in 2017. For 2018 the SREP requirement will be 10.4%. This requirement consists of a 4.5% Pillar 1 requirement, a 1.75% Pillar 2 requirement, a 1.875% Capital Conservation Buffer (CCB), Countercyclical Buffer (CCyB) of 0.06% (based on December 2017 positions) and the 2.25% Systemic Risk Buffer (SRB). This excludes Pillar 2 guidance, which is not disclosed.
Dividend ING Group’s dividend policy aims to pay a progressive dividend that will reflect considerations including expected future capital requirements, growth opportunities available to the Group, net earnings, and regulatory developments. The Executive Board proposes to pay a total cash dividend of EUR 2.6 billion, or EUR 0.67 per ordinary share, over the financial year 2017. This is subject to the approval of shareholders at the Annual General Meeting in April 2018. Taking into account the interim dividend of EUR 0.24 per ordinary share paid in August 2017, the final dividend will amount to EUR 0.43 per ordinary share and will be paid fully in cash. The total amount of EUR 1.7 billion is completely covered by the remaining balance of ‘interim profits not included in CET1 capital’ at year-end 2017.
R.M.M. (Roel) Louwhoff (52) COO/CTO and member of the Management Board Banking Roel Louwhoff was appointed as chief operations officer (COO) member of the Management Board Banking as of 1 May 2014. He was also appointed chief transformation officer (CTO) per 1 October 2016. Roel Louwhoff is responsible for operations, IT (including standardisation), data management, information security, process management, and procurement.
(Euronext Amsterdam) 21 August² Payment date interim dividend 2018 (NYSE) 1 November Publication results 3Q2018 1 All dates are provisional. 2 Only if any dividend is paid.
Reporting guidelines This integrated annual report, including the Nonfinancial Appendix, is prepared in accordance with the GRI Standards: Comprehensive option and supplementing Financial Services Sector Disclosures, as well as the Dutch Accounting Standard 400. The content and quality criteria specified by the guidelines (sustainability context, stakeholder inclusiveness, materiality, completeness, balance, comparability, accuracy and reliability) are integral to our reporting process. The Framework of the International Integrated Reporting Council (IIRC) served as a reference in drawing up the content for this report, particularly for our value creation model in which we have included the main capitals as input for our business.
This year KPMG has also audited, and provided a reasonable level of assurance, on the ‘What matters most to our stakeholders’ section (page 11), the data for the Net Promoter Score for Retail Banking, the feeling of Financial empowerment and system availability. The data with a footnote (1) on page 4 is within the reasonable assurance scope.
Furthermore, KPMG audited ING Group’s internal control over financial reporting as of 31 December 2017, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework, the COSO criteria).
Based on our procedures performed, nothing has come to our attention that causes us to believe that the Non-financial Information is not prepared, in all material respects, in accordance with the GRI Sustainability Reporting Standards and the applied reporting criteria as described in the section ‘About this report’.
Consistency with other non-financial information included in other parts of the Report of the Executive Board In addition to the Non-financial Information and our assurance report thereon, the Report of the Executive Board contains other non-financial information. Based on the following procedures performed, we conclude that the other non-financial information included in other parts of the Report of the Executive Board is consistent with the Non-financial Information reviewed or audited and does not contain material misstatements.
Our responsibilities for the review of the Non-financial Information and the audit of the Four Specific Topics Our responsibility is to plan and perform the assurance engagement in a manner that allows us to obtain sufficient and appropriate assurance evidence for our conclusion and our opinion.
Procedures performed in an assurance engagement to obtain a limited level of assurance are aimed to determine the plausibility of information and are less extensive than a reasonable assurance engagement. The level of assurance obtained in review engagements is therefore substantially less than the level of assurance obtained in an audit engagement.
Our audit on the Four Specific Topics has been performed with a high, but not absolute, level of assurance, which means we may not have detected all material errors and fraud. Misstatements can arise from fraud or errors and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of users taken on the basis of the Non-financial Information, including the Four Specific Topics. The materiality affects the nature, timing and extent of our review and audit procedures and the evaluation of the effect of identified misstatements on our conclusion and opinion.
We communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the review and the audit and significant findings, including any significant findings in internal control that we identify during our review and our audit.
Permanent education The task of the Supervisory Board is to look at the total picture and to have a holistic view. It’s important to have good insights and understanding of all the relevant topics and developments that contribute to ING’s strategy. To do that, we need to stay informed and upgrade our own skills and knowledge as needed.
As Supervisory Board, we challenge, supervise and advise the Executive Board and Management Board Banking with respect to the company’s strategy. We do that by making sure decision-making is timely as well as of high quality. An important part of that is ensuring proper delegation of responsibilities and that our role facilitates and does not block decision-making.
2017 was a successful year for ING. Much progress was made in building the ING of tomorrow. ING is recognised as a leader in the digital banking experience. The bank also continued to support the development of a sustainable world. The Supervisory Board believes in ING’s journey of transformation to create a business that excels for our customers now and in the future. We actively supported and challenged the Executive Board and Management Board Banking in 2017 to make this a reality.
Successful journey As Supervisory Board members, we are very aware of the hard work that ING’s employees put in every day to give customers the best possible service and experience. And we realise what an achievement it is to deliver such impressive commercial and financial results at the same time that the business is going through a major transformation. We’re proud of how ING works to live up to its purpose and transform its business to serve customers better in the future.
I will step down as Chairman of the Supervisory Board immediately following the AGM in 2018. When I came on board in 2009, ING was in the midst of a crisis. Now, nine years later, through the hard work of employees, loyalty of customers and support of stakeholders, ING is in many ways among the frontrunners in banking. I am really impressed by the results achieved so far and also feel very grateful to the people who made this all happen, despite difficult times. It’s my sincere wish that ING’s journey of success will continue in the future.
NCGcom. 5 The figures exclude observers. In case an SB member cannot join a meeting, he/she will at all times continue to receive all meeting materials to allow him/her to provide feedback in advance.
Throughout the year, the Supervisory Board discussed the progress of this programme and, as part of this, had an active dialogue with the management board. ING’s strategy, together with the transformation programme, includes an overarching view and a number of initiatives to further improve the customer experience, further grow primary customers and lending, and increase efficiency. Other aspects of the programme were discussed and approved. Important drivers of the programme were addressed, such as the future of banking, the journey of convergence, maintaining commercial momentum, how to fund and drive the transformation and risk management. The Supervisory Board acknowledges it is important to take into account the duty of care towards those stakeholders of the bank who may be impacted by the transition.
Financial and risk reporting ING’s Annual Report, for the third time in integrated form, was reviewed and the annual accounts and the SOX 404 Report (in relation to our Annual Report on Form 20-F) were approved. Also approved was the proposal to pay a final 2016 dividend of EUR 0.66 per share based on the fact that ING is comfortably ahead of prevailing fully-loaded requirements and well positioned for future regulatory uncertainties. The dividend proposal was approved by the Annual General Meeting of Shareholders on 8 May 2017. The quarterly results were reviewed and discussed in January, May, August and October 2017, including the relevant press releases. The fullyear financial results were discussed in March. These discussions included the related press releases and also reports from the external auditor. The Executive Board’s assessment of the adequacy and effectiveness of the risk management and control systems was also discussed. The payment of an interim 2017 dividend of EUR 0.24 per ordinary share, which was declared on 2 August 2017, was also discussed.
KPMG, in its role as ING’s external auditor, audited ING’s 2017 accounts and financial statements. As part of the standard procedures, KPMG declared itself independent from ING, in compliance with applicable rules and regulations.
The future composition of the Executive Board, the Management Board Banking and the Supervisory Board, its committees and potential candidates were a recurring topic of discussion in light of various developments. ING’s talent and succession planning were also discussed including the outcome of the Annual Talent Review. Remuneration was another recurring agenda item. The Supervisory Board approved the update of ING’s Remuneration Regulations Framework 2017 in line with various regulatory changes.
Risk Committee meetings The Risk Committee met five times in 2017, compared with four times in previous years. On average, 93 percent of the members were present at the scheduled meetings. As with the meetings of the other committees, all relevant items discussed by the Risk Committee were reported to the Supervisory Board, with the Supervisory Board approving those items as required from a governance perspective.
The number and importance of topics dealt with led to there being an additional Risk Committee meeting in 2017. It was agreed to continue this practice in the future. During this extra meeting, risk modelling developments and their potential capital impact and model validation, the assessment of the effectiveness of ING risk functions, and the results of the continuous dialogue between ING and external supervisors related to risk management were discussed.
Nomination and Corporate Governance Committee meetings It was decided to merge the Nomination Committee and Corporate Governance Committee as per 9 May 2017. This is in line with the practice at other institutions that have comparable board meeting governance and structures in place. A separate Corporate Governance committee was created several years ago in connection with the corporate governance review whose recommendations were approved by the AGM in 2016, following which there was no longer a need for such separate committee. Before this merger, the Nomination Committee met once, with no absentees. The Corporate Governance Committee also met once, with no absentees. After the merger, the Nomination and Corporate Governance Committee met an additional three times in 2017. On average, 93 percent of the members were present at the scheduled meetings.
The Remuneration Committee reviewed the thresholds above which the pool for variable remuneration may be used for actually granting variable remuneration. It discussed the variable remuneration pool and reviewed the performance assessment for the Executive Board and Management Board Banking, as well as the variable remuneration proposals. The remuneration proposals for Identified Staff were also reviewed, including potential cases for holdback of deferred compensation by way of malus. In addition, the proposed annual targets for the Executive Board and the Management Board Banking members were approved.
Furthermore, during 2017 all three newly appointed members to the Supervisory Board completed an extensive, tailor-made induction programme as agreed upon with the ECB. As an enhancement to the previous induction programmes, this year external experts, in addition to internal experts, also contributed to the programme.
Read more in the ‘Corporate governance’ chapter on the composition of the Supervisory Board committees at year-end 2017.
British • • • • • • • • • Margarete Haase2 1953 F Austrian • • • • • • • • • Robert Reibestein 1956 M Dutch • • • • • • • Hans Wijers 1951 M Dutch • • • • • • • • •
Recent developments Legislative and regulatory developments On 8 December 2016, the Monitoring Committee of the Dutch Corporate Governance Code published the final version of the revised Corporate Governance Code. The Corporate Governance Code became effective on 1 January 2017 (‘Corporate Governance Code’). According to the decree with respect to the contents of the Annual Report, Dutch listed companies are required to report, on the basis of ‘apply or explain’ on their application of the principles and best-practice provisions of the code for the first time in their annual report for the financial year 2017.
• Consistent with Dutch law, supervisory board committees generally act only in an advisory capacity to the supervisory board and, for instance, ING’s Remuneration Committee may not directly set the compensation of the CEO.
The board of the ING Continuity Foundation is comprised of four members who are independent of ING Group. No (former) Executive Board member, (former) Supervisory Board member, (former) ING Group employee or (former) permanent adviser to ING Group is on the board of the ING Continuity Foundation. The Board of the ING Continuity Foundation appoints its own members, after consultation with the Supervisory Board of ING Group, but without any requirement for approval by ING Group.
Netherlands and the US (SEC registered offering); 2 Qualified investors in EU member states; 3 Retail investors in EU member states where ING
The share issue authorisation that will be proposed to the 2018 Annual General Meeting will be along the same lines as the currently applicable authorisation described above.
Shares that are included in the Securities Giro Transfer system are transferred pursuant to the Securities Giro Transfer Act (‘Wet Giraal Effectenverkeer’). A shareholder who wishes to transfer such shares, must instruct the securities intermediary where his shares are administered accordingly.
Pursuant to this authorisation, no more than 10 percent of ING Group’s share capital may be held as treasury shares. When repurchasing shares, the Executive Board must observe the price ranges prescribed in the authorisation. For the ordinary shares , the authorisation currently in force stipulates a minimum price of one eurocent and a maximum price equal to the highest stock price on the Amsterdam stock exchange on the date on which the purchase agreement is concluded or on the preceding day of stock market trading.
Corporate governance – continued b. ING Group if, as a result of such acquisition or disposal the person’s net short position reaches, exceeds or falls below 0.5% of the issued share capital of ING Group and each 0.1% above that.
ING Group participates in several industry conferences and generally hosts one Investor Relations Day every two to three years. These events are announced in advance on ING Group’s website, and presentation materials are made available in real time on the website. This is in accordance with the applicable regulatory requirements intended to ensure that all shareholders and other market participants have equal and simultaneous access to information that could potentially influence the price of ING Group’s securities. ING Group’s Investor Relations Days can be accessed by means of live webcasts. Investor Relations Days or conferences in which ING Group participates will not take place during the period immediately prior to the publication of quarterly financial results.
If bilateral communication between ING Group and investors is organised and/or facilitated through a broker, an analyst or specialist salesperson representing the broker may be present in the meeting.
As of the date of convening a General Meeting, all information relevant for shareholders is made available via the ING Group website and through its head office. Information relevant for shareholders includes the notice of the General Meeting, the agenda, the place and time of the meeting, the address of the website of ING Group, the verbatim text of the proposals with an explanation and instructions on how to participate in the meeting (either in person or by proxy), as well as the reports of the Executive Board and the Supervisory Board. More complex proposals, such as proposals to amend the Articles of Association, are normally not included in the notice, but are made available separately on the website of ING Group and at the ING Group head office.
Proxy voting facilities ING Group provides proxy voting facilities to its investors via its website and solicits proxies from its ADR holders in line with common practice in the US.
To encourage participation at the Annual General Meeting, ING provides the EVO (e-voting) platform, an online facility through which shareholders can register for a meeting or appoint a proxy.
• The issuance of shares or rights to subscribe for shares, the restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which has been approved by the Supervisory Board.
Corporate governance – continued succession planning and future appointments to the Executive Board.
Information on members of the Executive Board R.A.J.G. (Ralph) Hamers, Chief Executive Officer (‘CEO’) (Born 1966, Dutch nationality, male; appointed in 2013, current term expires in 2021)
Relevant positions pursuant to CRD IV1: Chairman and CEO of the Executive Board of ING Groep N.V. and of the Management Board of ING Bank N.V.
Other relevant ancillary positions: Member of the Management Board of the Nederlandse Vereniging van Banken (NVB), member of the Board of Directors of the Institute of International Finance, Inc. and non-executive member of the board of Foundation Royal Concertgebouw Orchestra Amsterdam.
In line with Dutch company law, the Articles of Association, the Corporate Governance Code as well as the Supervisory Board Charter, all members of the Supervisory Board are required to: • Act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all stakeholders of ING Group; • Perform their duties without mandate and independent of any interest in the business of ING Group; and
Former members of the Executive Board are not eligible for appointment to the position of chairman or vicechairman of the Supervisory Board.
Corporate governance – continued the political and social environment in which such companies operate. In the selection of Supervisory Board members, ING is striving for a balance in nationality, gender, age, and educational and work background. In addition, there should be a balance in the experience and affinity with the nature and culture of the business of ING and its subsidiaries. More specifically ING strives to have at least 30% of the seats held by women, and at least 30% of the seats by men. These guidelines, that relate to the composition of the Supervisory Board, are laid down in the Supervisory Board Profile. Based on this profile, the Supervisory Board is responsible for selecting and nominating candidates for appointment or reappointment to the Supervisory Board.
With respect to gender diversity, in the course of 2017 two female board members (Isabel Martín Castellá and Ann Sherry) stepped down from the Supervisory Board and one female member (Margarete Haase) was appointed. From January up to May the percentage of females exceeded 30% of the total composition, with an annual average of 28%. Considering the appointment of Margarete Haase and further measures to be taken, the preferred composition in terms of gender will be adhered to as soon as reasonably possible.
We believe that the Supervisory Board, diversity wise, is well-balanced. in terms of other relevant diversity aspects. Overall, the preferred emphasis on members with a financial or banking background has been maintained, although for 2017 it was decided to attract two new members (Hans Wijers and Jan Peter Balkenende) with a broader, more generic background, having experience in the political and social environment as well. In terms of nationality, the ratio between Dutch and non-Dutch nationals in 2017 was on average 50%-50%.
Term of appointment of members of the Supervisory Board As a general rule, Supervisory Board members step down from the Supervisory Board in the fourth, eight, 10th and 12th year after their initial appointment. They are eligible for re-appointment in the fourth year after their initial appointment and, with explanation, also in the eight and 10th year.
The Nomination and Corporate Governance Committee’s tasks include advising the Supervisory Board on the composition of the Executive Board and Supervisory Board and assisting 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 2017, the members of the Nomination and Corporate Governance Committee were: Jeroen van der Veer (chairman), Henk Breukink and Hans Wijers.
ING regulations regarding insiders are available on the website of ING Group www.ing.com/17ar14.
Relevant positions pursuant to CRD IV: Chairman of the Supervisory Board of ING Groep N.V./ ING Bank N.V., chairman of the Supervisory Board of Koninklijke Philips N.V., Member of the Supervisory Board of Koninklijke Boskalis Westminster N.V. and member of the Supervisory Board of Statoil ASA.
Other relevant ancillary positions: Chairman of Stichting Het Concertgebouw Fonds (foundation) and chairman of the Supervisory Council of the Delft University of Technology, and senior advisor at Mazarine Energy B.V.
J.P. (Jan Peter) Balkenende (Born 1956, Dutch nationality, male; appointed in 2017, term expires in 2021) Former position: partner EY (on corporate responsibility).
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V. and non-executive chairman of the Board of Directors of ING Belgium S.A./N.V.
Margarete Haase started as an observer for the Audit Committee and the Supervisory Board on 1 October 2017, until her outside positions would meet the CRD IV requirements; her membership will become effective as per 1 May 2018. As observer she is present at the Supervisory Board and Audit Committee meetings, however, as an observer she does not participate in the decision-making.
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V. and member of the Supervisory Board of IMC B.V.
Change of control provisions Legal provisions Pursuant to the terms of the Dutch Financial Supervision Act, a declaration of no objection from the ECB must be obtained by anyone wishing to acquire or hold a participating interest of at least 10 percent in ING Group and to exercise control attached to such a participating interest. Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from, or notification to, local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
Amendment of the Articles of Association The General Meeting may resolve to amend the Articles of Association of ING Group, provided that the resolution is adopted based on a proposal of the Executive Board, which has been approved by the Supervisory Board. An amendment of the Articles of Association is required to be passed by notarial deed.
The external auditor may be questioned at the Annual General Meeting in relation to its audit opinion on the financial statements. The external auditor will therefore attend and be entitled to address this meeting. The external auditor attended the meetings of the Risk Committee and of the Audit Committee and attended and addressed the 2017 Annual General Meeting, at which the external auditor was questioned on the audit opinion.
The design and the operation of the internal risk management and control systems are discussed annually with the Risk Committee and the full Supervisory Board, whereas the design and the operation of internal control over financial reporting are discussed annually with the Audit Committee and the Supervisory Board. As part of this process, shortcomings in Know Your Customer processes were identified and discussed with the Risk committee of the Supervisory Board.
• the ING Groep N.V. 2017 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2017 of ING Groep N.V. and the enterprises included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is being confronted with.
ING’s remuneration policy is designed to ensure that we offer well-balanced remuneration so we can recruit, engage and retain highly qualified staff and live up to our responsibilities towards our stakeholders. ING’s global remuneration policy complies with all relevant international and local legislation and regulations.
The remuneration principles below apply to all staff: Total direct compensation Total direct compensation is the total of fixed and variable remuneration, excluding benefits such as pension and allowances.
For Identified Staff (i.e. staff that is considered to have a material impact on the risk profile of ING) a deferral scheme applies to their variable remuneration and a substantial part (50-100%) of their variable remuneration is awarded in equity. A minimum of 40% of variable remuneration is deferred over a period of three to five years with a tiered vesting schedule.
Performance driven ING operates a robust performance management process linked to remuneration to steer and motivate all staff to deliver on ING’s strategic goals and prevent rewarding for failure.
In 2017, there were 14 employees, working in the Corporate Staff (COO, CRO, CFO), Wholesale Banking and Retail Banking business lines, to whom total annual remuneration (including employer pension contributions and any severance payments made) of EUR 1 million or more was awarded. Most of these employees work outside of the Netherlands.
• Recognition management: an approach that empowers managers to decide on a continuous basis the right mix of recognition both financial and nonfinancial.
The current remuneration policy for the Executive Board was adopted at the AGM on 27 April 2010. Amendments to this policy were adopted at subsequent AGMs: • On 9 May 2011 in response to new regulatory requirements • On 12 May 2014 with respect to pensions for the
Executive Board • On 11 May 2015 in order to lower the maximum variable remuneration in line with legal requirements and specify that variable remuneration for the Executive Board be paid fully in shares
Total direct compensation Total direct compensation is the total of fixed and variable remuneration, excluding benefits such as pension and allowances. It is determined and reviewed periodically by the Supervisory Board taken into account a number of varying factors in particular the international market environment.
The Executive Board’s total direct compensation is compared to Euro Stoxx 50 companies as the Euro Stoxx 50 benchmark includes similar organisations in terms of size and international scope. The index comprises 50 companies, including ING, in a range of financial and non-financial industries from 12 countries within the Eurozone, mainly operating in an international context. The Executive Board’s remuneration policy aims to award total direct compensation slightly below the median of the Euro Stoxx 50.
40% of total variable remuneration is awarded upfront in the year following the performance year. The remainder (60%) is deferred. In accordance with guidelines issued by the European Banking Authority (EBA) as per 2017, the variable remuneration of the Executive Board members is subject to tiered vesting over a period of five years. In 2017, approval was given at the AGM to extend the deferral period for the variable remuneration for Executive Board members from three to five years, with one fifth vesting each year. This will be applied for the first time in 2018 with respect to variable remuneration over performance year 2017.
It is the responsibility of the Supervisory Board to take into account the interests of all stakeholders, as well as long-term value creation, business continuity and sustainable growth, when determining the Executive Board’s remuneration.
The Supervisory Board has the authority and obligation in specific cases to impose holdback and/or claw back on variable remuneration awarded to a member of the Executive Board based on the same criteria that apply to all staff. It also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in an undesired outcome. The Supervisory Board also has decision-making authority in situations that are not addressed in the policy.
Financial performance indicators • Underlying net result • Underlying return on IFRS equity • Common equity Tier 1 ratio • Underlying operating expenses • Underlying cost/income ratio
2017 Executive Board base salary In 2017 the Supervisory Board decided to increase the base salary of the CEO by 3% with effect from 1 January 2017. The base salary of the other Executive Board members remained the same in 2017.
• Ranked number one in Net Promoter Scores relative to competitors in 7 of 13 retail markets.
• Establishment of a partnership with online wealth manager Scalable Capital in Germany, expanding ING’s offering to customers with digital investment management services, also known as robo-advice.
The table below shows the remuneration awarded to the individual Executive Board members with respect to the performance years 2017, 2016 and 2015.
The other emoluments amounted in 2017, 2016 and 2015 to the following costs.
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2017, 2016 and 2015.
Shares Deferred shares are shares conditionally granted subject to a tiered vesting over a period of five years (for awards in 2017 and before), of which the ultimate value of each deferred share will be based on ING’s share price on the vesting date (the opening share price).
2018 Remuneration Executive Board More and more shareholders are calling for Executive Boards to be long-term oriented in their decision making. This change in the market enables further alignment of interests that Executive Boards need to serve, between for instance shareholders, society and regulations. This is also the objective of the recent focus in the Dutch Corporate Governance Code, by proposing a long-term orientation of Executive Boards, incentivised by increasing the shareholding of executives in the companies they serve and to hold these as long-term investments. At the same time, Dutch banking regulations limit the variable reward for Executive Boards to a maximum of 20% of fixed salary.
Reflecting on the past five years, ING has more than exceeded market expectations, evidenced amongst others by very robust financial results and position, a strengthened capital base, relatively high customer satisfaction levels in the many markets ING operates in, relatively high scores in the biennial Organisational Health Index and the Winning Performance Culture employee engagement survey, its track record on sustainability and the many accolades ING received over the years.
Remuneration report – continued 2017 Remuneration Supervisory Board amounts in euros 2017 2016 2015 (rounded figures) Remuneration5 VAT Remuneration VAT Remuneration VAT
Hermann-Josef Lamberti 141,000 149,000 111,000 Henk Breukink 105,000 22,000 115,000 24,000 83,000 17,000
Isabel Martín Castellá¹ 46,000 114,000 92,000 Eric Boyer de la Giroday 106,000 114,000 92,000 Ann Sherry² 94,000 85,000 Hans Wijers³ 35,000 7,000 Jan Peter Balkenende4 27,000 6,000 1 Isabel Martín Castellá left the Supervisory Board as of 9 May 2017. The remuneration figures for 2017 reflect a partial year as a member of the Supervisory Board.
J.P. (Jan) Driessen P.E. (Egon) Gijsbers I.M. (Michiel) van Lagen A. (Arie) Noomen M. (Margriet) Pel J. (Judith) Roosken M. (Michel) Rutte M.T. (Marinus) Stoffers J.H.C. (John) Stribos E. (Erik) Timmerman M. (Marcel) de Valk
Parent company annual accounts Parent company statement of financial position 295 Parent company statement of profit or loss 296 Parent company statement of changes in equity 297 Notes to the parent company annual accounts 299
Share of result from associates and joint ventures 7 178 88 492
Items that may subsequently be reclassified to the statement of profit or loss: Unrealised revaluations available-for-sale investments and other revaluations –283 61 –414
Share of other comprehensive income of associates and joint ventures and other income –5 –14 –5
Reference is made to Note 36 ‘Taxation’ for the disclosure on the income tax effects on each component of the other comprehensive income.
Disposals and redemptions: – group companies (including cash in company disposed) 2 –6,926
2 In 2015, Disposals and redemptions – group companies included EUR –7,975 million and EUR 997 million related to cash and cash equivalents of NN Group and proceeds from the sale of shares of NN Group resulting in loss of control at the end of May 2015 respectively.
As at 31 December 2017, Cash and cash equivalents includes cash and balances with central banks of EUR 21,989 million (2016: EUR 18,144 million; 2015: EUR 21,458 million). The increase in cash and balances with central banks reflects ING’s liquidity management. Reference is made to Note 32 ‘Cash and cash equivalents’.
Dividend paid –2,564 –2,521 –1,393 1 All interest and dividend paid and received from trading positions are included. 2016 and 2015 interest and dividend received have been restated to align to current year presentation.
2 Includes dividends received as recognized within Investment Income, from equity securities included in the Financial assets at fair value through profit or loss, and from Investments in associates and joint ventures.
Interest received, interest paid and dividends received are included in operating activities in the Consolidated statement of cash flow. Dividend paid is included in financing activities in the statement of cash flow.
Authorisation of the Consolidated annual accounts The ING Group Consolidated annual accounts, as at and for the year ended 31 December 2017, were authorised for issue in accordance with a resolution of the Executive Board on 5 March 2018. The Executive Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these.
Under the EU carve-out, ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging). For further information, reference is made to Note 1 ‘Accounting policies’, d) Principles of valuation and determination of results and Note 38 ‘Derivatives and hedge accounting’.
The list of upcoming changes to IFRS, which are applicable for ING Group Effective in 2018 (* - endorsed by the EU, the rest not yet endorsed by the EU): • *Amendments to IFRS 2 ‘Share-based Payment’: Classification and Measurement of Share-based payment transactions; • Amendments to IAS 40 ‘Investment Property’: Transfers of Investment Property; • *Annual improvements cycle 2014 – 2016: Amendments to IAS 28 ‘Investments in Associates and Joint Ventures’; and • IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’.
January 2018; • Developing and validating of the new expected credit loss models; • Developing and implementing processes for staging and using forward looking economic guidance in the Expected Credit Losses models; • Finalising technical interpretation of the IFRS 9 standard; • Finalising the business model assessment and solely payments of principal and interest testing for Classification and
A financial asset is measured at AC if it is held within a HtC business model, the contractual cash flows are solely SPPI and if it is not designated as at FVPL. A financial asset is measured at FVOCI if it is held within a HtC&S business model, the contractual cash flows are solely SPPI and if it is not designated at FVPL. Financial assets not classified as AC or FVOCI are measured at FVPL.
ING’s business models are based on the existing management structure of the bank, and refined based on an analysis of how businesses are evaluated and reported, how their specific business risks are managed and on historic and expected future sales. The SPPI testing was carried out on a sample basis conducted after the financial assets within the business models were stratified based on an analysis of product characteristics. In performing the SPPI testing, ING considered the contractual terms of the instruments. This included assessing whether the financial assets contained a contractual term that would change the amount or timing of contractual cash flows such that they would no longer be SPPI compliant. In making the assessment, terms such as the following were considered: • Prepayment terms. For example a prepayment of an outstanding principal amount plus a penalty capped to three or six months of interest; • Leverage features, which increase the variability of the contractual cash flows with the result that they do not have the economic characteristics of interest. An example is a Libor contract with a multiplier of 1.3; • Terms that limit the groups claim to cash flows from specified assets – e.g. non-recourse asset arrangements. This could be the case if payments of principal and interest are met solely by the cash flows generated by the underlying asset, for example in real estate, shipping and aviation financing; • Features that modify consideration for the time value of money. These are contracts with for example an interest rate which is reset every month to a one-year rate.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of financial liabilities designated at FVPL are recognised in the statement of profit or loss (SOPL), whereas under IFRS 9 the fair value changes are presented as follows: • The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in the statement of other comprehensive income (SOCI). Upon derecognition this Debt Valuation Adjustment (DVA) impact shall not be recycled from other comprehensive income (OCI) to the SOPL; and
Furthermore, there are a few portfolios for which only the classification on ING’s Consolidated statement of financial position will change without impacting equity: • ING has a portfolio of equity securities amounting to EUR 4.0 billion. For strategic equity instruments amounting to EUR 3.9 billion; ING has decided to apply the option to irrevocably designate these at FVOCI, instead of the IFRS 9 default measurement of FVPL. FVOCI equity investments will have no recycling of the revaluation reserve anymore to the SOPL upon disposal. For these instruments only dividend income continues to be recognised in the SOPL; and
The delta in lifetime probability of default is the main trigger for movement between Stage 1 and Stage 2. The trigger compares lifetime probability of default at origination versus lifetime probability of default at reporting date, considering the remaining maturity. Assets can move in both directions, meaning that they will move back to Stage 1 or Stage 2 when the Stage 2 or Stage 3 triggers are not applicable anymore (taking into account the regulatory probation periods). The stage allocation is implemented in the central credit risk systems.
Measurement The calculation of IFRS 9 ECL leverages on ING Group’s expected loss models (PD, LGD, EAD) currently used for regulatory capital, economic capital, and collective provisions in the current IAS 39 framework. These models are adjusted for 1) removal of embedded prudential conservatism (such as floors), 2) provide forward-looking point in time estimates based on macroeconomic predictions and 3) a 12 months or lifetime view of credit risk where needed. Lifetime features are default behaviour over a longer horizon, full behaviour after the default moment, repayment schedules and early settlements. For most financial instruments, the expected life is limited to the remaining maturity. For overdrafts and certain revolving credit facilities, such as credit cards, open ended assumptions are taken as these do not have a fixed term or repayment schedule.
IFRS 9 Impact on capital and other regulatory requirements IFRS 9 will impact ING Group’s reported capital as a result of the transition adjustments recorded in shareholders’ equity on transition date. The Basel Committee on Banking Supervision (BCBS) pointed out that the treatment of provisions under both the SA and the AIRB frameworks remains, but allows jurisdictions the option to choose whether to apply a transitional arrangement for the impact of impairment under IFRS 9. As a result, the EU introduced transitional arrangements for mitigating the impact of the introduction of IFRS 9 impairment on own funds in the Capital Requirements Regulations (CRR). ING has decided not to apply the IFRS 9 impairment transitional arrangements. The increase in provisions will have limited impact on ING’s CET1 ratio as for the AIRB portfolios it will be offset by the existing regulatory provision shortfall per 31 December 2017.
ING Group has identified areas that require management to make significant judgements and use critical accounting estimates and assumptions based on the information and financial data that may change in future periods. These areas are: • The determination of the fair values of financial assets and liabilities; • Loan loss provisions; and • Provisions.
Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Exchange rate differences resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss, except when deferred in equity as part of qualifying cash flow hedges or qualifying net investment hedges.
Goodwill and fair value adjustments arising from the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the exchange rate prevailing at the balance sheet date.
Significant judgements and critical accounting estimates and assumptions: Even if market prices are available, when markets are less liquid there may be a range of prices for the same security from different price sources. Selecting the most appropriate price requires judgement and could result in different estimates of fair value.
Price testing is performed to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate reflection of these valuations in the statement of profit or loss. Price testing is performed to minimise the potential risks for economic losses due to incorrect or misused models.
Credit risk management classification and maximum credit risk exposure Credit risk management disclosures are provided in the section ‘Risk management – Credit risk’ paragraph ‘Credit risk categories’.
The manner in which ING Group manages credit risk and determines credit risk exposures for that purpose is explained in the section ‘Risk management – Credit risk’ paragraph ‘Credit Risk Appetite and Concentration Risk Framework’.
Derivatives and hedge accounting Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative.
Certain derivatives embedded in other contracts are measured as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the host contract is not carried at fair value through profit or loss, and if a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. These embedded derivatives are measured at fair value with changes in fair value recognised in the statement of profit or loss. An assessment is carried out when the Group first becomes party to the contract. A reassessment is carried out only when there is a change in the terms of the contract that significantly modifies the expected cash flows.
Net investment hedges Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity and the gain or loss relating to the ineffective portion is recognised immediately in the statement of profit or loss. Gains and losses accumulated in equity are included in the statement of profit or loss when the foreign operation is disposed.
Securities purchased under agreements to resell (reverse repos) are not recognised in the statement of financial position. The consideration paid to purchase securities is recognised as Loans and advances to customers, Loans and advances to banks, or Financial assets at fair value through profit or loss - Trading assets, as appropriate. The difference between the sale and repurchase price is treated as interest and amortised over the life of the agreement using the effective interest method.
In certain circumstances ING grants borrowers postponement and/or reduction of loan principal and/or interest payments for a temporary period of time to maximise collection opportunities, and if possible, avoid default, foreclosure, or repossession. When such postponement and/or reduction of loan principal and/or interest payments is executed based on credit concerns it is also referred to as forbearance. In such cases, the net present value of the postponement and/or reduction of loan and/or interest payments is taken into account in the determination of the appropriate level of impairment loss as described below. If the forbearance results in a substantial modification of the terms of the loan, the original loan is derecognised and a new loan is recognised at its fair value at the modification date. The Group determines whether there has been a substantial modification using both quantitative and qualitative factors.
Significant judgements and critical accounting estimates and assumptions: Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) for financial assets assessed for impairment both individually and collectively. Judgement is exercised in management’s evaluation of whether there is objective evidence that an impairment loss on an asset has been incurred, the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry, geographical, and concentration trends. Changes in such judgements and analyses may lead to changes in the loan loss provisions over time.
Investments in associates and joint ventures Associates are all entities over which the Group has significant influence but not control. Significant influence is the ability to participate in the financial and operating policies of the investee. It generally results from a shareholding of between 20% and 50% of the voting rights or through situations including, but not limited to one or more of the following: • Representation on the board of directors; • Participation in the policymaking process; and • Interchange of managerial personnel.
The initial accounting for the fair value of the net assets of the companies acquired during the year may be determined only provisionally as the determination of the fair value can be complex and the time between the acquisition and the preparation of the Annual accounts can be limited. The initial accounting shall be completed within a year after acquisition. Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities, that are identified within one year after acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. On disposal of group companies, the difference between the sale proceeds and carrying value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the statement of profit or loss.
When a group of assets that is classified as held for sale represents a major line of business or geographical area the disposal group is classified as discontinued operations. Upon classification of a business as held for sale and discontinued operations the individual income and expenses are presented within the Total net result from discontinued operations instead of being presented in the usual line items in the Consolidated statement of profit or loss. All comparative years in the Consolidated statement of profit or loss are restated and presented as discontinued operations for all periods presented. Furthermore, the individual assets and liabilities are presented in the Consolidated statement of financial position as Assets and liabilities held for sale and are no longer included in the usual line items in the Consolidated statement of financial position. Changes in assets and liabilities as a result of classification as held for sale are included in the notes in the line Changes in composition of the group and other changes.
Provisions, contingent liabilities and contingent assets A provision is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits, however the timing or the amount is uncertain. Provisions are discounted when the effect of the time value of money is significant using a pre-tax discount rate.
ING Group may become involved in legal proceedings. The degree of uncertainty and the method of making the accounting estimate depends on the individual case, its nature and complexity. Legal cases are usually one of a kind. Judgment is required to estimate the probability of an unfavourable outcome and the amount of potential loss. For the assessment of litigation provisions the Group consults with legal experts. Even taking into consideration legal experts’ advice, the probability of an outflow of economic benefits can still be uncertain and the amount provisioned can remain sensitive to the assumptions used which may have a broad range of outcomes. Reference is made to Note 14 ‘Provisions’. For legal proceedings where it is not possible to make a reliable estimate of the expected financial effect, that could result from the ultimate resolution of the proceedings, no provision is recognised, however disclosure is included in the annual accounts. Reference is made to Note 45 ‘Legal proceedings’.
Statement of profit or loss; and • Remeasurements which are recognised in Other comprehensive income (equity).
As at 31 December 2017, Trading assets include receivables of EUR 67,138 million (2016: EUR 56,020 million) with regard to reverse repurchase transactions.
Available-for-sale equity securities Available-for-sale debt securities Held-to-maturity Total 2017 2016 2017 2016 2017 2016 2017 2016
Changes in unrealised revaluations1 21 363 –1,030 –102 –64 –70 –1,073 191
− more than 1 year but less than 5 years 6,215 6,282
TMB Public Company Limited (TMB) is an associate in which ING Group holds a 30% ownership interest. TMB is a financial institution providing products and services to Wholesale, Small and Medium Enterprise (SME), and Retail customers. TMB is domiciled in Bangkok, Thailand and is listed on the Stock Exchange of Thailand (SET).
Amounts recognised in the statement of profit or loss for the year - Depreciation –13 –15 - Impairments –8 –64 3 –74
Net carrying value as at 31 December 291 323 626 692 917 1,015 9 Intangible assets
Accumulated impairments as at 31 December –29 –38 –2 –2 –31 –40
No goodwill impairment was recognised in 2017 (2016: nil). Changes in the goodwill per group of CGUs in 2017 is due to changes in currency exchange rates.
Sensitivity of key assumptions Key assumptions in the goodwill impairment test model are the Price-to-Book ratios, level 1 inputs (e.g. share price of a listed subsidiary), and the local parameters for CET1, discount rate, and long term growth rates. The model was tested for sensitivity by changing the key parameters in the model to more conservative values. The sensitivity analysis did not trigger additional impairment considerations.
Liabilities 11 Deposits from banks Deposits from banks include non-subordinated debt from banks, except for amounts in the form of debt securities.
The amount that ING Group is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit or loss is EUR 10,742 million (2016: EUR 11,720 million).
ING Group Annual Report 2017 148 16 Debt securities in issue Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit or loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: Fixed rate debt securities
In March, and October 2017 respectively, ING Groep N.V. redeemed the USD 1,100 million 7.20% perpetual and the USD 500 million 6.2% Perpetual Debt Securities. In September 2017 ING redeemed the USD 522 million Additional Tier 1 instrument issued by ING Capital Funding Trust III.
Other reserves - Revaluation reserve: Available-for-sale and other 3,447 3,830 3,896 - Revaluation reserve: Cash flow hedge 263 777 666 - Revaluation reserve: Property in own use 203 204 326 - Net defined benefit asset/liability remeasurement reserve –400 –371 –306 - Currency translation reserve –1,663 –770 –538 - Share of associates and joint ventures and other 2,527 2,235 1,733 - Treasury shares –15 –8 –18
In 2017, ING Groep N.V. issued 7.3 million ordinary shares (2016: 8.3 million depositary receipts for ordinary shares, converted into ordinary shares per 26 July 2016 and 2015: 11.3 million: depositary receipts for ordinary shares). These issues were made in order to fund obligations arising from share-based employee incentive programmes.
In 2017, 2016 and 2015 respectively, ING Groep N.V. issued nil, USD 1,000 million and USD 2,250 million Perpetual Additional Tier 1 Contingent Convertible Capital Securities which can, in accordance with their terms and conditions, convert by operation of law into ordinary shares if the conditions to such conversion are fulfilled. As a result of this conversion, the issued share capital can increase by no more than 111 million and 250 million ordinary shares, respectively. Reference is made to Note 17 ‘Subordinated loans’ and to the Parent company annual accounts, Note 5 ‘Subordinated loans’.
Realised gains/losses transferred to the statement of profit or loss –90 –146 –94
Following the purchase of VISA Europe by VISA Inc. in 2016, the available-for-sale equity securities were derecognised from the statement of financial position with a corresponding release of the available-for-sale revaluation reserve recognised in Equity of EUR 154 million. Reference is made to Note 7 ‘Share of results of associates and joint ventures, and Note 37 ‘Fair value of assets and liabilities’.
Changes in composition of the group and other changes –26 –127 –6
Non-controlling interests In 2015, Non-controlling interests decreased by EUR 7,434 million and was mainly related to the deconsolidation of NN Group. Reference is made to Note 27 ‘Discontinued Operations’.
The cumulative preference shares rank before the ordinary shares in entitlement to dividend and to distributions upon liquidation of ING Groep N.V.
Notes to the Consolidated statement of profit or loss 19 Net interest income
Included in Other, are commission fees of EUR 209 million (2016: EUR 202 million; 2015: EUR 171 million) in respect of bank guarantees, commission fees of EUR 52 million (2016: EUR 44 million; 2015: EUR 30 million) in respect of underwriting syndication loans, structured finance fees of EUR 136 million (2016: EUR 110 million; 2015: EUR 87 million), and collective instruments distributed but not managed by ING of EUR 165 million (2016: EUR 145 million; 2015: EUR 145 million).
Valuation results and net trading income includes the fair value movements on derivatives (used for both hedge accounting and economically hedging exposures) as well as the changes in the fair value of assets and liabilities included in hedging relationships as hedged items. In addition, Valuation results and net trading income includes the results on assets and liabilities designated at fair value through profit or loss.
In 2017, Valuation results on assets and liabilities designated at fair value through profit or loss (excluding trading) includes fair value adjustments on own issued notes amounting to EUR –107 million (2016: EUR –70 million; 2015: EUR 404 million), of which DVA adjustment on own issued notes in 2017 amounted to EUR –79 million (2016: EUR –50 million; 2015: EUR 163 million).
In 2017, Valuation results and net trading income includes EUR –52 million related to warrants on the shares of Voya and NN Group (2016: EUR 33 million; 2015: EUR –19 million). Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’.
ING Group Annual Report 2017 161 million; 2015: EUR 17 million). The remainder of the Other income is mainly impacted by positive results on the sale of loans and property and increased renegotiations of mortgages.
As per 31 December 2017, total options outstanding consists of 10,156,219 options (2016: 16,861,694; 2015: 27,657,794) relating to equity-settled share-based payment arrangements and 4,985,761 options (2016: 8,713,218; 2015: 9,653,337) relating to cash-settled share-based payment arrangements.
As at 31 December 2017, total unrecognised compensation costs related to share awards amount to EUR 37 million (2016: EUR 41 million; 2015: EUR 45 million). These costs are expected to be recognised over a weighted average period of 1.4 years (2016: 1.4 years; 2015: 1.4 years).
Regulatory costs Regulatory costs represent contributions to the Deposit Guarantee Schemes (DGS), The Single Resolution Fund (SRF) and local bank taxes. As of 1 January 2016, the new ex-ante DGS in the Netherlands and the SRF came into effect resulting in increased Regulatory costs for the period. Included in Regulatory costs for 2017, are contributions to DGS of EUR 341 million (2016: EUR 316 million; 2015: EUR 233 million) mainly related to the Netherlands, Germany, Belgium, Poland, and Spain and contributions to the SRF of EUR 179 million (2016: EUR 176 million; 2015: EUR 143 million) related to National Resolution Funds.
In 2017, reversals of impairments on property and equipment, mainly include impairments on property in own use that were reversed following the sale of office buildings.
Other Included in Other operating expenses – Other in 2017, is a net charge for the provision recognised in relation to floating interest rate derivatives that were sold in the Netherlands. Also included in this line, is a charge related to the provision recognised for reimbursement of expenses associated to the formalization of mortgages at ING Spain and a charge related to the provision recognised for a discontinued business in ING Luxembourg. Reference is made to Note 14 ‘Provisions’ and Note 45 ‘Legal proceedings’.
27 Discontinued operations Total net result from discontinued operations comprises the results from NN Group and Voya.
Net result from disposal of discontinued operations In 2015, Net result from disposal of discontinued operations included mainly a profit of EUR 323 million on the sale of the last Voya shares in March 2015 to reduce ING Group’s stake in Voya from 18.9% to zero, a loss of EUR 1,224 million as a result of the further sale and deconsolidation of NN Group at the end of May 2015 and a loss of EUR 15 million on the further divestments of ING Group’s interest in NN Group in September 2015.
February 2016 – Final tranche exchange of subordinated notes: Anchor investors On 2 February 2016, ING settled the exchange of the third and final tranche of EUR 337.5 million mandatory exchangeable subordinated notes which were issued in 2014 as part of the Anchor investment in NN Group. EUR 210 million of the notes were exchanged into 6.9 million NN Group ordinary shares with the three Anchor investors. EUR 128 million of notes were settled in cash with RRJ Capital. This transaction reduced ING’s remaining stake in NN Group from 16.22% to 14.09%. The transaction did not have a material impact on the shareholders’ equity or the statement of profit or loss of ING Group.
Treasury bills and other eligible bills included in available-for-sale investments 386 386 135
Included in cash and cash equivalents: – deposits from banks –8,563 –9,809 –10,312
–3,403 –2,492 –1,442 Not included in cash and cash equivalents: – deposits from banks –28,258 –22,155 –23,501
ING Group reconciles the total segment results to the total result of Banking using Corporate Line Banking. The Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. The Corporate Line Banking includes the isolated legacy costs (mainly negative interest results) caused by the replacement of short-term funding with long-term funding during 2012 and 2013. 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.
Underlying result before taxation 7,283 –84 7,199 7,199 Taxation 2,182 –22 2,160 2,160
– Total investment and other income 257 224 –28 207 919 –301 1,277
Luxembourg ING Luxembourg S.A. Wholesale banking/Retail banking 777 298 14,748 68 27
UK Branch of ING Bank N.V. Wholesale banking 603 550 78,573 324 76
Branch of ING Bank N.V. Wholesale banking/Retail banking 245 66 5,641 16 3
Hungary Branch of ING Bank N.V. Wholesale banking 146 32 1,003 – 2
Ireland Branch of ING Bank N.V. Wholesale banking 43 57 2,337 47 6
Switzerland Branch of ING België N.V. Wholesale banking 204 224 9,737 145 38
Mexico ING Consulting, S.A. de C.V. Wholesale banking 8 1 2 –2
Malaysia Branch of ING Bank N.V. Wholesale banking 5 – 29 –1 –
Turkey ING Bank A.S. Wholesale banking/Retail banking 5,221 741 13,798 267 54
Australia Australia ING Bank (Australia) Ltd. Retail banking 1,143 577 37,982 330 235
Other Mauritius ING Mauritius Ltd. Investment management – 1 939 – –
Luxembourg ING Luxembourg S.A. Wholesale banking/Retail banking 793 274 10,783 138 32
Germany ING DiBa A.G. Wholesale banking/Retail banking 4,341 2,212 134,902 1,282 407
Russia ING Bank (Eurasia) Z.A.O. Wholesale banking 276 118 2,008 69 7
Ukraine PJSC ING Bank Ukraine Wholesale banking 111 59 622 47 7
Branch of ING Bank N.V. Wholesale banking 10 – 1 –2 –
1 Public subsidies received, as defined in article 89 of the CRD IV, amounts to EUR 1 million (2015: EUR 3 million).
The UK has a high tax charge due to changes in tax law and prior year adjustments. Russia, China, Philippines and South Korea all have lower tax charges due to prior year adjustments. Austria has an inverse tax charge due to the recognition of a tax asset for previously unrecognised tax losses. Brazil has a low tax charge due to the combination of relatively high exempt income with a decreased profit. Mauritius has no tax charge as the partial sale of Kotak Mahindra Bank shares in September 2016 was tax exempt.
Germany ING DiBa A.G. Wholesale banking/Retail banking 4,052 2,037 126,171 1,081 363
Other Mauritius ING Mauritius Ltd. Investment management – 380 1,186 380 –
Changes in the fair value of plan assets for the period were as follows: Remeasurements: Return on plan assets excluding amounts included in interest income 52 467
Amounts recognised in statement of profit or loss related to pension and other staff related benefits are as follows: Net defined benefit asset/liability
The key assumption in the determination of the net defined benefit asset/liability is the discount rate. The discount rate is the weighted average of the discount rates that are applied in different regions where the Group has defined benefit pension plans (weighted by defined benefit obligation). The discount rate is based on a methodology that uses market yields on high quality corporate bonds of the specific regions with durations matching the pension liabilities as key input. Market yields of high quality corporate bonds reflect the yield on corporate bonds with an AA rating for durations where such yields are available. An extrapolation is applied in order to determine the yield to the longer durations for which no AA-rated corporate bonds are available. As a result of the limited availability of long-duration AA-rated corporate bonds, extrapolation is an important element of the determination of the discount rate. The weighted average discount rate applied for net defined benefit asset/liability for 2017 was 2.0% (2.1% in 2016) based on the pension plan in the Netherlands, Germany, Belgium, The United States of America, and the United Kingdom. The average discount rate for Other post-employment benefits 3.2% (3.5% in 2016).
Expected cash flows Annual contributions are paid to the funds at a rate necessary to adequately finance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries are designed to comply with applicable local regulations governing investments and funding levels. ING Group’s subsidiaries should fund the cost of the entitlements expected to be earned on a yearly basis.
The benefit payments for defined benefit and other post-employment benefits expected to be made by the plan between 2018-2022 are estimated to be between EUR 91 million and EUR 112 million per annum. From 2023 to 2027 the total payments made by the plan are expected to be EUR 423 million.
As at 31 December 2017 and 31 December 2016, ING Groep N.V. had no significant temporary differences associated with the parent company’s investments in subsidiaries as any economic benefit from those investments will not be taxable at parent company level.
Impact on deferred tax from change in tax rates 55 –1 12
37 Fair value of assets and liabilities a) Financial assets and liabilities The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain items per the statement of financial position are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Financial assets at fair value through profit or loss – trading assets 116,748 114,504 116,748 114,504
Financial liabilities at fair value through profit or loss – trading liabilities 73,596 83,167 73,596 83,167
The Global Price Testing and Impairment Committee is responsible for the oversight and the approval of the outcome of impairments (other than loan loss provisioning) and valuation- (price-testing) processes which include the use of appropriate models and inputs related to fair valued positions. It oversees the quality and coherence of valuation methodologies and processes. Local Parameter Committees monitor the appropriateness of (quoted) pricing, any other relevant market info, as well as that of pricing models themselves related to the fair valued positions to which they are applied. LPC executes valuation methodology and processes at a local level. Global Price Testing and Impairment Committee oversees market data sources and market data set up / points used for official valuation of positions for fair value. Trading Pricing Model Committee approve and review all pricing models and methodologies for the calculation of market parameters.
Valuation Adjustments Valuation adjustments are an integral part of the fair value. They are included as part of the fair value to provide better estimation of market exit value on measurement date. ING applies various valuation adjustments including Bid-Offer adjustments, Credit Valuation Adjustments (CVA), Debt Valuation Adjustments (DVA), Model Risk Valuation Adjustments, Collateral Valuation Adjustment (CollVA) and Funding Valuation Adjustment (FVA). The combination of Credit Valuation adjustment and Debt Valuation adjustment for derivatives is called Bilateral Valuation Adjustment (BVA).
• Bilateral Valuation Adjustment (BVA) is the valuation component for the counterparty credit risk of the derivative contracts. It has bilateral nature, where both counterparty’s credit risk and ING own credit risks are taken into account. The calculation is based on the estimation of the expected exposure, the counterparties’ risk of default, and taking into account the collateral agreements as well as netting agreements. The counterparties’ risk of default is measured by probability of default and expected loss given default, which is based on market information including credit default swap (CDS) spread. Where counterparty CDS spreads are not available, relevant proxy spreads are used. Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty deteriorates) and right-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty improves) are included in the adjustment.
• ING applies an additional ‘funding valuation adjustment’ (FVA) to address the funding costs associated with the collateral funding asymmetry on uncollateralized or partially collateralized derivatives in the portfolio. This adjustment is based on the expected exposure profiles of the uncollateralized or partially collateralized OTC derivatives and market-based funding spreads.
Debt securities Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an exchange, dealer, broker, industry group, pricing service, or regulatory service. The quoted prices from non-exchange sources are assessed to determine if they are tradable prices. This distinction determines where it falls in the fair value hierarchy.
Customer deposits The carrying values of customer deposits with an immediate on demand features approximate their fair values. The fair values of deposits with fixed contractual terms have been estimated based on discounting future cash flows using the interest rates currently applicable to deposits of similar maturities.
Financial liabilities at fair value through profit or loss The fair values of securities in the trading portfolio and other liabilities at fair value through profit or loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal discounted cash flow valuation techniques using interest rates and credit spreads that apply to similar instruments. Reference is made to Financial assets at fair value through profit or loss above.
Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. An instrument in its entirety is classified as Level 3 if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which to derive a price that an unrelated, informed buyer would purchase the asset or liability at.
Transfers out of Level 3 –37 –43 –23 –319 –75 -13 –392 –118
In 2016, included in ‘Realised gain/loss recognised in the statement of profit or loss during the period’, is EUR 163 million related to the release of revaluation reserves on shares held in VISA Europe Limited.
Changes in the composition of the group and other changes –3 –3 1 Net gains/losses were recorded in income from trading activities in continuing operations included herein as ‘Valuation results and net trading income’ in the statement of profit or loss. 2 ‘Amounts recongnised in the statement of profit or loss during the year’ has been renamed to ‘Realised gain/loss recognised in the statement of profit or loss during the period’.
Furthermore, Level 3 financial liabilities includes approximately EUR 0.1 billion (31 December 2016: EUR 0.1 billion) which relates to financial liabilities that are part of structures that are designed to be fully neutral in terms of market risk. As explained above, the fair value of each of the components of these structures may be sensitive to unobservable inputs, but the overall sensitivity is by design not significant.
The table below provides a summary of the valuation techniques, key unobservable inputs and the lower and upper range of such unobservable inputs, by type of Level 3 asset/liability. The lower and upper range mentioned in the overview represent the lowest and highest variance of the respective valuation input as actually used in the valuation of the different financial instruments. Amounts and percentages stated are unweighted. The range can vary from period to period subject to market movements and change in Level 3 position. Lower and upper bounds reflect the variability of Level 3 positions and their underlying valuation inputs in the portfolio, but do not adequately reflect their level of valuation uncertainty. For valuation uncertainty assessment, reference is made to section Sensitivity analysis of unobservable inputs (Level 3).
– FX 477 642 479 688 Present value techniques Inflation rate (%) 4% 2% 4% 3%
– Equity 161 258 128 208 Option pricing model Equity volatility (%) 5% 0% 129% 140%
Correlation Correlation is a measure of dependence between two underlying references which is relevant for valuing derivatives and other instruments which have more than one underlying reference. For example, correlation between underlying equity names may be a relevant input parameter for basket equity option pricing models. High positive correlation (close to 1) indicates strong positive (statistical) relationship between underlyings, implying they typically move in the same direction. High negative correlation, on the other hand, implies that underlyings typically move in opposite directions.
Interest rates Examples of interest rate related unobservable inputs are prepayment rates, reset rates and inflation rates. Prepayment rate and reset spread are key inputs to mortgage linked prepayment swaps valuation. Prepayment rate is the estimated rate at which mortgage borrowers will repay their mortgages early, e.g. 5% per year. Reset spread is the future spread at which mortgages will re-price at interest rate reset dates.
Sensitivity analysis of unobservable inputs (Level 3) Where the fair value of a financial instrument is determined using inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument, the actual value of those inputs at the balance date may be drawn from a range of reasonably possible alternatives. In line with market practice the upper and lower bounds of the range of alternative input values reflect a 90% level of valuation certainty. The actual levels chosen for the unobservable inputs in preparing the annual accounts are consistent with the valuation methodology used for fair valued financial instruments.
Other financial instruments The fair values of the financial instruments carried at amortised cost in the statement of financial position, but for which fair values are disclosed are determined as follows: Financial Assets
Financial liabilities 1 Financial assets and liabilities that are on demand are excluded from the fair value hierarchy as their fair value approximates the carrying value. In 2017, comparative figures of customer deposits have been reclassified between the levels to conform with the current year presentation.
As at 31 December 2017, ING Group has no non-financial liabilities measured at fair value (2016: none).
Net accounting ineffectiveness recognised in the Statement of profit or loss –93 74
The fluctuation in balances between 2016 and 2017 relate to the volatility in interest rate movements.
Effective portion of fair value changes on derivatives under cash flow hedges, after tax –514 111
In some jurisdictions ING Bank N.V. has an obligation to maintain a reserve with central banks. As at 31 December 2017, the minimum mandatory reserve deposits with various central banks amount to EUR 8,503 million (2016: EUR 9,055 million).
Net amounts of financial assets presented in the statement of financial position Financial instruments
Net amounts of financial liabilities presented in the statement of financial position Financial instruments
Financial liabilities at fair value through profit or loss Trading liabilities Derivatives 21,356 –975 20,381 19,292 302 787
Repurchase, securities lending and similar agreements 46,695 –19,415 27,280 36 27,102 142
ING Group Annual Report 2017 213 44 Contingent liabilities and commitments In the normal course of business, ING Group is party to activities where risks are not reflected in whole or in part in the consolidated annual accounts. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Reference is made to Parent company annual accounts – Notes to the parent company annual accounts, Note 13 ‘Other’ for further information on Guarantees issued by ING Groep N.V.
Furthermore, ING Group leases assets from third parties under operating leases as lessee. The future rental commitments to be paid under non-cancellable operating leases are as follows: 45 Legal proceedings ING and its consolidated subsidiaries are involved in governmental, regulatory, arbitration and legal proceedings and investigations in the Netherlands and in a number of foreign jurisdictions, including the US, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as lenders, broker-dealers, underwriters, issuers of securities and investors and their position as employers and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened governmental, regulatory, arbitration and legal proceedings and investigations, ING is of the opinion that some of the proceedings and investigations set out below may have or have in the recent past had a significant effect on the financial position, profitability or reputation of ING and/or ING and its consolidated subsidiaries.
Claims regarding accounts with predecessors of ING Bank Turkey: ING Bank Turkey has received numerous claims from (former) customers of legal predecessors of ING Bank Turkey. The claims are based on offshore accounts held with these banks, which banks were seized by the Savings Deposit Insurance Fund (SDIF’) prior to the acquisition of ING Bank Turkey in 2007 from Oyak. SDIF has also filed various lawsuits against ING Bank Turkey to claim compensation from ING Bank Turkey, with respect to amounts paid out to offshore account holders so far. ING Bank had initiated an arbitration procedure against OYAK in which ING Bank sought to be held harmless for these claims. The arbitration court dismissed ING’s prayers for relief. At this moment it is not possible to assess the outcome of these procedures nor to provide an estimate of the (potential) financial effect of these claims.
Criminal proceedings regarding cash company financing: In June 2017, a Belgian criminal Court ruled that ING Luxembourg assisted third parties in 2000 to commit a tax fraud in the context of the purchase of the shares of a cash company. The Court condemned ING Luxembourg among others to a penal fine of EUR 120,000 (suspended for half of the total amount). The court also condemned ING Luxembourg jointly and severally with other parties, to pay EUR 31.48 million (to be increased with the legal interests) to the bankruptcy trustee of the cash company. A provision has been recorded. In July 2017, ING Luxembourg filed an appeal against this judgment, which is currently pending. In another case the Belgian authorities are also investigating ING Luxembourg for allegedly assisting third parties in 2001 to commit tax fraud in the context of the purchase of the shares of a cash company. For this case, a provision has been recorded by ING Luxembourg as well. The outcome of those cases is uncertain.
Other For information on transactions related to ING Group’s shareholding in NN Group, reference is made to Note 27 ‘Discontinued operations’, and Note 49 ‘Related parties’.
48 Structured entities ING Group’s activities involve transactions with various structured entities (SE) in the normal course of its business. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. ING Group’s involvement in these entities varies and includes both debt financing and equity financing of these entities as well as other relationships. Based on its accounting policies, as disclosed in the section Principles of valuation and determination of results of these annual accounts, ING establishes whether these involvements result in no significant influence, significant influence, joint control or control over the structured entity.
In 2017, there are no non-controlling interests as part of the securitisation structured entities that are significant to ING Group. ING Group for the majority of the securitisation vehicles provides the funding for the entity except for EUR 7 billion.
The transactions are funded by the ING Group administered multi seller Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corporation (Mont Blanc), which funds itself in the ABCP market. Mont Blanc does not have non-controlling interests that are significant to ING Group. ING Group facilitates these transactions by providing structuring, accounting, funding and operations services.
The types of assets currently in Mont Blanc include trade receivables, consumer finance receivables, credit card receivables, motor vehicle loans, and residential mortgage backed securities (RMBS).
ING Group Annual Report 2017 220 5. Other structured entities In the normal course of business, ING Group enters into transactions with structured entities as counterparty. Predominantly in its structured finance operations, ING can be instrumental in facilitating the creation of these structured entity counterparties. These entities are generally not included in the consolidated annual accounts of ING Group, as ING facilitates these transactions as administrative agent by providing structuring, accounting, funding, lending, and operation services.
In January 2016, ING Group sold shares in NN Group and lost significant influence resulting in NN Group no longer being a related party of ING Group. Prior to this sale, since deconsolidation at the end of May 2015, NN Group was accounted for as an Investment in associate held for sale and transactions with ING Group were included as Associates in the table above.
In 2017 and 2016, three members of the Executive Board of ING Groep N.V. were also members of the Management Board Banking. The members of the Management Board Banking are considered to be key management personnel and their compensation is therefore included in the tables below.
Variable compensation – Upfront cash – 485 485 1 Includes their compensation earned in the capacity as Board members. 2 Excluding members that are also members of the Executive Board of ING Groep N.V. 3 In 2016, one new member joined and one member retired 4 The collective fixed allowances consist of two savings allowances applicable to employees in the Netherlands; an individual savings allowance of 3.5% and a collective savings allowance to compensate for loss of pension benefits with respect to salary in excess of EUR 101,519.
Key management personnel compensation is generally included in Staff expenses in the statement of profit or loss, 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.
Remuneration of the Executive Board and Management Board Banking is recognised in the statement of profit or loss in Staff expenses as part of Total expenses. The total remuneration of the Executive Board and Management Board Banking as disclosed in the table above includes all variable remuneration related to the performance year 2017. Under IFRS, certain components of variable remuneration are not recognised in the statement of profit or loss directly, but are allocated over the vesting period of the award. The comparable amount recognised in Staff expenses in 2017 and included in Total expenses in 2017, relating to the fixed expenses of 2017 and the vesting of variable remuneration of earlier performance years, is EUR 15 million.
51 Subsequent events On 29 January 2018 ING announced it had reached agreement to acquire a 75% stake in Payvision. Payvision is a Netherlands based payments service provider with a total estimated value of EUR 360 million. The transaction is not expected to have material impact on ING's CET1 ratio.
The Risk Management section describes the key risks that arise from ING’s business model. It explains how the risk management function is embedded within the organisation based on the ‘three lines of defence’. The key risks resulting from the bank’s business model are managed by dedicated and specific risk management departments that each covers its own area of expertise. The risk management disclosures provide qualitative and quantitative disclosures about credit, market, liquidity and funding, business and non-financial risks.
Risk governance Effective risk management requires a firm-wide risk governance. ING’s risk and control structure is based on the ‘three lines of defence’ governance model, whereby each line has a specific role and defined responsibilities in such a way that the execution of tasks is separated from the control of the same tasks. At the same time, they have to work closely together to identify, assess and mitigate risks. This governance framework ensures that risk is managed in line with the risk appetite as approved by the Management Board Banking (MBB), the EB and the SB, and is cascaded throughout ING. The MBB is composed of the Executive Board of ING Group and the managers of the business lines.
The second line of defence consists of oversight functions with a major role for the risk management organisation headed by the Chief Risk Officer (CRO), who has ultimate responsibility. Risk Management at the corporate level is responsible for (i) the development of overall policies and guidance, (ii) objectively challenge the execution, management and control processes and (iii) coordinate the reporting of risks and controls by the first line of defence. It also has an escalation/veto power in relation to business activities that are judged to present unacceptable risks to ING.
• The Risk Committee, which assists and advises the SB in monitoring the risk profile and approving the risk limits of the company as well as the structure and operation of the internal risk management and control systems.
• Non-Financial Risk Committee Bank (NFRC Bank) is accountable for the design and maintenance of the Non-Financial Risk Management Framework including Operational Risk Management, Compliance and Legal policies, minimum standards, procedures and guidelines; the NFRC structure; development of tools, methods and key parameters (incl. major changes) for risk identification, measurement and monitoring/ reporting. The minimum frequency of the NFRC Bank is at least quarterly.
Risk management function Organisational structure Over the past years, banks have been faced with regulatory and public pressure with regard to their risk management policies, processes and systems. New requirements and regulations have been introduced and implemented. To be able to effectively address these internal and external (market and regulatory) developments and challenges, ING started to redesign the set-up of its riskmanagement organisation in 2015. The purpose of this redesign is to better support the Bank’s Think Forward strategy and enhance the interconnection between the risk oversight responsibilities in the business units on one hand, and the global risk functions on the other hand.
As announced in 2016, ING is accelerating its Think Forward strategy. Therefore, ING has introduced a number of initiatives to enhance the customer experience, further grow primary customers and lending, and increase efficiency. For Risk, it has initiated a Target Operating Model (TOM) programme to enable further convergence of our operations, which resulted in the establishment of a new risk organisation as of 1 March 2017.
Tier 2 level compromises of corporate risk departments headed by General Managers directly reporting to the CRO. The corporate risk departments support the CRO to set the risk appetite, develop corporate policies, rules and global procedures, and manage the risk infrastructure. It is composed of 4 main departments which are Financial Risk, Non-Financial Risk, Model Risk Management and the Risk COO. The purpose of Financial Risk (FR) is to set the risk strategy across the organisation to control the financial risk and financialrelated regulatory risk, while Non-Financial Risk (NFR) focuses on operational and compliance risks. Model Risk Management is responsible for policy setting in the domain of model risk, validating regulatory and non-regulatory models. The last department is the Risk COO which operates as a Shared Service Centre for the global risk community. Furthermore, the General Managers and the CRO are responsible for the harmonisation and standardisation of risk management practices.
The organisation chart below illustrates the reporting lines in 2017 for the risk organisation:
Risk policies, procedures and standards ING has a framework of risk management policies, procedures and minimum standards in place to create consistency throughout the organisation, and to define requirements that are binding to all business units. The goal of the governance framework of the local business units is to align with ING’s framework and to meet local (regulatory) requirements. Senior management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and practices.
An independent MRM department is one of the cornerstones of ING’s risk model governance. It consists of the process of determining that a model is appropriate for its intended use. It is an on-going process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes to the model are made. The validation process contains a mix of developmental evidence, process verification and outcome analysis.
Risk culture The risk management framework based on the three lines of defence governance model is effective when a sound and consistent risk culture is present throughout the whole organisation. The reputation and integrity of ING’s organisation are considered key requirements to operate successfully in the financial world. It promotes awareness of collectively shared values, ideas and goals but also of potential threats and it ensures alignment of individual performance objectives with the short- and long-term strategy. ING believes that embedding the risk culture and awareness in the organisation leads to effective risk management. ING therefore aims to make risk responsibilities transparent within the different levels of the organisation and hold every employee accountable for his/her acts.
To support the embedding of risk culture into business practices, ING has initiated different programmes and issued several guidelines. Risk awareness is to be alert to potential threats that can occur during day-to-day business, which can be specific to the sector, the region or the clients ING is doing business with. Part of the training curriculum to increase risk awareness is the Promoting Integrity Programme (PIP), which is a long-term, global, educational and behavioural change programme supported by the EB and MBB for all ING employees. With the programme, ING aims to gain a sound risk culture and to ensure that every employee in every part of the organisation understands how his/her actions and behaviour can help earn and retain customer and stakeholder trust. Recently, additional modules with current topics, were added to the programme, among others on integrity and cybersecurity. To enhance risk awareness, these topics are discussed between managers and employees through dialogue sessions that managers organise within their teams to create clear and consistent understanding. The endorsement from the executive level and the emphasis in the communication strengthen the culture.
Credit risk, market risk, funding & liquidity risk, non-financial risk (operational and compliance), business riskRisk profile
• Industry Lending • General Lending • Transaction Services • Financial markets
The recurrence is twofold. One: identification, assessment and review, and update of mitigating measures are done periodically. Two: the periodical monitoring exercise may indicate emerging risks, known risks are changing, assessed risk levels are changing, or control measures are not effective enough. Further analyses of these findings may result in renewed and more frequent risk identification, and/or assessment, and/or change of mitigating measures.
Risk assessment and control Each identified risk is assessed to determine the importance, or risk level, of the risk for the ING entity in scope. This enables the entity to decide which of the identified risks need control measures and how strict or tolerant these measures must be. Known risks are reassessed to either confirm the risk level or detect change.
Risks can be controlled by mitigating measures that either lower the likelihood the risk occurs, or measures that lower the impact when they occur. The ultimate measure to lower risk is to stop the activity or service that causes the risk (risk avoidance). Risk controlling/mitigating measures are defined and maintained at both bank wide and local level.
This annual risk assessment serves as input when defining the global risk appetite which – in line with its business model and risk ambition – is currently formulated as follows: ING 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.
To be able to execute the strategy, ING has formulated the following risk and capital targets: • have a rating strong enough to support the execution of ING’s Funding & Capital issuance plan; • be able to restore the capital and liquidity position following a stress situation on its own strength; • be in a position to meet current and forthcoming regulatory requirements and targets; and • have a risk profile that compares favourably to its main banking peers.
For financial risks, a sequence of different risk appetite frameworks is implemented to address the most significant risks. This implies that a whole framework of credit risk limits is in place that monitors the overall quality of ING’s credit portfolio and all underlying portfolios. In addition, specific concentration risk appetites are defined on product level, geographic level and (single name) counterparty level which are cascaded down into the organisation. The risk appetite for the trading book activities within Financial Markets is accompanied by a risk appetite framework for market risks in the banking books. For both types of market risk, limits at ING level are translated into the organisation. The funding & liquidity risk appetite statements that are defined on ING level are translated into the organisation, taking the funding & liquidity specific situation of each (solo) unit into account. Risk appetite for non-financial risk is cascaded to the divisions and business units through a set of quantitative and qualitative statements. The risk appetite at ING level is applicable to all divisions and business units. The suite of risk appetite statements serves as input for the MTP process as well as for the establishment of key performance indicators and targets for senior management.
Step 3. Data processing & proposal mitigating actions When the scenario parameters have been finalised, the impact of the scenario on the solvency and liquidity position is determined. Based on the scenario values for the relevant macro-economic and financial market variables, the impact on amongst others P&L, revaluation reserves, RWA and liquidity buffers are calculated. These outcomes are subsequently used to calculate the evolution of relevant solvency and liquidity ratios, such as the common equity Tier-1 (CET1) capital ratio, the leverage ratio and the net liquidity position.
Economic and Regulatory Capital Economic Capital (EC) and Regulatory Capital (RC) are the main sources of capital allocation within ING. Both of these capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic and regulatorybased risks it faces. The concept of EC differs from RC in the sense that RC is the mandatory amount of capital that is defined under Pillar I while EC is the best estimate of Pillar II capital that ING uses internally to manage its own risk. EC is a non-accounting measure that is inherently subject to dynamic changes and updated as a result of ING’s portfolio mix and general market developments. ING continuously recalibrates the underlying assumptions behind its economic capital model which may have an impact on the values of EC going forward.
The following fundamental principles and definitions have been established for the model: • ING Bank uses a one-sided confidence level of 99.95% and a one-year time horizon to calculate EC; • It is assumed that all currently known measurable sources of risk are included; • The best estimate risk assumptions are as objective as possible and based on thorough statistical analysis.; GDP Growth Unemployment Real estate prices Interest rates Credit spreads Equity prices Savings outflow Professional funding availability Downgrades Haircuts FX Rates Etc.
• The EC calculations reflect known embedded options and the influence of customer behaviour in banking products; • The EC calculations are on a before tax basis and do not consider the effect of regulatory requirements on capital levels; and • The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
In December 2017, the Basel III revisions were formally announced by the Basel Committee on Banking Supervision (BCBS). These new prudential rules for banks consist of a revision to the standardised approach to credit risk, the introduction of a capital floor based on standardised approaches, the use of internal models, limitation of options for modelling operating risks, and new rules for the establishment of risk-weighted items and unused credit lines at the banks. ING believes it is good that there is now more clarity. With a long implementation phase and the transposition into EU regulation still pending, some question marks remain on how this will shape up. We will meet the final requirements and as before we will continue executing our strategy for our clients and delivering growth at good returns.
Principles for Effective Risk Data Aggregation and Risk Reporting In January 2013, the BCBS published Principles for Effective Risk Data Aggregation and Risk Reporting (also known as BCBS239). BCBS239 consists of fourteen principles to strengthen a bank’s risk data aggregation and risk reporting practices. Collectively implementing these principles will enhance risk management and decision-making processes at banks. Banks indicated as G-SIBs, including ING, were required to implement the principles by 2016.
Top and emerging risks The risks listed below are defined as material existing and emerging risks that may have a potentially significant impact on our financial position or our business model. They may have a material impact on the reputation of the company, introduce volatility in future results of operations or impact ING’s medium and long-term strategy including the ability to pay dividends, maintain appropriate levels of capital or meet capital and leverage ratio targets. An emerging risk is defined as a risk that has the potential to have a significant negative effect on our performance, but currently difficult to quantify the impact on the organisation than for other risk factors that are not identified as emerging risks.
Macroeconomic developments The economic environment further improved in 2017 marked by strong growth in the United States and a robust recovery in the eurozone. However, the outcome of Brexit, persistent low interest rates and geopolitical risks are sources of uncertainty.
The sustained low interest rate environment in Europe, where central banks held their rates at very low and even negative levels in some countries, negatively impacted short-term as well as long-term market rates. The typical interest rate position at ING is that the duration of the assets is slightly higher than the duration of the liabilities. Given this mismatch, decreasing interest rates are under normal circumstances favourable for the interest income of ING: liabilities reprice more quickly than assets, and therefore the average interest rates paid on liabilities should adapt more quickly to lower market interest rates.
Cybercrime Cybercrime remains a continuous threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks increase on a global scale. Threats from Distributed Denial of Service (DDoS), targeted attacks (also called Advanced Persistent Threats) and Ransomware have intensified worldwide. ING builds on its cybercrime resilience through its dedicated Cyber Crime Expertise and Response Team, further enhancing the control environment to protect, detect and respond to ebanking fraud, DDoS and targeted attacks. Additional controls continue to be embedded in the organisation as part of the overall internal control framework and are continuously re-assessed against existing and new threats.
ING’s credit risk strategy is to maintain an internationally diversified loan and bond portfolio, avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of a top-down risk appetite framework, which sets concentration limits for countries, individual clients, sectors, products, secondary risk (collateral/guarantees) and investment activities. The aim is to support relationship-banking activities, while maintaining internal risk/reward guidelines and controls.
Credit analysis at portfolio level is monitored using metrics such as economic capital, regulatory capital, exposure at default (EAD), probability of default (PD) and loss given default (LGD). To ensure efficient use of ING’s capital, the risk appetite is monitored and managed at portfolio level. Credit analysis at transactional level focuses on the risk amount, tenor, structure of the facility and profile of the borrower. ING’s credit risk managers make use of publicly available information, information provided by the client, peer group comparisons, industry comparisons and quantitative techniques.
• Investment risk: is the credit default and risk rating migration risk that is associated with ING’s investments in bonds, commercial paper, equities, securitisations, and other similar publicly traded securities. This can be viewed as the worst-case loss that ING may incur as a result of holding a position in underlying securities whose Issuer's credit quality deteriorates or defaults. All investments in the banking book are classified in the investment risk category. The primary purpose of ING’s investments in the banking books is for liquidity management.
Credit risk appetite and concentration risk boundaries and instruments are set and reviewed on an annual basis and require approval from the Risk Committee of the SB.
Complementary to the country boundaries, country instruments are defined to support the setting of an actual hard limit on a given country. The country instrument takes into account ING’s ability to actively reduce exposure without triggering either market distortion or tying up too much of its capital in a country. Country instruments are quantified by the maximum internal economic capital (INCAP) tolerance level in terms of consolidated BIS capital or the individual country’s outstanding domestic credit or gross domestic product.
Measured through various metrics: Expected loss CRWA CRWAaR INCAP EAD LGD amount Secondary risk outstandings NPL%
Product and secondary Risk Concentration ING has additionally established a concentration framework to identify, measure and monitor: • Product concentration: concentrations arising from exposure to same activities or commodities. These concentrations are capped through actual limits and monitored at retail and wholesale portfolio levels per geographical region. • Secondary risk: risks arising from secondary exposures that ING has with insurance and re-insurance companies from which the
ING performs periodical stress tests based on a standardised and pre-determined 1-in-10 year-stress event (i.e. at 90% confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and Economic Capital are recalculated to assess what the combined impact of such a year would be. The additional credit RWA (CRWA) that ING should allocate in such an event is named CRWA-at-Risk. Additionally, ING calculates an Earnings-at-Risk which influences overall CET1 ratio.
Risk programs Within ING, risk programs are detailed analyses of defined products and/or industries. They identify the major risk drivers and risk mitigants, the internal business mandate, and propose the minimum risk (including business) parameters – and potentially the maximum product and/or portfolio limit - to undertake that business. A risk program is always prepared by the front office responsible for the internal business mandate and requires an approval from an approval authority. Risk programs may carry various names and/or may have geographical and/or business limitations (e.g. local vs global).
Reference benchmarks A reference benchmark is the maximum appetite of credit risk per legal one obligor group. It is expressed as a (benchmark) exposure at the concentration risk level, which corresponds to (maximum) internal capital consumption for credit risk. It is used as a reference amount in the credit approval process and can be waived on the basis of proper credit risk arguments.
Given the nature of the retail business, roles and responsibilities of the local credit risk policy are delegated to local retail credit risk management. However, the CRO C&G risk is informed of all local retail risk policies so as to monitor that local policies do not conflict with any global Financial Risk policies. This framework serves to ensure more global alignment while preserving existing empowerment of local units. As such, approval authorities differ depending on the materiality of the deviation between local policy and global policy.
Environmental and Social Risk Framework ING makes a positive contribution to global economic growth and more sustainable development by promoting responsible lending and investment practices. The ESR policy framework incorporates assessment tools that are used in ING’s mainstream processes and systems. It is therefore fully integrated into regular client and transaction reviews.
• Includes checks on ESR Restricted List • Aligned with Customer Domain Units globally
• Front Office: departments that originate transactions and have direct contact with the client or project sponsors; • Risk Management: departments that provide control over front office activities and generally sign off on the environmental and social impacts for ’low risk’ or ‘medium risk’ transactions; and • ESR department within risk management fully dedicated to assessing environmental and social impacts associated with ’high-risk’
transactions. Negative advice from the ESR department can only be waived by ING’s highest credit committee or the MBB. In practice such waivers are very exceptional.
Credit risk capital and measurement Credit risk capital Regulatory capital is the minimum amount of capital (based on 99.90% confidence level) that ING must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
An important characteristic of our IT systems and framework is that models are built for several purposes, including economic capital, regulatory capital and loan loss provision. These credit risk models are used throughout the organisation which is compliant with the Basel Use Test requirement and ensures active feedback on the risk parameters by business units.
• Probability of Default (PD): The first is the counterparty’s probability of default, which measures a counterparty’s creditworthiness in terms of likelihood to go into default. It attempts to measure the senior, unsecured standalone creditworthiness of an organisation without consideration of structural elements of the underlying transactions, such as collateral, pricing, or maturity. Each borrower has a rating which translates into a specific PD.
(CRR/CRDIV) floor the maturity element at one year and cap it at five years.
Credit risk rating process In principle all risk ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed in CRR/CRDIV, ECB Supervisory Rules and EBA guidelines. This concerns all counterparty types and segments. ING’s PD rating models are based on a 1-22 scale (1=highest rating; 22=lowest rating) referred to as the ‘Master scale’, which roughly corresponds to the same rating grades that are assigned by external rating agencies, such as Standard & Poor’s, Moody’s and Fitch. For example, an ING rating of 1 corresponds to an S&P/Fitch rating of AAA and a Moody’s rating of Aaa; an ING rating of 2 corresponds to an S&P/Fitch rating of AA+ and a Moody’s rating of Aa1, and so on.
The three first categories (1-19) are risk ratings for performing loans. They are calculated in IT systems with internally developed models based on data either manually or automatically fed. Under certain conditions, the outcome of a manually fed model can be challenged through a clearly defined rating appeal process. Risk ratings for non-performing individually significant loans (20-22) are set by the global or regional restructuring. For securitisation portfolios, the external ratings of the tranche in which ING has invested are leading.
Rating Models for retail clients are predominantly statistically driven and automated, such that ratings can be updated on a monthly or bi-monthly basis. Models for SME companies, and larger corporates, institutions and banks are manually updated, and are individually monitored on at least an annual basis.
AIRB models per exposure class In the table below, the number of significant PD, EAD, and LGD models per asset class are shown. Additionally a description of the model and methodology are provided per exposure class. The asset classes presented in this table do not align with the EBA Exposure classes as the scope has been redefined to better fit the scope of the model. SME exposure for example can be part of either corporate exposures or other retail depending on the size of the SME.
1 Belgian PD models provide a rating at a customer level, covering both secured and unsecured loans. 2 For retail PD modelling a minimum of 5 years is allowed based on ING’s Modelling Standards, which are compliant with regulatory requirements
Credit risk tools Credit risk policies ING’s credit risk policies provide for generic rules and roles and responsibilities that always prevail within the organisation. While allowance is given for discretionary variation to comply with local regulations, such variations must always comply with the content of a global ING wide credit risk policy and approved by (local) credit risk. All credit risk policies are created according to policy development standards and reviewed on a regular basis. Each policy has a credit risk sponsor and is created in close consultation with various stakeholders within credit risk, front office and where applicable other corporate departments. All policies require approval by the CTRC and where applicable by the GCTP.
Data Governance and Data Quality ING recognises that information and underlying data are assets that are key (together with people, processes and IT systems) to further develop its digital profile. Cooperation and mutual agreement on global data management roles and responsibilities in ING are critical success factors to meet this objective. As such ING has embraced multiple data management and governance initiatives triggered by internal and external stakeholders (e.g. Principles for Effective Risk Data Aggregation and Risk Reporting). In the Financial Risk and Risk COO departments, these principles are embedded into the credit risk data management and enshrined within the Data Governance framework. The framework outlines roles and responsibilities relevant for the credit risk lifecycle and data quality assurance.
Credit risk data lifecycle The credit risk data governance framework used by ING is based on the credit risk data lifecycle. The governance related to the data delivery and exchange is described in various data agreements between data users and data suppliers. The scope of credit risk data is the data set determined and assigned for ING’s external and internal reporting requirements and credit risk modelling requirements. Principally, data can be categorised into one of the two following types: • Atomic data: the lowest level of detail and provides the base data for all data transformations. The guiding principles are that each data element is only input once, and have a clear data owner and ‘home’ system or database which is leading throughout all uses of that data element. From the data ‘home’, the data may then be redistributed to other systems or databases that may require that data in an automated Straight through Processing (STP) method. Depending on the need, the data may be transferred in real time, near real time, daily, weekly or monthly.
• Data Quality Assurance: establishes data quality management with the primary focus how credit risk data quality is managed throughout the credit risk data lifecycle. It covers the data quality cycle, data quality criteria and relevant activities through the stages. The data quality cycle consists of four stages: define, implement, monitor and improve. During the data definitions step, data quality rules are determined. Having set the definitions, local data quality rules are implemented in the source systems, and both successively and simultaneously, data quality rules are implemented in the central credit risk system. The next stage consists of data validations, monitoring and control activities performed early in the data exchange and after data processing and calculation stage. The last stage is the continuous improvement of data quality which can be split into two categories: • One off issues and reoccurring issues that are identified, prioritised and subject to resolution; • The periodic review of data quality rules and improvements based on lessons learned from solving issues, audits and best practices. After the last stage, the data quality cycle resumes from the start, ultimately leading to high standard credit risk data quality.
Unless specifically stated, the figures in the tables included in the credit risk section are calculated on the basis of CRR/CRD IV regulatory standards and includes ‘intercompany loans’ to ING Group. The portfolio breakdown of ING per exposure class and per risk category is shown below.
2017 AIRB SA AIRB SA AIRB SA AIRB SA AIRB SA AIRB + SA
Exposure classes: ING Bank portfolio per risk category, as % of total regulatory EAD
In residential mortgages, the concentration increased mainly due to shifting exposure from corporate lending SA bucket to the residential mortgage SA bucket to align the scope with regular capital reporting practices. The decline was mainly visible in the Netherlands due to repayments in the core mortgage book, continued transfer of mortgages from WestlandUtrecht (WU) Bank to NN Bank and the run-off of the WU Bank mortgage book. This was partly offset by growth in residential mortgages in Belgium, Germany, Poland and Spain.
The concentration in sovereigns declined caused by a decrease in government bond exposures of France, the Netherlands, Austria and Belgium, which was partly offset by increase in money market exposure towards the central banks of Luxembourg and Belgium. The concentration in institutions went down due to a decline in interest rate derivatives to a central counterparty clearinghouse.
For AAA-rated assets, the concentration in Wholesale Banking reduced while it increased in Corporate Line due to a shift of the regulatory reserve deposits at the Dutch Central Bank between these business lines. The decrease in Wholesale Banking was partly offset by increase in money market assets to the central banks of Luxembourg and Belgium. The concentration in the A rating class for Wholesale Banking increased mainly driven by an improved rating for one German financial institution shifting pre-settlement exposure from rating class BBB to A. The increase in rating class A was partly offset by decreased exposure in money market assets for Wholesale Banking. A rating upgrade of the Bank of Beijing shifted equity investment exposure from rating class BB to rating class BBB in Corporate Line.
Risk industry concentration ING uses a common industry classification methodology based on the NAICS system (North American Industry Classification System). This methodology has over 1,500 detailed industry descriptions, which are aggregated into 22 industry classes at the highest level. Certain countries require ING to report locally based on other industry classification methodologies, which are generally derived from the NAICS classifications presented here. Residential mortgages are generally only extended to private individuals.
Risk classes: ING Bank portfolio per credit risk type, as % of total outstandings1,2
Growth Markets Corporate Line Total Industry 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
The main concentration in Private Individuals is related to mortgage lending. Mortgage volume growth, mainly in Belgium, Germany and Spain, was offset by a decline in mortgage exposures in Netherlands. The decrease in the Netherlands was due to repayments in the core mortgage book, continued transfer of mortgages from WestlandUtrecht (WU) Bank to NN Bank and the run-off of the WU Bank mortgage book.
Europe 1 Geographic areas are based on country of residence, except for private individuals for which the geographic areas are based on the primary country of risk. 2 The top 5 exposures within Rest of Europe are to the United Kingdom (3.8%), Poland (3.8%), France (3.2%), Spain (3.1%) and Italy (2.4%).
Credit risk mitigation ING’s lending and investment businesses are subject to credit risk. As such, the creditworthiness of our customers and investments is continually monitored for their ability to meet their financial obligations to ING. In addition to determine the credit quality and creditworthiness of the customer, ING uses various credit risk mitigation techniques and instruments to mitigate the credit risk associated with an exposure and to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING. The most common terminology used in ING for credit risk protection is ‘cover’. While a cover can be an important mitigant of credit risk and an alternative source of repayment, generally it is ING’s practice to lend on the basis of the customer’s creditworthiness rather than exclusively relying on the value of the cover. Within ING, there are two distinct forms of covers: assets and third party obligations.
Cover forms Assets The asset that has been pledged to ING as collateral or security gives ING the right to liquidate it in cases where the customer is unable to fulfil its financial obligation. As such, the proceeds can be applied towards full or partial compensation of the customer's outstanding exposure. An asset can be tangible (such as cash, securities, receivables, inventory, plant & machinery and mortgages on real estate properties) or intangible (such as patents, trademarks, contract rights and licenses).
The cover values are presented for the total portfolio of ING. Covers of both AIRB and SA portfolios are presented in detail reflecting ING’s complete portfolio. Next to that, detailed information is provided on the cover coverage for the performing and non-performing portfolio. The non-performing loan definition is explained in detail in the section ‘Credit Restructuring’. To understand the nature of the collateralised loans, insight is given in the industry and geography breakdown of ING’s portfolio as well. For comparability reasons with previous tables, outstandings are used to show ING’s portfolio.
Exposures are categorised into different Value to Loan (VTL) buckets that give insight in the level of collateralisation of ING’s portfolio. VTL is calculated as the cover value divided by the outstandings at the balance sheet date. The cover values are indexed and exclude any cost of liquidation. Covers can either be valid for all limits, sub-limits or a particular outstanding of a borrower, the latter being the most common. For the purpose of aggregation, the coverage of all outstanding is capped at 100%. Over-collateralisation is ignored in this overview for the VTL. Each limit is subsequently assigned to one of the six defined VTL buckets: no cover, >0% to 25%, >25% to 50%, >50% to 75%, >75% to <100%, and ≥ 100%. As the nature of the Pre-settlement portfolio determines that collateral is netted, these VTL buckets are not shown.
1 Consists mainly of residential mortgages to small one man business clients
For the residential mortgages portfolio, the cover type guarantees relates to mortgages covered by governmental insurers under the Nationale Hypotheek Garantie (NHG) in the Netherlands. The NHG guarantees the repayment of a loan in case of a forced property sale.
Total business lending outstandings increased by EUR 9.8 billion, after accounting for a decline due to an FX impact of EUR 14.5 billion following the depreciation of the US Dollar. The largest increase in outstandings is visible in Commercial Banks (19.2%) mainly driven by growth in trade related transactions, followed by Real Estate and Services. The largest decrease was observed in Transportation & Logistics where outstandings as well as covers declined, mainly seen in Energy Transportation in the Netherlands and United States.
As part of its securities financing business, ING entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sell-back and sell/buyback agreements, and securities borrowing and lending agreements are the most common. As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or re-pledged in other (similar) transactions. ING is obliged to return equivalent securities in such cases.
Total past due exposure for consumer loans increased by EUR 0.4 billion. The deterioration in past due obligations was a result of the change in the days count methodology related to IFRS 9 and was mainly seen in the 31-60 days bucket and the 61-90 days. The increase in the 1-30 days bucket was driven by increased residential mortgage exposure in Netherlands Retail and Poland Retail, the increase was offset by a decrease in past due exposure in Australia.
Credit restructuring Global Credit Restructuring (GCR) is the dedicated and independent department 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. This concerns mainly WB clients. The loans are managed by GCR or by units in the various regions and business units.
At the end of 2017, ING Bank held specific (ISFA) and collective provisions (INSFA) of EUR 2,511 million and EUR 1,391 million, respectively (2016: EUR 3,044 million and EUR 1,443 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 was EUR 726 million (2016: EUR 821 million) in provisions (IBNR) against the performing portfolio.
Recoveries of amounts written off 3 49 53 38 3 7 59 94
Exchange rate or other movements -92 -15 -2 -19 -42 -18 -136 -52 1 At the end of 2017, the stock of provisions included provisions for amounts due from banks: EUR 8 million (2016: EUR 11 million). 2 Includes EUR 104 million provisions for contingent liabilities (2016: EUR 119 million).
As of 1 January 2018, the IFRS 9 accounting rules on loan loss provisioning will be implemented. These accounting rules will not change the actual credit losses, but will have an impact on the timing of the reflection of these losses in the P&L. Where in current accounting practice loan loss provisions are booked from the moment losses are incurred, under IFRS 9 loan loss provisions are booked given expected losses. More specifically, loan loss provisioning becomes more forward-looking under IFRS 9 partly due to the fact that provisions will be based on the macroeconomic outlook. Furthermore, loan loss provisioning will be calculated on lifetime expected losses for assets that have been significantly deteriorated in credit quality. As a result of these elements, loan loss provisioning in the P&L could become more volatile.
To identify forbearance, ING assesses clients with Early Warning Signals, Watch List, Restructuring, Default or Recovery status. ING reviews the performance of forborne exposures at least quarterly, either on a case-by-case (business) or on a portfolio (retail) basis.
ING as Originator ING occasionally originates its own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes. Securitisations originated by a company may only be considered for balance sheet de-recognition when the requirements for significant credit risk transfer have been fulfilled. ING has executed a very limited number of external transactions as originator.
ING as Sponsor In the normal course of business, ING structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to a special purpose vehicle (SPV). Senior positions in these transactions are often funded by the ING administered multi-seller asset backed commercial paper (ABCP) conduit Mont Blanc Capital Corp. (rated A1 /P-1). Mont Blanc Capital Corp. funds itself externally in the ABCP markets. In its role as administrative agent, ING facilitates these transactions by providing structuring, accounting, funding and operations services. ING also provides support facilities (liquidity facilities) backing the transactions funded by the conduit. Mont Blanc is fully consolidated into the ING annual accounts.
ING recognises the importance of sound market risk management and bases its market risk management framework on the approach to identify, assess, control and manage market risks. The approach consists of a cycle of five recurring activities: risk identification, risk assessment, risk control, risk monitoring and risk reporting.
Supervision of market risk falls under responsibility of the Management Board Banking (MBB) and is delegated to the ALCO function, where ALCO Bank is the highest approval authority and sets the market risk appetite. ALCO Bank monitors adherence to the risk appetite for market risk and sets additional limits where appropriate. These limits are cascaded through the organisation through lower level ALCO’s. This ALCO structure facilitates top-down risk management, limit setting and the monitoring and control of market risk.
The organisational structure facilitates top-down risk management by recognising that risk taking and risk management to a large extent occur at the regional/local level. Bottom-up reporting from regional/local units to head office units allows each management level to fully assess the market risk relevant at the respective levels.
Several committees govern the communication between the parties involved in market risk management. Market Risk Model Committee (MRMC) is the highest dedicated authority within ING for the approval of all trading and banking risk models, methodologies and parameters related to market risk. Trading Pricing Model Committee (TPMC) approves pricing models for trading and banking books. The GCTP is the highest dedicated authority with representatives from Financial Risk, CRO Challengers & Growth Markets and CRO Wholesale Banking for the approval of policies, models, methodologies and parameters related to credit risk and trading risk and for consideration of risk appetite and risk governance. Systematic risk reporting takes place by departments of Financial Risk and FI-FM Risk to the EB and MBB, senior executive management of CRO function and senior executive management of related business functions.
FI-FM Risk Management Framework governs the boundary between trading books and banking books. It defines the activities ING considers to be trading according to a regulatory definition and as constituting part of the trading book for own funds requirement purposes. Trading activity is systematically reviewed and positions against the mandates are assessed jointly by first and second lines of defence. As specified in the framework, transfer of risk or positions between banking and trading books is not allowed.
Economic Capital for market risk is calculated for exposures both in trading portfolios and banking portfolios and includes interest rate risk, credit spread risk, equity price risk, foreign exchange rate risk, real estate risk, model risks and pension risk. Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year.
To arrive at the economic capital for market risk, a simulation based model is used which includes scaling to the required confidence interval and holding period. In determining this scaling factor, several other factors are also taken into account like the occurrence of large market movements (events) and management interventions.
Risk measurement The main concepts and metrics used for measuring market risk in the banking books are described below per risk type.
Below the three activities are described in more detail: Capital Management is responsible for managing the investment of own funds (core capital), more information can be found in the Capital Management section. Capital is invested for longer periods, targeting to maximise return, while keeping earnings stable.
Further, the change in NII-at-Risk for Retail Challengers & Growth Markets is driven by the savings model updates for market developments in Italy, Spain and ING Germany.
Wholesale Banking shows a more negative NII sensitivity in the downward scenario as a result of the removal of the floor. The change in NII-at-Risk for the Corporate Line is due to investments in longer tenors of own funds.
Ramped, unfloored Instantaneous, floored parallel ▼ parallel ▲ parallel ▼ +100 bps By business Wholesale Banking -185 201 -15 138 Retail Banking Benelux 17 -48 -73 -88 Retail Challengers & Growth Markets 101 -133 20 58 Corporate Line Banking -24 13 8 116 Total -91 33 -60 224
Ramped, unfloored Instantaneous, floored parallel ▼ parallel ▲ parallel ▼ +100 bps By currency Euro -83 9 -54 186 US Dollar 10 -20 -14 19 Other -19 44 8 19 Total -91 33 -60 224
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds, as the equity itself is not modelled and hence is not presented as an offset for the investments of own funds. The value of these investments is impacted significantly if interest rates move up. The asymmetry between the NPV-at-Risk for a downward scenario and an upward shock is primarily caused by the convexity risk due to (embedded) optionality in the savings and mortgage portfolio.
The change in impact per accounting category for both the downward and upward scenario is primarily a result of the update of the IRRBB measures. In the downward scenario the change in the NPV-at-Risk is a result of the removal of the floor. The downward and upward scenario for the Available for Sale and Fair value through profit and loss accounting category show a more symmetric impact as a result of the removal of the floor.
In order to measure the sensitivity of the target CET1 ratio against FX rate fluctuations, the Historical Value at Risk is used based on historical series of the last 12 months FX rates. It measures the drop in the CET1 ratio from the target based on historical FX rates. Based on these time series and with a probability of 1%, the drop in the CET1 ratio would be 0.16%. As this methodology has been newly developed in 2017, the comparable 2016 sensitivity is not available.
Risk Profile Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. ING’s equity exposure mainly consists of the investments in associates and joint ventures of EUR 947 million (2016: EUR 1,003 million) and equity securities held in the available-for-sale (AFS) portfolio of EUR 3,983 million (2016: EUR 4,024 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised in the revaluation reserve, except in the case of impairment. Investments in associates and joint ventures are measured in accordance with the equity method of accounting and the balance sheet value is therefore not directly linked to equity security prices.
Risk profile ING has two main different categories of real estate exposure on its banking books: first, its own buildings which ING occupies, and second, development assets, which mostly consists of former Real Estate Development and Real Estate Investment Management activities. The total real estate exposure amounts to EUR 0.9 billion (excluding property from foreclosures and third party interest). ING has EUR 0.1 billion recognised at fair value through profit and loss and EUR 0.8 billion is recognised at cost or revalued through equity (with impairments going through profit and loss). A split on the real estate exposure per continent and sector based on the risk management view is shown below.
Market risk in trading books Within the trading portfolios, positions are maintained in the professional financial markets. These positions are often a result of transactions with clients and may serve to benefit from short-term price movements. In 2017, ING continued its strategy of undertaking trading activities to develop its client-driven franchise and deliver a differentiating experience by offering multiple market and trading products efficiently and effectively.
Valuation techniques range from discounting of cash flows to valuation models. Such models are based on relevant risk factors such as the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour. Some of these risk factors require assumptions which imply that valuation models are subjective by nature. Depending on what valuation technique is used and what assumptions are made, the obtained fair value can be different. Hence the implied downward and/or upward uncertainty of the accounting value may vary. For a classification of fair valued exposure to products in accordance with their degree of valuation uncertainty, refer to the section ‘Financial instruments at fair value’ of Note 37 ‘Fair value of assets and liabilities’.
ING has aligned existing fair valuation adjustments with the regulatory standards for fair valued instruments issued by EBA, hence where possible it follows a unified valuation framework which meets both IFRS and CRR requirements. This approach is supported by a bank-wide valuation policy framework. Detailed methodologies for fair valued instruments per product and degree of liquidity are available. These cover among others close out costs and mid-price uncertainty. Benefits of this framework and chosen approach are a significant increase in consistency and transparency of the fair valuation of financial instruments across different locations and books. For compliance with EBA regulatory standards an additional valuation adjustment through capital on the concentrated positions (the Concentration AVA) of EUR 13 million after tax is booked for ING in 2017. On a quarterly basis all valuation adjustments are discussed and approved in the Global Pricing and Impairment Committee (GP&IC). This committee oversees the valuation framework and Independent price verification.
Backtesting Backtesting is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future trading results, estimates are based on historical market data. In a backtest, the actual daily trading result (excluding fees and commissions) is compared with the 1-day VaR. In addition to using actual results for backtesting, ING also uses hypothetical results, which excludes the effect of intraday trading, fees, and commissions. When the actual or hypothetical loss exceeds the VaR, an ‘outlier’ occurs. Based on ING’s one-sided confidence level of 99%, an outlier is expected once in every 100 business days. In 2017 there were no occurrences where an actual or hypothetical daily trading loss exceeded the daily consolidated VaR of ING. ING reports the backtesting results on a quarterly basis to ECB.
ING’s Event Risk policy is based on a large set of possible stress scenarios per risk type (fixed income, equity, foreign exchange, credit and related derivative markets). In stress scenarios, shocks are applied to prices (credit spreads, interest rates, equity, commodities, and fx rates) and volatilities. Depending on the type of stress test, additional scenario assumptions could be made, for example on correlations, dividends, or recovery rates. For example, for equity products both a crisis scenario (prices decrease) as well as a bull scenario (prices increase) are assumed. Scenarios are calculated based on events happening independently, jointly by region, or in all countries simultaneously. This way, for each risk type, a large set of scenarios is calculated. The worst scenarios per market are combined across markets by assessing both independent events per market, and worst events happening in all markets at the same time.
Minimum Maximum Average Year end amounts in millions of euros 2017 2016 2017 2016 2017 2016 2017 2016 Interest rate 3 3 8 10 4 5 4 5 Equity and commodity 1 2 4 11 3 5 2 4 Foreign exchange 1 1 4 5 2 2 1 2 Credit spread 3 4 7 11 5 6 4 7 Diversification2 -7 -7 -6 -12 Total VaR 4 5 9 22 6 11 5 6 1 CVA risk is not included in VaR. 2 The total VaR for the columns Minimum and Maximum cannot be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
In 2017, the average VaR was at a lower level compared to last year, as notable also in different risk types. Over these two years (2016-2017), the trading portfolios saw a decline in both the level and the volatility of 1-day VaR, thanks to the development of equity derivatives trading strategy and generally more positive market conditions.
Regulatory Capital According to the Capital Requirements Regulation (CRR/CRD IV), regulatory capital (own funds requirements) for market risk can be calculated using the standardised approach or an internal model approach. ING received regulatory approval to use an internal model to determine the regulatory capital for the market risk in all trading books of ING. Market risk capital of trading books is calculated according to the CRR, using internal VaR, SVaR, and IRC models, where diversification is taken into account. Commodities risk in the banking books is calculated under Internal Model Approach. However, mismatches in foreign exchange risk from the banking books are calculated using Standardised Approach with fixed risk weights. ING does not have a Correlation Trading Portfolio or any other securitisations in the trading book.
Internal Model Approach amounts in EUR millions RWA Capital requirements RWA Capital requirements 1 VaR (higher of values a and b) 649 52 1,123 90 (a) Previous day's VaR (Article 365(1) (VaRt-1)) 209 17 449 36 (b) Average of the daily VaR (Article 365(1)) on each of the preceding sixty business days
(VaRavg) x multiplication factor ((mc) in accordance with Article 366) 649 52 1,123 90 2 SVaR (higher of values a and b) 1,750 140 2,546 204 (a) Latest SVaR (Article 365(2) (sVaRt-1)) 842 67 1,054 84 (b) Average of the SVaR (Article 365(2) during the preceding sixty business days (sVaRavg)
Sensitivities As part of the risk monitoring framework, FI-FM Risk actively monitors the daily changes of sensitivities of the trading portfolios. Sensitivities measure the impact of movements in individual market risk factors (foreign exchange rates, interest rates, credit spreads, equity, and commodity prices) on profit and loss results of the trading positions and portfolios.
Liquidity risk management within ING falls under the supervision of the ALCO function, which determines the liquidity risk (limit) framework and appetite after which this is cascaded down in the organisation. ING’s liquidity risk framework is based on the three lines of defence concept, whereby risk principles are implemented, monitored and controlled in conjunction with both first and second line functions within the bank.
ING has defined the following funding and liquidity risk management risk appetite statements: • Home/host regulatory liquidity limits must be pro-actively complied with; • The time-to-survive in a funding stress situation must extend over defined period, depending on the level of stress applied; • Funding of longer-term assets and investments must be done by stable and longer-term liabilities; • Geographical dependencies with respect to intra-group funding are to be limited; and • Diversification must be in place of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies.
The starting point for ING Group’s assessment of the adequacy of its liquidity position is the overall business strategy and the risk appetite i.e. the level of financial risk ING Group is willing to accept for growth and value creation, while maintaining a sound balance sheet. Other relevant factors are developments in the business environment and corresponding business opportunities and risk exposures as well as developments in the (future) regulatory framework. For example: ING Group takes into account the developments in applicable regulatory and accounting standards and the setting of MREL/TLAC requirements.
Based on all these perspectives ING Group assesses the current and future adequacy of its liquidity position and, if deemed necessary, takes steps to further improve the position. Aim is to ensure that ING Group has sufficient counterbalancing capacity.
Funding sources In 2017, ING had readily access to a large variety of funding sources, both short term and long term. In the table below, the various funding sources are presented in the funding mix: 2017 2016 Funding type Retail deposits 51% 51% Corporate & other deposits 22% 21% Interbank (incl. central bank) 5% 5% Lending/repurchase agreement 6% 5% Public debt 14% 16% Subordinated debt 2% 2% Total 100% 100%
The Chief Compliance Officer (CCO) is the Head of the Compliance Risk Management function. This is an independent function responsible for developing and establishing the Bank-wide policies and minimum standards for managing compliance risks. The CCO assists and supports the EB and MBB in managing ING’s compliance risks and control framework. The CCO is a permanent participant of the Risk Committee of the Supervisory Board and meets regularly with its Chairman.
The NFR function uses a layered functional approach within divisions to support a systematic and consistent implementation of the framework of policies and minimum standards within ING. To avoid potential conflicts of interests, it is imperative that staff in this function are independent and objective when advising business management on non-financial risk matters in their business unit or business line. To facilitate this, a functional reporting line to the next higher level within Operational Risk Management (ORM), Information Risk Management (IRM) and Compliance is in place. The functional reporting line has clear accountabilities with regard to objectives setting, remuneration, performance management and appointment of new staff as well as obligations to veto and escalate.
Framework Non-financial risk is the risk of financial loss, legal or regulatory sanctions, or reputational damage due to inadequate or failing internal processes, people and systems; a failure to comply with laws, regulations and standards; or external events. ING has a framework for non-financial risks that supports and governs the process of identifying, measuring, mitigating, monitoring and reporting non-financial risks. It reflects the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
External events inventories External non-financial loss data provides valuable information about the losses experienced by other businesses, and assists ING to quantify its exposure to risk events that have not been experienced internally.
Risk response can be achieved through several combinations of mitigation strategies, for example reducing likelihood of occurrence, reducing impact, risk avoidance, risk acceptance or through the transfer of risk. Tracking takes place through ING’s central risk management system.
Risk mitigations ING is currently not using any insurance or risk transfer mechanisms for the mitigation of risk in the context of the AMA capital calculation.
Risk categories ING categorises operational risks in a number of risk areas: • Information (Technology) risk is the risk of financial loss, regulatory sanctions or reputational damage due to breaches of confidentiality, integrity or availability within business processes or information or lack of information quality; • Continuity risk is the risk of financial loss, regulatory sanctions or reputational damage due to business disruptions (loss of people, processes, systems, data, premises); • Control and processing risk are the risks of financial loss, regulatory sanctions or reputational damage due to ineffective organisation structures and governance procedures (including unclear roles and responsibilities and inadequate reporting structure), failed (transaction) processing (input, execution, output) or failing process management; monitoring and enforcement of risk mitigating measures; and risk culture; • Internal fraud risk is the risk of financial loss, regulatory sanctions or reputational damage due to deliberate abuse of procedures, systems, assets, products and/or services of ING by employees (incl. temporary workers, third party contractors, internships and consultants) who intend to deceitfully or unlawfully benefit themselves or others; • External fraud risk is the risk of financial loss, regulatory sanctions or reputational damage due to deliberate abuse of procedures, systems, assets, products and/or services of ING by external parties (clients, potential clients or other third parties, including vendors and outside agencies) who intend to deceitfully or unlawfully benefit themselves or others; • Unauthorised activity risk is the risk of financial loss, regulatory sanctions or reputational damage due to employees performing outside the normal course of their business, intentionally giving unauthorised approvals or overstepping of their authority; • Personal and physical security risk is the risk of financial loss, regulatory sanctions or reputational damage due to criminal and environmental threats that might endanger the security or safety of ING personnel at work, people in ING locations, ING assets or assets entrusted to ING, people at ING event locations, or might have an impact on ING organisation's confidentiality, integrity or availability; and
Operational risk includes the related risk of reputation loss, as well as legal risk; strategic risks are not included. Reputational risk is defined as the possibility that adverse publicity regarding ING’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of ING. Reputational risk is multidimensional and reflects the perception of other market participants, like customers, counterparties, shareholders, investors or regulators that can adversely affect ING’s ability to maintain existing, or establish new, business relationships and continued access to sources of funding (e.g. through the interbank or securitisation markets).
In cases where an employee of ING suspects an actual or suspected irregularity or misconduct within ING that leads or could lead to a violation of ING Orange Code, any ING policy and/or any law, regulation or code, this can be reported anonymously in line with the Whistle-blower Policy, via internal or external channels next to normal reporting channels.
Also in 2017, the Ukraine-related sanctions as imposed earlier by both the US (including further extensions of the scope have been imposed by the US) and the EU remained in force. Those sanctions restrict amongst others the dealing in specific (financial) products with certain named parties. Management of ING entities use their existing control framework to remain compliant. Newly imposed sanctions on Venezuela also include restrictions on financing Venezuelan government owned entities.
Regulation is becoming increasingly more extensive and complex. A recent example is the implementation of the Common Reporting Standard (CRS), which like FATCA requires financial institutions to report detailed client-related information to the competent authorities. Customer due diligence (CDD) and transaction monitoring impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering , terrorist financing, and fraud.
4th AML Directive The 4th AML Directive, as issued by the European Union, has been incorporated into the update of the ING Financial Economic Crime Policy and Minimum Standards. The main changes in this Directive (compared to the 3rd AML Directive) are related to: the establishment of an Ultimate Beneficial Owner (UBO) register (at national level with the potential to share the information within the European Economic Area (EEA)) and a stronger approach towards the application of due diligence on ING’s customers. The implementation date of the Directive was 26 June 2017. The implementation of the directive into Dutch law was expected in July 2017, but has been delayed, probably until early 2018. ING started to implement several KYC enhancements in 2017.
On 5 July 2016 the European Commission presented a new proposal for a Directive amending the 4th AML Directive (so called 5th AML Directive). The aim of the proposal is to tackle new means of terrorist financing, increase transparency to combat money laundering and help strengthen the fight against tax avoidance. On 8 June 2017, the EU Council adopted its position on the proposed Directive. The Council and the Parliament will enter into negotiations on the final text as soon as the latter has decided on its position.
In addition, the European Supervisory Authorities (ESAs) issued their final Guidelines on risk factors on 26 June 2017, which will become applicable by 26 June 2018. These Guidelines promote a common understanding of the risk-based approach to AML/CFT and set out how it should be applied in the context of the 4th EU AML Directive. Furthermore, on 22 September 2017 the ESAs also issued their final Guidelines to prevent the abuse of funds transfers for terrorist financing and money laundering purposes. These guidelines will apply from six months after the date on which they are issued.
Business Risk Introduction Business Risk for ING has been defined as the exposure to value loss due to fluctuations in volumes/margins as well as expenses. It is the risk inherent to strategy decisions and internal efficiency. Business risk capital is calculated via the variance-covariance methodology for expense risk, covering the risk that expenses will deviate from the expected expenses over the horizon of the relevant activities. This risk primarily relates to the (in)flexibility to adjust expenses, when that is needed. Expense risk only concerns nonfinancial expenses (e.g. staff and IT expenses); financial expenses are not in scope.
In 2017, a total of USD 2.1 billion grandfathered additional Tier 1 instruments were redeemed. ING Groep NV did not issue additional Tier 1 instruments during the year. In 2017, EUR 1.0 billion ING Bank Tier 2 bonds were exchanged for ING Group Tier 2 notes at similar terms. In addition, ING Groep NV issued EUR 1.8 billion of Tier 2 bonds and EUR 0.4 billion of Tier 2 private placements in Japanese Yen and USD.