The 2016 ING Annual Report is available digitally and as print-on-demand, reflecting an increased focus on online presentation and our experience with how readers prefer to access the report.
These reports can be read on desktop, tablet and mobile devices at www.ing.com
Chairman’s statement 70 Report of the Supervisory Board 72 Corporate Governance 77 Report of ING Trust Office 90 Report of ING Continuity Foundation 93 Conformity statement 94 Section 404 Sarbanes-Oxley Act 95 Report of independent registered public accounting firm 96 Remuneration report 97 Works councils 107
Consolidated statement of financial position 111 Consolidated statement of profit or loss 112 Consolidated statement of comprehensive income 114 Consolidated statement of changes in equity 115 Consolidated statement of cash flows 118 Notes to the consolidated annual accounts 121 Risk management 247 Capital management 316
Who we are 2016 highlights • Attracted almost 1.4 million new retail customers; primary relationships grew by 8% to 9.7 million.
• Net core lending to customers grew by almost EUR 35 billion and savings entrusted rose by over EUR 28 billion, both increasing by around 6% compared to 2015.
• ING again performed strongly in the area of sustainability in 2016. Sustainalytics ranked ING number 1 out of its 395 financial peers. The Dow Jones Sustainability Indices also named ING among world leaders in the category “Banks”.
• The sale of our remaining stake in NN Group in April 2016 was the final step in ING´s programme to divest all of its insurance and investment management businesses as part of the restructuring agreement with the European Commission.
Common equity Tier 1 ratio fully loaded ING Group > Prevailing fully-loaded requirements 14.2% 12.7% 10.5% Common equity Tier 1 ratio fully loaded ING Bank 12.6% 11.6% 11.4% Leverage ratio ING Group 1 >4% 4.8% 4.4% Leverage ratio ING Bank 1 4.2% 4.1% 3.6% Underlying cost/income ratio 50-52% 54.2% 55.9% 58.7% Underlying return on equity ING Group awaiting regulatory clarity 10.1% 8.6% 7.2% Underlying return on equity ING Bank 11.6% 10.8% 9.9% Dividend per share (in euros) progressive dividend over time 0.66 0.65 0.12
Net result per share (in euros) 1.20 1.04 0.32 Shareholders' equity per share (end of period in euros) 12.84 12.36 13.08 Dividend per share (in euros) 0.66 0.65 0.12
+ 16% The strong increase was driven by the higher underlying net result from Banking, as the negative impact of special items in 2016 (due to the restructuring charges taken in the fourth quarter) were largely offset by higher results from the discontinued Insurance operations in 2016 compared with 2015. ING sold its final stake in NN Group in April 2016.
Our focus on sustainability driven business resulted in EUR 34.3 billion sustainable transitions financed at year-end 2016. SAuM increased to EUR 3.3 billion, which underlines our client’s appetite for products and services that apply sustainability criteria.
Since 2015 we measure our performance in this area to be sure our efforts are really driving sustained improvements in the financial behaviour of our customers and society. In 2016, 23.9 million people felt financially empowered as a result of interactions with our financial empowerment initiatives.
In early 2015, an initiative was launched to find a permanent solution for system reliability issues we experienced in the Netherlands and Belgium with our online payments channels. At the end of 2016, systems reliability improved to 99.75 percent, up from 99.6 percent in 2015.
Reflecting these strong results, the Board proposes to pay a total 2016 dividend of EUR 0.66 per ordinary share, subject to shareholder approval at the AGM in May 2017. This is in line with our goal of paying a progressive dividend over time, while maintaining healthy capital levels.
At the core of that strategy is our Customer Promise: to be clear and easy, available anytime and anywhere, to empower our customers and to keep getting better. These pledges underpin ING’s ambition to provide a differentiating experience for our increasingly digital and self-directed customers. We took important steps in 2016 to fulfil this promise, and the growing number of customers and the high ratings we receive from them confirm the success of those efforts.
CEO statement – continued digital financial management tools and better data management so we can provide customers with more tailored offerings that meet their needs.
This transformation will benefit our customers and put our business on a solid footing for the future. But we also realise that change does not come only with benefits. We anticipate that the creation of an integrated banking platform in the Netherlands and Belgium, together with the other initiatives announced, will impact around 7,000 jobs in various countries over the next five years. This will result in job losses, changed functions or functions moving to new locations. We are well aware that the change we need to make to be successful in the future will have a major impact on many employees who have worked hard to get ING to where it is today. We are committed to building on our track record as a responsible employer, to treating all those affected with respect and care and to helping employees who face job losses to find suitable new job opportunities.
I feel strongly that the bank of the future will not look like banking as we know it today. I see this in particular in the development of digital ecosystems that connect people and businesses. They include features like shopping and paying for goods and services to become the one stop for all of their users’ needs. This trend makes it important for us to also develop an open platform where customers can go not only for their financial needs but also for relevant offers and services from third parties, and even for an overview of their accounts with other financial services providers. We believe this will provide them with an enhanced customer experience and us with opportunities to generate fee and other revenue from services beyond traditional banking. ING’s digital systems also must be capable of integrating seamlessly into other ecosystems so that we are present where our customers spend their time online – available anytime and anywhere.
On the Wholesale Banking side, an open platform approach is also needed to tap into important developments like blockchain. This distributed ledger technology has the potential to develop into a digital standard between banks, enabling them to offer faster, safer and cheaper services to their clients.
To succeed in this we must move faster as an organisation. In October 2016 we announced that we will accelerate the implementation of our strategy. We aim to converge over time to a single digital and scalable banking platform across borders. In our Wholesale Banking business we have already made significant progress toward this goal.
CEO statement – continued environmental and social challenges. The value of these sustainable transitions financed (STF) in 2016 came to more than EUR 34 billion, close to our 2020 target of EUR 35 billion, which we will now revisit. It is also our ambition to promote sustainable transitions among our retail customers in the future.
ING remains a supporter of the SSM. With our strong European footprint, we have a clear interest in the proper functioning of European financial markets and in a harmonised approach to European banking supervision. We believe that this will contribute to a more efficient use of capital across Europe. As banks’ customers are more able to realise their ambitions, the European economy’s growth prospects will benefit. Harmonisation will also help us accelerate our Think Forward strategy to create one digital banking platform across borders.
Brexit In late June, financial market volatility increased as Britain surprised markets by deciding to leave the European Union (“Brexit”). While the British pound depreciated to record lows against the US dollar and the Bank of England loosened monetary policy as a precaution, the immediate economic impact appears relatively limited. Still, there is long-term uncertainty, as the actual Brexit probably won’t take place until 2019 at the earliest. It is still unclear what the relationship between the UK and the EU will be after Brexit.
The world around us – continued case in Germany and foreseen in France, bank taxes will be abolished in the Netherlands and in other countries that still require them.
Bank taxes were also a major reason for higher costs in 2016; specifically a Polish bank tax of EUR 64 million compared with zero in 2015. This taxes a part of ING’s balance sheet on which we already pay tax in the Netherlands. There is no European regulation on bank taxes and little coordination between countries addressing the fact that banks pay the same taxes in more than one country. We hope that, as is already the
Strengths • Well-known, strong brand with positive recognition from customers in many countries
Opportunities • Maintain trust by demonstrating care, especially towards customers, and being more transparent about our strategic choices
The world around us – continued and our business. We identify the issues with the highest priority for stakeholders and the biggest potential impact on our business. This guides us in our strategic decision-making, stakeholder engagement agenda and reporting framework.
To improve as an organisation, we need to continuously identify and understand the most important topics for our stakeholders and how these relate to the actions and decisions we take. This helps us balance competing expectations and address topics in an informed way.
We also believe it is important to discuss these challenges with other banks to learn from each other and reach common ground to really create sustainable change across the sector. We try to do this through working groups with our regulators and other stakeholder organisations.
As a bank we collect and store vast amounts of data, such as customer profiles, payment transactions, complaints and more. Besides giving us meaningful insights to better understand our customers, it improves the accuracy of our internal and external reporting, for example to regulators. On its own, raw data has little value, that is why we are working to standardise global data management. At the same time, we see an increasing focus on data security across all industries. For banks, this especially relates to people’s personal financial information.
Being a responsible employer vs adapting to a changing environment With over 54,000 employees, we aim to be a responsible employer that provides staff with good working conditions and opportunities for growth. In the digital world, human touch remains important. Therefore we strive to create an entrepreneurial, open, collaborative, innovative and energetic culture that attracts and motivates employees and helps to deliver on our Customer Promise.
Banks are strictly regulated and are therefore less flexible when it comes to developing new ways to improve the customer experience. However, partnerships with external financial technology companies – usually start-ups – who can move faster will strengthen the bank’s transition towards digitalisation.
Fintechs are very focused in their product and services offerings and cater to specific customer needs, targeting segments underserved by traditional banks.
At the same time, the transition to a circular economy will change the business models of our clients and, related to that, their financial needs.
The third edition of our annual Innovation Bootcamp attracted 1,194 ideas. The Innovation Fund is currently supporting four initiatives. And by the end of 2016, ING had more than 65 fintech partners, of which we invested in 11.
In 2016, more than 2,000 employees were trained in the PACE methodology, a structured process to accelerate innovation at ING.
Creating a culture of innovation section in the “Improving the customer experience” chapter.
It is our duty to handle our customers’ data with the utmost care. We strive to be transparent about what we do with the personal data of customers, suppliers and business partners, and only to process personal data for specific business purposes.
In 2016, more than 23.9 million people felt financially empowered by ING, a 16.6% increase compared to 2015. We introduced products and services such as “Kijk Vooruit” and My Money Coach to help people make better financial decisions.
With deposits at the ECB already earning negative interest rates, we have to continuously balance customer expectations with the prices we offer to remain profitable. To address this trade-off, we actively manage our interest rate risk exposure and successfully maintained the net interest margin on our core lending in 2016. To manage this challenge moving forward we are proactively containing costs, developing new offerings at fair pricing that help empower our customers and generate fee-based income.
More information on both our financial and non-financial risks (including ESR) in the “Risk and capital management” chapter.
We have responsible lending activities and prevent customers from going into financial distress.
Fair operating practices Opportunities: With regulatory initiatives such as Single Supervisory Mechanism (SSM) - the new system of banking supervision for Europe - banks could benefit from harmonised supervision that can enhance the creation of one digital platform across borders.
Besides government involvement, stakeholders are pushing banks to include environmental and social issues such as climate-change risk and human rights in financing and investing decisions.
We promote activities that have a positive impact on society through financing sustainable transitions and increasing sustainable assets under management (SAuM). In 2016, our sustainable transitions financed (STF) was 34.3 billion and our SAuM was 3.3 billion. Furthermore, our strengthened Environmental and Social Risk (ESR) framework guides our decisions for client engagement and assessing finance proposals.
Stakeholder engagement Opportunities: Customers tend to trust banks over new entrants and fintechs. Being transparent about what’s in our portfolio, shows the diversity of investments and loans covering all sectors. Furthermore it shows banks have nothing to hide and are open to discussions.
P Trust Maintaining the confidence of our stakeholders by acting with professionalism and integrity and placing the customer at the heart of everything we do via our Customer Promise.
We introduced a diversity manifesto, “Success through difference”, in January 2016 that applies to all employees worldwide. This policy sets out what diversity means at ING, why it is important, and what employees can do. Discrimination is against the law, which is reflected in ING’s policies.
ING’s Winning Performance Culture (WPC) survey looks at how engaged, enabled and energised employees are. A WPC survey was conducted in September 2016. Around 70% of employees responded. ING achieved an overall engagement score of 77%, exceeding the 70% target it had set.
Last year, we launched Moje ING in Poland, an omnichannel customer interface offering an easy overview of a customer’s finances and financial planning tools and based on our successful Genoma platform in Spain. In the Netherlands we also introduced the “Kijk Vooruit” (or “Look Ahead”) tool, which enables users to gain more control over their finances through an overview of future planned and predicted transactions.
Low interest rates are also decreasing returns for customers and depressing banks’ interest margins. And regulatory changes are increasing the cost of capital, limiting banks’ capacity to continue to provide certain types of services at a reasonable price. This means we need to look to new offerings that can provide consumers an alternative, for example to low yielding savings accounts, and generate fee income for the bank. We also need to reduce our operating costs without compromising on the customer experience that we deliver.
The approach to the customer experience we offer is based on our Customer Promise. This is our pledge to customers to be clear and easy, available anytime and anywhere, to empower and to keep getting better. We do that by striving to be leaders in the digital customer experience based on easy access, simplified products and services, and tools to help customers make smart financial decisions.
Strategic priorities To deliver on our Customer Promise and create a differentiating customer experience, we have identified four strategic priorities: 1. Earn the primary relationship The better we know our customers, the better we will be able to empower them to make smart financial decisions and continue to be relevant for them. We can do this best when they do a range of banking with us and when we are the bank our customers go to for their daily transactions. We call that the primary relationship.
Material topics: stability of IT systems and platfoms, usability and accessibility of our products and services
Our services and products We add value by delivering products and services that aim to empower people and fuel economic growth. Examples of that are payments services, which help companies run smoothly, and mortgages, which help people buy homes.
Financial As a bank, our value chain involves the inflow and outflow of money. We facilitate payments and transactions. We also take in savings and transform them by making them available in the form of loans, at the same time managing the associated risks. Our 2016 profitability was strong, enabling us to support economic development by paying wages, taxes and dividends.
Environmental capital Our activities impact the environment. This includes the direct impact we have from the operations of our buildings, from IT systems and from business travel. However, our indirect impact on the environment is much greater through our financing portfolio and our procurement supply chain. We are committed to reducing our own footprint by 20 percent in 2020 and to working closely with both customers and suppliers to help them adapt and take advantage of opportunities in the low-carbon economy of the future. This is demonstrated by our increased number of sustainable transitions financed and sustainable assets under management in 2016.
Our value creation model As a global bank we bring more to society than just our financial value. Our value creation model shows in a simplified way how we create value for and with our stakeholders, as well as major external trends that have an influence on that. As a financial institution, our input is in the areas of finance, our people, innovation and environmental capital. We impact society across all the capital outputs defined in the International Integrated Reporting Council (IIRC) value creation framework. More information and context to the numbers below can be found throughout this report.
Low interest rates are decreasing returns for customers and depressing banks' interest margins.
• Making banking easier • Customers value our products and services • Supporting economies of countries where we are present
• Strong financial results • Ensuring stability • Shareholder value • Paid taxes and regulatory costs
• Better awareness of how consumers make financial decisions leading to improved products and services
Proposition (EVP). • Wholesale Banking expertise in a variety of sectors. • Advanced analytics teams in five countries and in
Solid financial position • EUR 49.8 billion shareholders’ equity and EUR 152.4 billion debt securities, bank deposits and subordinated loans.
Environmental Environmental programme • Global Environmental Management System (EMS) in place. • ISO14001 EMS certification for head office and operations in the Netherlands.
Products & services Customers value our products and services • Our number of primary customers increased by more than 8%.
• Inside Business in 17 countries providing real-time insights and single point of access to manage financial transactions.
• In Wholesale Banking, simplified requirements for accounts and payments services, reducing paperwork for applications from 836 to 47 pages.
Our people Being a good employer • Human Capital Return on Investment 2.59. • Improved employability and helping employees to find new opportunities.
• ING ranked as one of the most transparent financial sector companies in the Netherlands when it comes to diversity and social equality in Bloomberg Financial Services Gender-Equality Index.
Impact of changing banking landscape and technology on people • We anticipate 7,000 jobs will be impacted by the acceleration of the Think Forward strategy.
Social & network • 23.9 million customers feel financially empowered by ING initiatives. • 95,227 adolescents reached through PFY UNICEF
Instant Lending allows customers in Poland, Romania, Spain and Turkey to get a personal loan instantly online. There is no requirement to submit income declarations. Credit risk decisions are taken within minutes.
Retail Banking performed well in 2016 despite the low interest rate environment and higher regulatory costs. Our digital-first operating model continued to provide a clear and easy, anytime and anywhere experience for customers, supported by tools and advice that empower them to make smart financial decisions. We will bring together our Retail Banking operating models to create a banking platform that will speed up innovation, offer a superior customer experience across borders and integrate with third-party providers to offer customers services that go beyond traditional banking.
Secondly, ING wants to offer the right information and tools at the right time. In the Netherlands ING has the Financially Fit programme where it offers a broad set of products and services that support customers in making better financial decisions. For example, the Kijk Vooruit (or Look Ahead) tool gives users more control over their finances through an overview of planned and predicted transactions. ING in Spain introduced My Money Coach, a free digital service that helps customers make smart savings, investment and retirement decisions. My Money Coach designs a personalised savings and investment plan to help customers achieve their financial goals. It is based on Coach Epargne offered by ING in France.
The app was initially also launched in the Netherlands but has now been discontinued there as part of a “fail fast” approach to innovation. It became clear that there was limited customer demand and insufficient differentiation with an existing service.
Financial empowerment ING wants people to make the right financial decisions and in doing so improve their day-to-day finances. ING believes financially empowered people contribute to a healthy economy and this helps drive social progress. In this way ING promotes sustainable and inclusive economic growth as part of the UN’s Sustainable Development Goals.
ING has a three-way approach to financially empower customers. First, we want to offer clear and easy products and services anytime, anywhere. ING in Poland, for instance, makes use of technology to help deaf customers who have previously had to bring an interpreter with them to do their banking. Partnering with Migam.pl, ING is the first Polish bank to feature online sign language interpreters. The service is now present in all branches.
The first step was taken at the Think Forward Summit in February 2016 in Brussels, where more than 120 academics, European and national policy-makers, consumer organisations, and leaders from the financial and technology sectors gathered for a “meeting of minds”.
An estimated 83 percent of all mobile phones in Austria are smart phones. ING in Austria, which started there as a direct bank dedicated to savings, has adopted a “mobile-first” approach with “banking in your pocket” as its campaign slogan.
Keeping track of their bank balance is now a lot easier for ING’s Dutch customers. The “Look Ahead” feature in the mobile app is a “crystal ball” that gives a view 35 days into the future. It uses advanced analytics to show planned and predicted transactions, helping customers to keep a grip on their finances and avoid going into the red.
In the Netherlands and Belgium, ING intends to improve the customer experience by moving to harmonise the business models and integrate banking platforms. We intend to combine the omnichannel capabilities of the Netherlands, with the relationship model and advice capabilities of Belgium. The intended combination would provide scale advantages to ING’s 11-million customer base, creating one value proposition, one strategy, one set of systems, one culture and one organisation - but with two legal entities and two balance sheets.
ING’s Challengers businesses such as Spain, Italy, France, the Czech Republic and Austria, will also shift to a common banking platform called Model Bank. This will be highly scalable, so that countries can add new products and services as needed, and other countries can come on board in the future. An example of this is the adoption of Spain’s Genoma omnichannel approach in Poland (ING Moje).
Accelerating Think Forward The next chapter of Think Forward is a story of convergence with all parts of the company collectively moving toward one ING. ING will become faster and more efficient by standardising its offer across borders. The goal is a single global banking platform but there is some way to go yet.
Retail Banking plans to come together, pick the best practices from across the company and use those globally, allowing ING to create a uniform and differentiating customer experience and enabling us to innovate faster.
Correction to eliminate double counting 3 - - 86 Total sustainable assets under management 3,306 2,573 1,538 1 The 2014 and 2015 figures are based on Benelux. In 2016 the SAuM figures also include Germany.
2 The Sustainable investment portfolios are managed by ING. The other sustainable assets are managed by others, but kept at ING accounts.
3 There used to be an overlap with allocated assets in the sustainable investment funds and the managed sustainable investment portfolios. In 2014 the Netherlands decided to align the calculation methodology with that of Belgium and Luxembourg. There has therefore been no double counting.
• ING’s emphasis on innovation in banking was recognised in an award for Western Europe’s Best Digital Bank by Euromoney magazine.
• Gazeta Bankowa awarded ING Poland “Best Bank” in the category of Large Commercial Bank.
• ING in Romania was awarded the “Most Innovative Bank of the Year” while ING Home Bank was declared the “Online Service of the Year” by MasterCard in Romania.
Results Total Retail Banking Retail Banking posted a strong set of 2016 results, although net result declined to EUR 2,671 million from EUR 3,091 million in 2015, primarily due to the restructuring charges and impairments related to the intended digital transformation programmes as announced at ING’s Investor Day on 3 October 2016. Underlying net result (excluding divestments and special items in both years) rose to EUR 3,294 million from EUR 2,782 million in 2015. The underlying result before tax increased 15.8 percent to EUR 4,579 million in 2016, driven by higher income and lower risk costs.
Market Leaders Retail Netherlands The underlying result before tax of Retail Netherlands rose to EUR 1,705 million from EUR 1,495 million in 2015, due to lower risk costs, while income was resilient due to stable interest margins and higher revenues from Bank Treasury.
The underlying result before tax of Retail Belgium rose 13.7 percent to EUR 961 million in 2016, compared with EUR 845 million in 2015, reflecting lower expenses and slightly higher income.
Underlying income increased 1.1 percent to EUR 2,573 million, from EUR 2,546 million in 2015, supported by higher Bank Treasury revenues and a gain on the sale of Visa shares. The interest result declined 0.9 percent, mainly due to lower margins on savings and current accounts, as well as on mortgages due to lower prepayment and renegotiation fees, which was largely offset by increased volumes in most products. The net production in the customer lending portfolio (excluding Bank Treasury) was EUR 4.8 billion, of which EUR 1.7 billion was in mortgages and EUR 3.2 billion in other lending. The net inflow in customer deposits was EUR 1.4 billion. Commission income was 3.0 percent lower. Investment and other income rose by EUR 58 million, driven by the Visa gain.
Operating expenses declined by EUR 94 million, or 6.1 percent to EUR 1,438 million, due to a EUR -95 million one-off expense adjustment in 2016.
Risk costs increased by EUR 6 million to EUR 175 million, or 54 basis points of average risk-weighted assets. The increase was mainly in business lending due to a few specific files, while risk costs for mortgages and consumer lending declined.
Retail Banking – continued lending (excluding Bank Treasury and movement in the mortgage hedge) was EUR 3.8 billion, of which EUR 3 billion was in mortgages and EUR 0.8 billion in consumer lending. Commission income rose 6.4% to EUR 183 million. Investment and other income was EUR 53 million lower, due to lower gains on the sale of bonds and less positive hedge results, which was partly compensated by a EUR 44 million gain on the sale of Visa shares.
Retail Other Retail Other’s underlying result before tax rose to EUR 858 million, from EUR 604 million in 2015. The increase was largely attributable to a EUR 109 million gain on the sale of Visa shares in 2016, while 2015 included a EUR 97 million of non-recurring charges in Italy related to increased prepayments and renegotiations of fixed-term mortgages.
Financially, Retail Banking posted strong 2016 results driven by higher income and lower risk costs. The underlying result (before tax) increased by 15.8 percent to EUR 4,579 million. This was achieved despite the low interest rate environment and higher regulatory costs.
We continued to innovate to offer clients better products. An example of innovation is the development of a Virtual Cash Management solution. This nextgeneration payments and cash management solution allows clients to manage cash, payments and collections in a multi-bank set-up, using virtual accounts and a selfservice portal. This solution will be introduced across the ING network in 2017.
ING partners with fintechs to stimulate innovation. WB for example is working with fintech Owlin to provide sector-relevant dashboards that convert three million news sources into real-time actionable intelligence, which ING’s Lending Services, Financial Markets and Risk Management divisions can use in conversations with our clients.
Who are we? Wholesale Banking (WB) is a primary-relationship-driven European bank with global reach. We want to help clients to achieve their ambitions. We aim to provide a differentiating and seamless client experience through specialised and integrated services across the globe, supported by new technologies.
adapting these to include a single set of banking conditions across 18 countries.
ING won Environmental Finance Green Bond Awards in the categories “Biggest Issuer” and “Bond of the Year”. This is a recognition of ING’s role as leader in the sector and of our pioneering effort in raising awareness for green bonds. The award for “Corporate Bond of the Year” went to leading European electricity transmission system operator TenneT, for which ING was adviser and underwriter.
For more information, see the report “From assets to access” at www.ing.com/16ar3. (PDF - 937 kb).
Total sustainable transitions financed 1 in EUR million at year-end 2016 2015 2014 ING Groenbank 2 745 875 836 Renewable Energy 3 4,658 3,187 1,730 Sustainable Real Estate 4 7,207 998 389 Other projects 5 1,638 1,274 379 Environmental Outperformers 6 20,020 17,470 16,142 Total 34,268 23,804 19,476 1 For more information on the boundaries of the number reported, please refer to non-financial data reporting protocol on ing.com.
6 As of year-end 2014, ING reports on loans to clients who have been identified as environmental outperformers compared to industry peers based on independent reputable data providers or internal client assessments.
In our view, the circular economy is the answer to solving the problem of the depletion and scarcity of resources. In 2016, ING acted as sole underwriter in the merger of international waste-toproduct business Shanks Group plc and leading Dutch recycler Van Gansewinkel Groep, creating Europe’s leading player in recycling.
FM is also streamlining certain trading functions in Western Europe by reducing roles in Amsterdam and Brussels and combining these in London. This will create a more efficient trading platform alongside our investments in e-commerce.
The Energy, Transport and Infrastructure Group (ETIG) specialises in capital-intensive industry sectors such as natural resources, transportation, utilities and power, and infrastructure. ETIG financings are typically longer tenor loans via senior secured debt with strong structural credit risk protection or collateral value. ETIG performed well in 2016 in terms of profitability, risk costs and growth. Market declines in oil and commodity prices at the end of 2015 continued into early 2016. The effects varied according to the type of commodity and the underlying business – lower commodity prices are not necessarily bad news for all our clients. While some sub-sectors have come under pressure, interesting opportunities remain in the natural resource space. Similarly, in Transportation Finance, we see attractive areas of growth. In Power and Utilities, ING is supporting many of its clients in the renewables area.
An example is the financing of Trailstone Group, a US-based, diversified and international physical commodity trading company. As sole lead manager, ING drew on experience and expertise in the area of the structuring of borrowing base facilities and insights into gas and power trade flows. Its gas and power borrowing base facility was a market first, underlining both ING WB’s innovation capabilities and its leadership position in trade and commodity financing.
The Specialised Finance Group (SFG) coordinates global teams that primarily arrange, underwrite and lend against clients’ business cash flows. They are active in sectors such as telecommunications, media and technology, and healthcare. They also provide specialised support for the insurance industry. Exposures are mostly medium term in established markets. We apply careful industry and client selection criteria. In line with our primary relationship strategy, we aim to lead transactions to maximise the value delivered to clients. SFG has continued to perform well in 2016 in terms of volume growth, risk costs and profitability. This is testament to our sector expertise and close cooperation between the different WB teams.
WestConnex is the largest transport project being undertaken in Australia. It is to be delivered over three stages, with separate financing to be raised for each stage. ING’s Utilities, Infrastructure & Project Finance (UIP) in Sydney acted as Joint MLA, Bookrunner and Swap Arranger in the AUD 1.75 billion financing of WestConnex (Stage 1). The project will significantly reduce congestion across Sydney’s motorway network and provide improved access to the city’s central business district. WestConnex is the first primary syndication to be undertaken since the inception of the UIP business in Sydney and highlights ING’s market position. UIP’s acknowledged motorway sector expertise developed from over 70 motorway transactions was one of the key reasons for success of this deal.
Wholesale Banking – continued top-10 European player in our chosen areas of focus. These areas of focus include supporting existing clients, maintaining our position as Dutch bank of choice for issuers, and capitalising on our continued balance sheet support for Russia, Turkey, Poland and Romania.
FM has defined a clear strategy for e-commerce. We will offer electronic trading solutions to FM clients, ING sales and traders to improve client relationships and profitability, and optimise risk distribution while reducing cost. ING offers electronic trading for the majority of our products, adding value for our clients via speed, transparency and better controls.
Key challenges Our business, market and regulatory environments remained challenging in 2016. WB has a strong market position and performance. However, like our peers, we face headwinds including low interest rates, increasing regulatory scrutiny and costs, overcapacity in the European banking sector, and the potential impact of Basel 3.5. WB is actively addressing these challenges.
Results Wholesale Banking recorded strong results in 2016. The net result, however, declined to 1,754 million from EUR 1,841 million in 2015, fully caused by the restructuring charges and impairments related to the digital transformation programmes as announced at ING’s Investor Day in October 2016. Excluding these charges, underlying net result rose by EUR 62 million to EUR 1,903 million, reflecting excellent performance in Industry Lending, steady volume growth across industries and products, and a lower level of risk costs. Despite regulatory costs that continued to increase, underlying operating expenses remained broadly flat year-on-year.
Underlying income increased 0.7 percent to EUR 5,608 million, compared with 2015. Excluding CVA/DVA impacts, income rose 5.4 percent driven by strong volume growth in lending and higher income in Bank Treasury. The net production of customer lending (excluding Bank Treasury and currency impacts) was EUR 21.8 billion in 2016. Wholesale Banking’s net core lending book (also excluding Lease run-off) grew by EUR 22.6 billion, due to strong growth in Structured Finance and General Lending & Transaction Services. The inflow in customer deposits (excluding Bank Treasury and currency impacts) was EUR 3.1 billion. The interest result rose 6.0 percent on 2015, whereas commission income increased by 4.3 percent.
A number of external awards underscored our success in meeting the needs of clients. We appreciate this recognition of our work that motivates us to keep getting better while delivering a differentiating experience to our clients.
More than 1,000 employees across eight countries, including the bank’s Leadership Council and the Human Resources Management Team, have participated in the course.
External recognition for diversity The Bloomberg Financial Services Gender-Equality Index was published for the first time in May 2016. ING was recognised as one of the most transparent financial sector companies for diversity and social equality. The index measures how companies disclose gender statistics and company policies and practices. It also provides investors and organisations with standardised data on these statistics and policies.
In October, we also saw an improvement in scores within the Workplace Pride Global Benchmark Survey – an external measurement of lesbian, gay, bi-sexual and transgender (LGBT) workplace inclusion. In 2016, we achieved a top-tier score of 70 percent compared to a median score of 61 percent in the Finance and Industry sector. This has increased from 63 percent in 2015, and 51 percent in 2014.
A company is only as good as its people. ING is made up of over 54,000 employees from different countries, cultures, backgrounds, education and experience. We value diversity and our success depends on it. ING needs every position filled with capable, motivated professionals. To do that, we have put a series of programmes in place aimed at further developing the skills and attributes needed to achieve our goals.
The Orange Code, which is based on the principle of “integrity above all”, comprises: • Values that set the standard. The non-negotiable promises we make to the world no matter what. • We are honest. • We are responsible.
The Orange Code underpins all people processes and tools including performance management. We also have ongoing local and global communication programmes around living the Orange Code to make sure it is embedded within ING.
At the end of 2016, more than 33,000 employees had signed up as kudos users and just under 143,000 compliments were sent.
The Banker’s Oath Committee was established to provide a platform for employees and management to discuss more complex dilemma cases. Advice is also given to help ethical decision-making and to resolve dilemmas.
How we attract and motivate employees Trends in the market and ING’s own business strategy determine long-term skill requirements and allocation of resources.
Job rotation, international assignments and job swaps help to optimise our talent management strategy. Employees are encouraged to apply for any position or training that fits their skills and experience. We aim to give qualified internal employees preference over external candidates and are committed to a positive employee experience for staff from the moment they apply for a job until the moment they leave.
ING in Turkey is a signatory to the UN’s Women’s Empowerment Principles (WEP). With 35 percent of women in leadership it exceeds the WEP’s criterion. Fifty-five percent of employees are women.
Equipping employees to become the best they can be Leadership development Creating greater leaders and better managers is pivotal to ING’s people strategy. The bank needs effective leaders to engage employees and empower them to deliver on its Customer Promise.
ING manages the performance of senior managers centrally. It aims to ensure that all performance management activities are coordinated and implemented to the highest standards.
Step up Performance Management includes: • Stretch ambitions: personal “stretch” aspirations that drive personal growth and make a tangible difference to the bank.
People planning for the future Organisational requirements continually change so we need to stay a step ahead in strategic people planning.
The IITP features six tracks: Wholesale Banking, Retail Banking, Finance, Risk, HR and IT. It is primarily delivered by ING staff. In 2016, ING recruited 130 IITP trainees of which 53 percent were female and 47 percent male. This was in line with an ambition to have at least 50-50 gender balance by 2016.
ING also encourages employees to contribute to positive change in society and the communities where they live. A wide range of local programmes gives employees opportunities to contribute their time or to make a financial contribution to worthwhile causes. In 2016 we donated over EUR 13.5 million to various charities and just under 50,000 company hours.
Reliability and stability Excellent delivery requires our services to be available to customers when and where they need them. Some countries’ legacy IT and operational systems obstruct this; here, remedial actions have been taken. For example, in the Netherlands and Belgium the Focused Reliability Initiative was launched in 2015 to find permanent solutions for issues that impacted the availability of online channels (internet, mobile) and payments processing. We continued the programme in 2016 to further improve the reliability of our financial services to customers. As a result, ING’s channel availability towards our customers improved to 99.75 percent on average in the Netherlands, Belgium and Wholesale Banking.
Digital customers have different expectations, driven by their various online experiences. No matter where they are in the world, people want seamless interaction across multiple devices and channels. They want products and services – not just financial ones – that are simple, save time and can be accessed when and where they need them.
Converge ING has a head start. We are already a digital leader in banking and we are pan-European. We have a unique opportunity now to converge our capabilities into one borderless digital financial platform: the go-to place for all our customers’ financial needs and an open ecosystem offering our products and services along with third-party offerings.
We are laying a strong foundation on which to converge ING onto a single platform for financial services. This encompasses global process management, global data
However, raw data in itself has little value. It has to be sorted, harmonised and put into context to be meaningful for ING and our customers. Global data management is therefore a key priority to ensure the quality, integrity, usability and security of our data.
In 2016, we started using ING Esperanto, a set of common terms that harmonises our data definitions. We also implemented data lakes, cloud-based repositories for storing and accessing vast amounts of data by authorised ING employees. We aim for 95 percent of our core data to be in the Esperanto language by the end of 2017.
To step up operational excellence we launched a global programme to improve 11 end-to-end bank-wide processes by standardising them based on the best practices from across the organisation. This will lead to fewer errors and help us work faster, more effectively and more efficiently. For example, getting a consumer loan varies from 10 minutes in one ING country to 10 days in another. On average it takes 3-4 days. ING aims to halve this to 1-2 days in all countries.
This is not new for ING. We have already successfully standardised and streamlined some of our Wholesale Banking and IT operations and have Centres of Excellence in several locations. We are convinced this will allow us to respond faster to new client needs, improve our IT capabilities and boost the efficiency of our digitalfirst model, helping it to evolve into a true competitive advantage.
ING actively promotes a culture of innovation. At our annual Innovation Bootcamp, employees submit ideas to improve the customer experience and compete for seed funding. Ideas launched commercially in 2016 included Startarium, a starter platform for entrepreneurs, and Direct Lease, a leasing platform for small and medium-sized enterprises.
The use of advanced analytics to improve the customer experience led to innovations in 2016 such as Kijk Vooruit (Look Ahead), a mobile app showing customers direct debits due up to 35 days in advance. It has 750,000 users in the Netherlands (where 2.5 million people use the banking app). More than 50% rate it favourably.
Our approach to innovation is built around making banking easier for customers; stimulating a culture that is open to new ideas; and connecting and cooperating with others to innovate faster.
To bring internal ideas to fruition, the Innovation Fund continued in 2016 to finance concepts developed by the business units, particularly when these can be shared and replicated in other countries. It supported 20 initiatives in 2016. These include FM Katana, a datadriven dashboard for bond traders. Since 2014, the fund has financed 29 ideas in total. In addition, the Chief Innovation Office supported initiatives such as Yolt, our UK cross-bank aggregator.
ING’s overall capacity to take risks is set out in the Risk Appetite Framework. Within the framework, we monitor a range of risk metrics to make sure that our risk profile is in line with our appetite for risk. ING also conducts bank-wide and portfolio-specific stress tests to assess resilience in specific market conditions. Underlying assumptions and metrics are regularly reviewed to ensure they stay relevant in a constantly changing environment. ING’s most important risks and control measures are regularly reported to and discussed by the Risk Committee of the Supervisory Board. Both the financial and non-financial risk reports are reviewed in detail, including the status of ING’s metrics with regard to solvency, liquidity, funding, credit and market risk.
Risk and capital management play a key role in supporting our senior leaders as they implement the Think Forward strategy. Financial and non-financial risk management support our leaders in setting our commercial direction and are key tools for sustainable decision-making. Capital management promotes the success and growth of our business by ensuring that we deploy capital efficiently at all levels of the bank.
Key developments Uncertainty in the macroeconomic environment persisted throughout 2016. Political and economic instability in Turkey, the outcome of the Brexit referendum in the United Kingdom, uncertainty about US economic policy, a slowing Chinese economy, the simmering conflict between Russia and Ukraine, as well as volatility in commodity prices (including oil prices) further impacted markets worldwide. At the same time, ING faced a further decline in interest rates, putting pressure on its net interest margin.
The commercial departments, which have the primary responsibility for day-to-day risk management, form the first line of defence. They are accountable for identifying and addressing the risks that occur in conducting their activities, including originating loans and taking deposits, within applicable frameworks and the institution’s limits. They know our customers well and are best placed to act in both customers’ and ING’s best interests.
For more information on key risks, please refer to the risk profile section of the “Risk Management” chapter, part of the consolidated annual accounts of this Annual Report.
ING is responding to these changes with a strategy that focuses on differentiating through leadership in digital banking and increasing the digital interactions that we have with our customers. Digitalisation is our strongest asset and most effective barrier for new entrants, as well as our best opportunity for increasing revenue and efficiency in our distribution model.
User Access Management (UAM) is an important element of our control framework to mitigate unauthorised and/or inappropriate access to our data and information. The standards of controls on UAM are high and best practices illustrate that the trends are towards further increasing requirements. We have identified control deficiencies related to UAM and a central task force was formed to coordinate, assess, monitor and track remediation efforts that resulted in increased focus by the Executive Board, senior management and ING staff. In 2017, management will continue to enhance the internal controls, mitigation and monitoring the progress of mitigation and remediation.
Risk and capital management – continued client engagements that better support our clients in managing environmental, social and human rights impacts.
Our commitment to sustainability and a positive ESR profile has also contributed to ING becoming the Environmental Agent Bank to two large and complex project financings where we take responsibility for coordinating the environmental, social and human rights information for the other lenders in the syndication.
The ESR policy framework in action We screen all ING clients across the entirety of our relationship. 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. The ESR policy framework covers ESR-sensitive sectors and also includes explicit restrictions for activities not in line with ING Values (for example, companies involved in manufacturing cluster munitions), which we will not finance.
Regulatory developments Banks must contend with new fundamental reform initiatives for some aspects of Basel III that are evolving into a so-called “Basel 3.5” capital regime. We are disappointed by the continuing lack of clarity around these reforms to capital rules to be set by the Basel Committee. This uncertainty makes it increasingly difficult for banks to actively support the economies where they operate, particularly in financing areas such as mortgages, SMEs and areas that structurally support economic recovery, including utilities, renewables and infrastructure.
Developing best practice Beyond stimulating higher environmental and social performance in our portfolio, ING actively collaborates with other institutions and regulators to address environmental challenges that are sector- not just clientspecific.
Risk and capital management – continued loss absorption capacity (TLAC) proposal published by the Financial Stability Board (FSB) in November 2015.
The CCB and the SRB are scheduled to phase in over the coming years to 2.5% and 3.0% respectively by 1 January 2019. Consequently, the fully loaded Maximum Distributable Amount (MDA) trigger level is expected to rise from 9.0% in 2017 to 11.75% in 2019 and assumes a stable Pillar 2 requirement. In the event that ING Group breaches the MDA level it may face restrictions on paying dividends, coupons on AT1 instruments and bonuses. We believe that the impact from the Countercyclical Buffer (CCyB) is negligible at this stage. With a 14.2% fullyloaded Group CET1 ratio as at 31 December 2016, ING is already in compliance with the expected fully-loaded requirement of 11.75% as of 2019 .
ING has set up a very comprehensive recovery plan to ensure the bank’s readiness and support decisive action to tackle financial crises on its own. Effective since 2012, the plan is updated annually to make sure it stays fit for purpose and to ensure ING’s ability to act decisively. In 2016, the plan was extensively updated to bring it in accordance with the BRRD. The completeness, quality and credibility of the updated plan is assessed annually by ING’s regulators.
Capital developments at ING Group 2016 was an important year for ING Group, as it further strengthened its capitalisation. The further regulatory capital strengthening reflects strong profitability as well as the sale of the remaining stake in NN Group. Although the regulatory environment remains uncertain, our strong capital position ensures we can continue to support our customers to realise their financial futures.
In March 2016 a GBP 66 million grandfathered additional Tier 1 security, which was fully on-lent to ING Bank, was redeemed by ING Group on its first call date. In April 2016, ING Bank NV successfully issued EUR 1.0 billion of CRD IV-eligible Tier 2 instruments. The transaction had an issuer substitution option which gives ING the right to exchange these for subordinated Tier 2 notes issued by ING Groep NV.
In September 2016, ING Group redeemed USD 800 million 7.05% grandfathered Perpetual Debt Securities which were on-lent to ING Bank NV.
Stress testing Stress testing is an integral component of our risk and capital management framework. It allows us to (i) assess potential vulnerabilities in our businesses, business model or portfolios; (ii) understand the sensitivities of the core assumptions in our strategic and capital plans; and (iii) improve decision-making through balancing risk and return.
Risk and capital management – continued 1 2017 requirement. ING Group’s fully-loaded Tier 1 ratio (including grandfathered securities) was 16.6% at the end of 2016, while the total capital ratio (including grandfathered securities) increased to 19.7%.
• Economic capital. Although it is currently not a constraining factor, economic capital is used to manage the bank’s risk profile and to set limits.
In April 2016, ING Bank issued EUR 1 billion of Tier 2 bonds with an issuer substitution option through exchange. Now that clarity has been provided on the preferred resolution strategy, ING intends to use the option to replace these ING Bank Tier 2 notes with ING Group Tier 2 notes at similar terms through exchange. The noteholders have agreed upfront to the terms and conditions to exchange their ING Bank Tier 2 notes for ING Group Tier 2 notes.
P.G. (Patrick) Flynn (56) CFO on the Executive Board ING Group and CFO on the Management Board Banking Patrick Flynn was appointed a member and chief financial officer (CFO) of the Executive Board of ING Group as of 27 April 2009. He also serves as a member and CFO of the Management Board Banking. He is responsible for ING’s finance departments, including Tax, Capital Management, ING Group Investments, and Investor Relations.
M.I. (Isabel) Fernandez Niemann (48) Head of Wholesale Banking and member of the Management Board Banking Isabel Fernandez joined ING and was appointed to the Management Board Banking as of 1 September 2016. She was appointed head of Wholesale Banking on 1 November 2016, succeeding William Connelly. Before joining ING, Isabel Fernandez was Global Commercial Leader and Head of Sales at General Electric.
Price/book value ratio 1.04 1.01 0.81 1 As of 26 July 2016, the depositary receipts were converted into ordinary shares and the nominal value per share was reduced from EUR 0.24 to EUR 0.01. Prior to that date, for year-end 2015 and 2014, the nominal value of (depositary receipts for) ordinary shares was EUR 0.24.
2 Based on the share price at year-end and the earnings per ordinary share for the financial year.
sustainability research and rating agencies help us to improve our strategy and policies. ING’s 2016 scores and rankings in key sustainability benchmarks show our progress and are as follows: Sustainability ratings ING Group’s approach to sustainability is shaped by our specific skills and expertise as a financial company, our vision of the future and the expectations of our stakeholders. Reviews of our performance by
Main credit ratings of ING at 31 December 2016 Standard & Poor’s Moody’s Fitch Rating Outlook Rating Outlook Rating Outlook
Sustainability rating agencies and analysts can find the content they need for an in-depth analysis of our performance on sustainability in this report and the accompanying Non-financial Appendix.
Data compilation and boundaries All financial data in this integrated report is extracted or derived from, and in line with, our annual accounts. The non-financial performance data published in this report covers five topics: sustainable business, customers, HR, environment and community investment. We extract or derive data on sustainability-related business activities, customers and HR from our regular business systems, in line with the data in our annual accounts. Data on environment and community investment is gathered through an online data management system. The centralised data processing team at ING Group is assisted by an independent external agency that helps to validate and process the large amount of environmental data gathered from our operations worldwide.
We are continually listening to key constituencies, and as material topics change we adapt our reporting to fit developing stakeholder expectations. As part of our materiality analysis, we have consulted key stakeholder groups – retail and business clients, investors, employees, academia, civil society organisations, and supervisors – via a structured stakeholder dialogue. Our materiality assessment guides our reporting with the aim of providing a more balanced and complete picture of our performance over the reporting year. The report including materiality disclosure is reviewed by the Executive Board.
Audiences This report is intended to serve the information needs of key stakeholder groups that affect, and are affected by our business: customers, employees, share- and bondholders, supervisors, regulators, civil society organisations, citizens and society at large. However, the information needs of stakeholders differ. Therefore we
Our stakeholders want to assess our ability to create and sustain value in the short, medium and long term. To do that, they need both financial and non-financial information. We believe that integrated reporting is a better way to meet the requirements and interests of all our stakeholders.
KPMG has reviewed and provided a limited level of assurance on the non-financial information of the report of the executive board and the non-financial appendix for the year 2016 as defined in the table on pages 15 to 18. The topics with asterix (*) in this table are out of the assurance scope.
See the assurance report of the independent auditor on page 68. The chapters “Risk and capital management” and “Remuneration report” are an integral part of the audited consolidated annual accounts.
See the report of the independent registered public accounting firm on page 96.
Based on our review, nothing has come to our attention to indicate that the Non-financial Information is not prepared, in all material respects, in accordance with the GRI Standards for Sustainability Reporting and the internally developed criteria as described in the section ‘About this report’.
The Non-financial Information includes prospective information such as ambitions, strategy and expectations. Inherently the actual future results may differ from these and are therefore uncertain. We do not provide any assurance on the assumptions and achievability of prospective information in the Nonfinancial Information.
Our observation: We found the materiality assessment process that ING Group executed during 2016 to be sufficiently solid to identify relevant material topics for inclusion. We also observed that the material topics as identified in the related process have been reflected in the Report of the Executive Board.
Our observation: We observed that the Non-financial Information reflects the insights of several ING staff members involved in the preparation of the Non-financial Information in a balanced manner.
Responsibilities of Executive Board for the Non-financial Information The Executive Board of ING Group is responsible for the preparation of the Non-financial Information in accordance with the GRI Standards and the internally developed criteria as described in ‘About this report’. The Executive Board is also responsible for such internal control as it determines is necessary to enable the preparation of the Non-financial Information to be free from material misstatement, whether due to fraud or error.
Our main procedures consisted of: • Performing an analysis of the external environment, obtaining an understanding of relevant social trends and issues, and of the organization’s business; • Evaluating the appropriateness of the reporting criteria and its consistent application, including the evaluation of the reasonableness of management’s estimates; • Evaluating the design and implementation of the reporting systems and processes related to the NonFinancial Information; • Interviewing management and relevant staff at corporate and business level responsible for the sustainability’s strategy and policy; • Interviewing relevant staff responsible for providing the Non-financial Information, carrying out internal control procedures on the data and consolidating the data as included in the Non-Financial Information; • An analytical review of the trends and data submitted for consolidation at corporate level; • Reviewing relevant data and evaluating internal and external documentation, based on limited sampling, to assess the accuracy of the information in scope.
The intended transformation is expected to impact employees, particularly in Belgium and the Netherlands where ING has announced it would lead to substantial job reductions. While we know these measures are necessary to realise our ambitions, the Management Board is fully aware of the impact these changes have on ING’s people. ING has a track record of treating employees with respect and care and has a wide range of programmes in place to help those who face the prospect of losing their job find new opportunities or develop their skills to make them more employable in the marketplace. We plan to continue to build on that.
As the abolition of the depositary receipt structure demonstrates, it is important to constantly review - and if needed - adapt the corporate governance structure. The ideal corporate governance structure does not exist. The Supervisory Board and the Executive Board believe that the current two-tier structure, which is the common structure for Dutch banks, serves ING well.
ING’s Annual Report, for the second time in integrated form, was reviewed and the annual accounts and the SOX 404 Report were approved, including the proposal to pay a final 2015 dividend of EUR 0.65 per share, which was approved by the Annual General Meeting of Shareholders on 25 April 2016. The quarterly results were reviewed and discussed in May, August and November 2016 with the external auditor being able to issue an unqualified review opinion on the financial results. On 3 August 2016, ING Group declared an interim 2016 dividend of EUR EUR 0.24 per ordinary share, which is equal to the interim dividend paid over the first half of 2015.
The draft agenda for the 2016 Annual General Meeting was discussed and approved, including the publication on the 2015 application of the Dutch Banking Code.
In order to comply with the mandatory external auditor rotation, KPMG is ING’s new external auditor as per the financial year 2016. KPMG declared independence from ING per 1 October 2015 in its role as new auditor and it was confirmed that KPMG’s independence is compliant with applicable rules and regulations. As of October 2015 EY facilitated the auditor transition. As per 28 September 2016, EY was no longer required to be independent in accordance with independence regulations applicable to audit firms.
Internal Supervisory Board meetings During the internal meetings of the Supervisory Board (which were joined by the CEO, except when the annual self-evaluation of the Supervisory Board or matters concerning the CEO were discussed), the Executive and Management Board Banking 2015 performance assessments were discussed and approved. Also the variable remuneration proposals for the employees in scope relating to 2015 were discussed and decided on. Furthermore the Executive and Management Board Banking 2016 targets were approved.
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. In addition ING’s talent and succession planning were discussed including the outcome of the Annual Talent Review. Remuneration was also a recurring agenda item. The Supervisory Board approved the update of ING’s Remuneration Framework 2017.
The Audit Committee discussed the quarterly results, the interim accounts and the annual accounts. Key audit matters, as included in the auditors’ reports and management letter were also a topic of discussion. In addition to the financial results and accounts, the subjects of the Audit Committee’s regular deliberations also included financial reporting, auditor’s independence and fees, the overall internal control environment, the internal controls over financial reporting, the external auditor reports and management letters, and capital management related matters. The Audit Committee also reviewed the quarterly press releases related to the results, the Annual Report, the 20-F form and the SOX404 Report.
All relevant items discussed by the Audit Committee were reported to the Supervisory Board with the Supervisory Board approving those items as required from a governance perspective. Directly following the Audit Committee meetings, the members of the Audit Committee met with the internal and external auditors to seek confirmation that all relevant topics were discussed in the Audit Committee meetings. In addition to the Audit Committee meetings, the chairman of the Audit Committee regularly held separate sessions with the independent external auditor, the head of the Corporate Audit Services department and the CFO. In addition he also met with different senior managers.
In the first half of 2016 the Nomination Committee discussed the hiring of Isabel Fernandez who was appointed member of the Management Board Banking as per 1 September 2016 and Head of Wholesale Banking succeeding William Connelly as per 1 November 2016. In light of various developments In the second half of 2016, future succession scenarios in general for the Executive Board and the Management Board Banking were discussed as well as the future composition of the Supervisory Board. Various diversity related aspects were taken into account, such as the minimum and optimal size of a Supervisory Board combined with a sound and reasonable balance in representation of geographies, gender, and financial and generalist expertise. Several potential candidates were discussed for various
During the first months of 2016 the Committee had extensive discussions on the future corporate governance of ING Groep N.V. in preparation for the 2016 Annual General Meeting, including the abolishment of the depositary receipt structure. External stakeholders were consulted on various aspects of the corporate governance of ING Groep N.V. The proposed amendments were discussed and approved by the 2016 Annual General Meeting.
Furthermore, the Executive Board, Management Board Banking and Supervisory Board charters were updated and discussed. These will be updated again if needed to cater for the new Dutch Corporate Governance Code requirements.
The committee also discussed the results of the continuous dialogue between ING and the external supervisors related to corporate governance.
Composition of the Executive and the Management Board At the Annual General Meeting on 25 April 2016, no changes to the Executive Board were proposed. As per 1 September 2016, as first female member of the Management Board Banking, Isabel Fernandez joined ING. She succeeded William Connelly as head of Wholesale Banking as per 1 November 2016.
Composition of the Supervisory Board At the Annual General Meeting on 25 April 2016, Ann Sherry was appointed a member of the Supervisory Board. Joost Kuiper stepped down due to health reasons. In May 2016, Mariana Gheorghe became a member of the Risk Committee and Robert Reibestein became a member of the Remuneration Committee.
Currently, only one Supervisory Board member, Eric Boyer de la Giroday, qualifies as “non-independent” as defined in the best practice provision III.2.2 of the currently applicable Dutch Corporate Governance Code. According to this Code, no more than one person can be non-independent. He is considered not independent because of his position as Chairman of the Board of Directors of ING Belgium S.A./N.V. and his former positions as a member of the Executive Board of ING Groep N.V. and vice-chairman of the Management Board Banking of ING Bank N.V.
Corporate Governance Codes Compliance with the Corporate Governance Code ING Group uses the Corporate Governance Code as reference for its corporate governance structure and practices.
• In contrast to the Sarbanes-Oxley Act of 2002, the Corporate Governance Code contains a “comply-orexplain ” principle, offering the possibility of deviating from the Code as long as any such deviations are explained. To the extent that such deviations are approved by the general meeting, the company is deemed to be fully compliant with the Code.
• Consistent with Dutch law, the 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.
• Dutch law requires that ING Group’s external auditors be appointed by the General Meeting and not by the Audit Committee.
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.
Shareholders’ structure Pursuant to the Dutch Financial Supervision Act (“Wet op het financieel toezicht”), any person who, directly or indirectly, acquires or disposes of an interest in the voting rights and/or the capital of ING Group as a result of which acquisition or disposal the percentage of his voting rights or capital interest, whether through ownership of shares, American depositary receipts (“ADR”) or any other financial instrument, whether stock-settled or cash-settled, such as call or put options, warrants, swaps or any other similar contract, reaches, exceeds or falls below certain thresholds, is required to notify in writing the Dutch Authority for the Financial Markets (“Autoriteit Financiële Markten”) immediately after the acquisition or disposal of the triggering interest in ING Group’s share capital. These thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% or 95% of the issued share capital of ING Group. The notification will be recorded in a public register that is held by the Dutch Authority for the Financial Markets.
Investor Relations and bilateral contacts with investors ING Group encourages and recognises the importance of bilateral communication with the investment community. The Investor Relations department actively manages communications with current and potential shareholders, holders of ADRs, bondholders, and industry analysts.
ING Group strives to provide clear, accurate and timely financial information that is in strict compliance with applicable rules and regulations, in particular those concerning selective disclosure, inside information and equal treatment. In addition to the Annual General Meeting, ING Group communicates with its shareholders and the investment community through earnings announcements, presentations, and meetings with analysts or investors.
In the event that any inside information is inadvertently disclosed during any bilateral contacts, it is ING Group’s policy, in accordance with applicable regulations, to publish such information as soon as possible.
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.
Attending General Meetings Holders of ordinary shares may attend a General Meeting, or may grant in writing a proxy to a third-party to attend the meeting and to vote on their behalf. Prior to General Meetings, ING will make proxy forms available on its website. For logistical reasons, attending the General Meeting, either in person or by proxy, is subject to the requirement that ING Group is notified in advance. Instructions to that effect are included in the notice for the General Meeting.
• The adoption of the annual accounts. • The declaration of dividends, subject to the power of the Executive Board to allocate part or all of the profits to the reserves – with approval of the Supervisory Board – and the declaration of other distributions, subject to a proposal by the Executive Board and approved by the Supervisory Board.
A resolution of the General Meeting to render this list non-binding, or to suspend or dismiss Executive Board members without this being proposed by the Supervisory Board, requires an absolute majority of the votes cast. Additionally, this majority must represent more than half of the issued share capital. This additional requirement was tightened up (from one third to one half of the issued share capital) in connection with the abolition of the depositary receipts structure in 2016. Also in connection with the abolition of the depositary receipts structure in 2016, the Articles of Association now exclude the possibility under Dutch corporate law to waive this requirement in a second General Meeting. Both additional elements, which deviate from what is recommended under the Dutch Corporate Governance Code, ensure that significant proposals of shareholders cannot be adopted in a General Meeting with a low attendance rate and can only be adopted with substantial support of ING Group’s shareholders.
ING Group indemnifies the members of the Executive Board against direct financial losses in connection with claims from third parties, as far as permitted by law, on the conditions laid down in the Articles of Association and their employment or commission contract. ING Group has taken out liability insurance for the members of the Executive Board.
ING Group aims to have an adequate and balanced composition of its Executive Board. The Supervisory Board annually assesses the composition of the Executive Board. In the context of such assessment, ING Group aims to have a gender balance by having at least 30% men and at least 30% women amongst its Executive Board members.
For an overview of loans granted to members of the Executive Board, see page 104 of the “Remuneration report” chapter.
Relevant positions pursuant to CRD IV: Member and CFO of the Executive Board of ING Groep N.V., Member and CFO of the Management Board of ING Bank N.V.
W.F. (Wilfred) Nagel, Chief Risk Officer (“CRO”) (Born 1956, Singaporean nationality, male; appointed in 2012, term expires in 2020) Wilfred Nagel has been a member of the Executive Board and CRO of ING Group since 14 May 2012. He also serves as a member and CRO on the Management Board Banking. He is responsible for ING’s risk appetite, risk-related policies, methodologies and guidance, risk management and control activities performed by the business. He was CEO of ING Bank Turkey until 5 October 2011, when he was appointed as a member of the Management Board Banking. He joined ING in 1991 and held various positions including Global Head Credit Risk Management from 2002 to 2005 and CEO Wholesale Banking in Asia from 2005 to 2010. He holds a Master’s degree in Economics from VU University Amsterdam.
ING Group indemnifies the members of the Supervisory Board against direct financial losses in connection with claims from third parties as far as permitted by law on the conditions laid down in the Articles of Association and an indemnity statement.
Members of the Supervisory Board are to disclose material conflicts of interest (including potential conflicts of interest) and to provide all relevant information relating to them. The Supervisory Board – without the member concerned taking part – then decides whether a conflict of interest exists.
More information on the composition of the Supervisory Board Committees can be found at www.ing.com/16ar6, which is updated on a regular basis.
I. (Isabel) Martín Castellá (Born 1947, Spanish nationality, female; appointed in 2013, term expires in 2017) Former Vice-President and Member of the Management Committee of the European Investment Bank.
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V., Chief Executive Officer of OMV Petrom S.A., Chairwoman of the Supervisory Board of OMV Petrom Marketing SRL, Chairwoman of the Supervisory Board of OMV Petrom Gas SRL and Member of the Supervisory Board of OMV Petrom Global Solutions SRL.
R.W.P. (Robert) Reibestein (Born 1956, Dutch nationality, male; appointed in 2012 as an observer, full member as of 2013, term expires in 2017) Former senior partner of McKinsey & Company.
Financial reporting A description of the main features of ING Group’s internal control and risk management systems in relation to the financial reporting process is included in the statement with respect to Section 404 of the Sarbanes-Oxley Act on page 96, which is deemed to be incorporated by reference herein.
ING Group subsidiaries may have customary change of control arrangements included in agreements related to various business activities, such as joint-venture agreements, letters of credit and other credit facilities, ISDA-agreements, hybrid capital and debt instruments, insurance and reinsurance agreements and futures and option trading agreements. Following a change of control of ING Group (as a result of a public bid or otherwise) such agreements may be amended or terminated, leading, for example, to an obligatory transfer of the interest in the joint venture, early repayment of amounts due, loss of credit facilities or reinsurance cover, and liquidation of outstanding futures and option trading positions.
Object The Stichting ING Aandelen (the “ING Trust Office”), a foundation organised under the laws of the Netherlands, was incorporated on 22 January 1991. The articles of association were most recently amended on 7 October 2010 (the “Articles of Association”). The most recent amendments of the trust conditions for registered shares in the share capital of ING Groep N.V. (“Trust Conditions”) date from 26 July 2016.
The object of the Trust Office, as described in the Articles of Association, is as follows: a. to acquire and administer against assignment of depositary receipts, registered shares in the capital of ING Groep N.V., a public limited company with its registered office in Amsterdam and any bonus shares which may be distributed thereon or shares acquired as stock dividend or by the exercise of subscription rights and to issue exchangeable depositary receipts for these shares, to exercise voting rights and all other rights attaching to the shares, to exercise subscription rights and to receive dividends and other distributions, including proceeds of liquidation, subject to the obligation to distribute the income to the holders of depositary receipts, with the understanding that depositary receipts shall be issued for bonus shares, shares acquired as stock dividend and shares acquired on behalf of holders of depositary receipts by virtue of the exercise of subscription rights; b. to foster the exchange of information between ING Group on the one hand and the holders of depositary receipts and shareholders in ING Group on the other; c. to promote the solicitation of proxies of shareholders other than the foundation itself and of specific proxies and/or voting instructions of holders of depositary receipts, and further to engage in any activity which may be related to the foregoing in the widest sense, whereby all activities which entail commercial risk shall be excluded from the foundation’s object.
On 13 July 2016, the Board of ING Trust Office announced that the date of the conversion of depositary receipts for shares into ordinary shares and the amendment of the Trust Conditions had been set on 26 July 2016, (the “Conversion Date”) being also the date of the amendment of the Articles of Association of ING Group.
Other The activities involved in the administration of shares are performed by Administratiekantoor van het Algemeen Administratie- en Trustkantoor B.V., Amsterdam until 26 July 2016.
A call-option agreement concluded between ING Continuity Foundation and ING Groep N.V. (‘ING Group’) vests ING Continuity Foundation with the right to acquire cumulative preference shares in the share capital of ING Group up to a maximum of 4.571 billion cumulative preference shares. The acquisition of cumulative preference shares by ING Continuity Foundation is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed onethird of the total issued share capital of ING Group. If new shares other than cumulative preference shares are subsequently issued, ING Continuity Foundation may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25 percent of the nominal value must be paid on said shares.
The composition of the Board is currently as follows: Sebastian Kortmann, chairman of the Board, Rob van den Bergh, Allard Metzelaar, and Wim van Vonno. Sebastian Kortmann was reappointed as of 13 May 2016 as chairman.
Conformity statement pursuant to section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act (Wet op het financieel toezicht). The Executive Board is responsible for maintaining proper accounting records, for safeguarding assets and for taking reasonable steps to prevent and detect fraud and other irregularities. It is responsible for selecting suitable accounting policies and applying them on a consistent basis, making judgements and estimates that are prudent and reasonable. It is also responsible for establishing and maintaining internal procedures which ensure that all major financial information is known to the Executive Board, so that the timeliness, completeness and correctness of the external financial reporting are assured.
• the ING Groep N.V. 2016 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 2016 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.
SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the Company’s internal control over financial reporting is effective as of 31 December 2016. The SOX 404 statement by the Executive Board is included on this page, followed by the report of the external auditor as issued on Form 20-F.
To: the Supervisory Board and Shareholders of ING Groep N.V. We have audited ING Groep N.V.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of the Executive Board on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the ING Groep N.V.’s internal control over financial reporting based on our audit.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
When looking at remuneration, our starting point is our position as a global financial institution in a rapidly changing marketplace.
Remuneration policy ING ING’s global remuneration policy complies with relevant international and local legislation and regulations. In determining compensation of ING’s staff, we consider a variety of factors, including but not limited to: • The complexity of work • The scope of responsibilities • The geographical location • Risk alignment • The (inter)national legal and regulatory landscape • Perception in society • Long-term objectives of ING and its stakeholders These factors differ for each role, line of business and country.
Performance Management There is a strong link between our remuneration approach and performance management. We have a comprehensive performance management process in place that aligns individual performance objectives to the strategy of ING and its annual priorities in order to build a sustainable and successful business for all our stakeholders.
Shareholders’ mandate Under the WBFO, financial institutions are permitted to set a variable remuneration cap higher than 100% of fixed remuneration for staff outside the European Economic Area (EEA), provided that the higher cap is approved by their shareholders. In 2015, approval was given by the Annual General Meeting to increase the cap up to 200% in performance years 2014 to 2016 for no more than 1% of ING’s staff globally.
Risk mitigating measures Our remuneration policy takes into consideration risk, capital, liquidity and the likelihood and timing of earnings. Based on applicable remuneration regulations, specific risk adjustment mechanisms must be applied in the pay-out process of variable remuneration. To this end, ING operates a so called pre-award and post-award assessment process when determining any variable remuneration.
The post-award assessment process includes an analysis as to whether the outcomes of the initial pre-award risk assessment process were correct, providing ING with a mechanism to adjust any variable remuneration downwards. ING can apply holdback up to 100% of the awarded and unvested deferred variable remuneration, or clawback up to 100% of the paid and/or vested variable remuneration from any (current or ex-) staff member. Any decision to apply holdback or clawback is at the discretion of the ING Supervisory Board.
The performance targets for the Executive Board are pre-determined annually by the Supervisory Board to support delivery of the ING strategy.
The current remuneration policy for the Executive Board was adopted by the Annual General Meeting (AGM) on 27 April 2010. Amendments to this policy were adopted by subsequent AGMs: • On 9 May 2011 in response to new regulatory requirements.
Variable remuneration In line with legal requirements, variable remuneration for the members of the Executive Board is limited to a maximum of 20% of base salary at the time of award. It is based for at least 50% on non-financial performance criteria and fully paid out in shares. We do not pay variable remuneration in cash.
Benefits Executive Board members are eligible for additional benefits (e.g. the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances) as well as banking and insurance benefits from ING in the ordinary course of their business. These additional benefits are provided on the same terms that apply to other employees of ING in the Netherlands. In addition, tax and financial planning services are provided to ensure compliance with the relevant legislative requirements.
Tenure Members of the Executive Board who were appointed prior to 2013 have an employment agreement with ING Groep N.V. Members who have been appointed as of 2013 have a commission contract. The employment agreement and the commission contract for Executive Board members are for an indefinite period of time and provide for an initial appointment for a period of four years, with the possibility of reappointment by the AGM. In the case of an involuntary exit, Executive Board members are eligible for an exit arrangement limited to a maximum of one year of base salary.
Special employment conditions Special employment conditions, such as commitments required to secure the recruitment of new executives, may be used in exceptional circumstances, subject to approval by the Supervisory Board.
• Driving digital transformation to improve customer experience and realise further efficiency gains
• Adopted One Way of Working to increase management understanding of the integrated network and realise delayering throughout the organisation.
• Developed the Think Forward Leadership Programme to support ING’s leaders in executing the Think Forward strategy in a manner desired by ING, with roll out planned to all leaders and managers around the world.
Innovation • Introduced insightful financial tools that make banking easier and more accessible for customers, including: • Mobile payments via Payconiq: just under 16,000 activated merchants. • ING Direct Spain’s service Twyp Cash to withdraw money via smartphone: over 200,000 registered users in Spain.
• Financially empowered 23.9 million people (2020 ambition: to make 25 million people feel financially empowered).
The table below shows the pension costs of the individual members of the Executive Board in 2016, 2015 and 2014.
A retention period of five years from the grant date applies to all share and employee stock option awards granted to Executive Board members. During this five-year period, the Executive Board members are only allowed to sell part of their shares on the date of vesting to pay tax on the vested amount of the award.
3 Shares granted to Wilfred Nagel in 2012 and 2013 were awarded for his performance in positions prior to his appointment to the Executive Board.
Loans and advances to individual members of the Executive Board amounts in thousands of euros 2016 2015 2014
ING shares held by members of the Executive Board number of shares 2016 2015 2014
Current remuneration levels of the ING Executive Board are below the median of the Euro Stoxx 50 benchmark, and in the case of the CEO position, even significantly below. This remains a concern. ING needs to be able to attract and retain the best (international) talent for its Executive Board. It is ING’s aim to further reduce the gap between the total direct compensation of ING’s Executive Board and the median of the Euro Stoxx 50 peer group over time. In determining executive remuneration, the ING Supervisory Board is aware of the public debate surrounding this topic and strives to balance all stakeholder interests.
2017 Remuneration Executive Board In the diagrams below, the median 2016 total (at target) remuneration is shown for the CEO and other Executive Board positions in the Euro Stoxx 50.
2016 Remuneration Supervisory Board amounts in thousands of euros Remuneration VAT 1 Remuneration VAT Remuneration VAT
ING shares held by the members of the Supervisory Board number of shares 2016 2015 2014 Jeroen van der Veer 119,469 119,469 119,469 Hermann-Josef Lamberti 5,700 5,700 5,700 Eric Boyer de la Giroday 47,565 47,565 43,094
Employee stock options on ING Groep N.V. shares held by members of the Supervisory Board at 31 December 2016 number of stock options
European works council December 2016 Austria: O. (Otmar) Haneder Belgium: J.P. (Jean Pierre) Lambert, H. (Herman) van Eesbeek, F. (Franck) Goethals, Ahmed Sanhayi Bulgaria: A. (Andrew) Nitov Czech: Lukas Jenicek Germany: N. (Norbert) Lucas, (chairman), Andre Fioritto Hungary: G. (Géza) Bodor (deputy chairman) Italy: C (Claudio) Casazza Luxembourg: A. (Alain) Back, Netherlands: Michel Rutte (secretary), Jan van Hest, Maarten Kramer, Bert Woltheus, Judith Roosken Poland: M. (Mariusz) Cieslik, Jakub Dzianowicz, Arthur Banasik Romania: Adrian Piscu, Magdalena Nitu Slovakia: Miroslav Fliega Spain: Santiago Hernanz Gomez, Francisco Javier Díaz Mosquera (deputy secretary) United Kingdom: Mark Foley Works council support: Miriam Rozenbrand, Karin van de Schouw
− designated as at fair value through profit or loss 5,099 3,234 2,756
References relate to the accompanying notes. These form an integral part of the Consolidated annual accounts.
Items that will not be reclassified to the statement of profit or loss: Unrealised revaluations property in own use 5 35 –30
Share of other comprehensive income of associates and joint ventures and other income –14 –5 43
Unrealised revaluations available-for-sale investments and other revaluations 5,503 5,503 1,478 6,981 Realised gains/losses transferred to the statement of profit or loss –133 –133 –6 –139
Unrealised revaluations property in own use –30 –30 –30 Remeasurement of the net defined benefit asset/liability 35 –254 –254 –35 –289
Exchange rate differences and other 2,384 2,384 –10 2,374 Share of other comprehensive income of associates and joint ventures –118 161 43 43
Employee stock option and share plans 12 87 99 13 112 Changes in the composition of the group and other changes 3,814 –3,754 60 –384 –324 1 In 2014, ING Group made the final repayment on the core Tier 1 securities of EUR 1.025 billion to the Dutch State. Including the final payment, the total amount paid to the Dutch State was EUR 13.5 billion, which contained EUR 10 billion in principal and EUR 3.5 billion in interest and premiums and resulted in an annualised return of 12.7% for the Dutch State.
Disposals and redemptions: – group companies (including cash in company disposed)3 –6,926 –1,216
Effect of exchange rate changes on cash and cash equivalents 155 –342 –4
3 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. (2014: EUR 950 million proceeds from the sale of shares of Voya which resulted in loss of control in the first quarter of 2014).
5 Disposals and redemptions – available-for-sale investments includes EUR 1,375 million proceeds on the divestment of the remaining shareholding in NN Group in April 2016.
7 The defined contribution payment for pension plans was previously presented in ‘Adjusted for: other’ and is now presented in ‘provisions and other liabilities’. Comparatives have been adjusted accordingly.
Reference is made to the Consolidated statement of financial position, Note 6 ‘Loans and advances to customers’, Note 13 ‘Customer deposits’, Note 34 ‘Information on geographical areas’, Note 37 ‘Fair value of assets and liabilities’, Note 39 ‘Assets by contractual maturities’, Note 40 ‘Liabilities by maturity’ and Note 43 ‘Offsetting financial assets and liabilities’.
ING Group Annual Report 2016 122 b) Changes in presentation of the Consolidated annual accounts and related notes Following further restructuring and deconsolidation of the insurance business in 2014 and 2015, ING Group revised its presentation of the Consolidated annual accounts to best present its core business and related results. Where relevant, comparative amounts are adjusted accordingly. The main changes in the presentation of the Consolidated annual accounts and related notes are as follows: • The primary statements and other terms used in these statements are renamed as follows: • The ‘Consolidated balance sheet’ is renamed to ‘Consolidated statement of financial position’; • The line item ‘Amounts due from banks’ is renamed to ‘Loans and advances to banks’: • The line item ‘Amounts due to banks’ is renamed to ‘Deposits from banks’; • The line item ‘Customer deposits and other funds on deposit’ is renamed to ‘Customer deposits’; • The line item ‘Minority interest’ is renamed to ‘Non-controlling interest’; • The ‘Consolidated profit and loss account’ is renamed to ‘Consolidated statement of profit or loss’; and • The naming of income and expense line items, specifically related to Interest and Commission, were simplified for further clarification. • The Consolidated statement of financial position is changed as follows: • The order of line items presented is changed to present assets, liabilities and equity in order of liquidity; • The line item ‘Real estate investments’ is now included in the line item ‘Other assets’ and renamed to ‘Investment properties’; • ‘Current and deferred tax assets and liabilities’ are now separately presented (previously included in the line items ‘Other assets and liabilities’); • ‘Provisions’, as previously included in the line item ‘Other liabilities’, are now separately presented; • The line item ‘Subordinated loans’ includes the line item ‘Other borrowed funds’ (previously separately presented); • The presentation of equity is changed to more granularly present the components of ‘Shareholder’s equity (parent)’; and • The asset line items Loans and advances to banks, Loans and advances to customers, and the liability line items Deposits from banks, Customer deposits, previously included amounts for Items to be settled. The Items to be settled amounts are now included in Other assets and Other liabilities respectively. On the basis of materiality, comparative amounts as at 31 December 2015 and 2014 have not been adjusted.
d) Upcoming changes in IFRS after 2016 Changes to IFRS effective in 2017onwards The following published amendments are not mandatory for 2016 and have not been early adopted by the group. These amendments are effective for 2017 annual periods (and 2018 for part of the annual improvements cycle) but have not yet been endorsed by the EU. The implementation of these amendments will have no significant impact on ING Group’s results or financial position.
In order to increase transparency and comparability across banks, the Enhanced Disclosure Task Force (EDTF) published a report in November 2015 on recommended disclosures on IFRS 9 that can help the market understand the upcoming changes as a result of using the Expected Credit Loss (ECL) approach. Given that IFRS 9 is effective on 1 January 2018, the EDTF recommended disclosures for the periods prior to the 2018 financial statements aimed at promoting consistency and comparability across internationally active banks.
The IFRS 9 Program is being implemented across functions, businesses, and countries. The Group Accounting policies are also being updated to align IFRS 9. In 2017, parallel runs will be performed to ensure IFRS 9 readiness on 1 January 2018.
The focus in 2017 will be finalising SPPI testing and formalising the governance to embed the changes brought by IFRS 9 into everyday business and financial reporting cycles to ensure ongoing compliance.
Key concepts ING Group aims to align the definition of credit impaired under IFRS 9 with the definition of default for prudential purposes. ING Group considers a financial asset credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. ING Group’s definition of modification that does not result in a derecognition event refers to any non-significant changes to contractual terms that impact the (timing of) contractual cash flows of that financial asset. In case the modification results in a significant change to the contractual terms, the asset is derecognised.
Loan loss provisions Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on management’s evaluation of 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.
Goodwill impairment ING assesses at each reporting period, whether there is an indication that an intangible asset may be impaired. Irrespective of whether there is an indication of impairment, intangible assets with an indefinite useful life, goodwill acquired in a business combination, and intangible assets not yet available for use, are tested annually for impairment. Goodwill is allocated to groups of CGUs (that is, the group of cash generating units or CGUs) for the purpose of impairment testing. These groups of CGUs represent the lowest level at which goodwill is monitored for internal management purposes. Goodwill is tested for impairment by comparing the carrying value of the group of CGUs to the best estimate of the recoverable amount of that group of CGUs. The carrying value is determined as the IFRS net asset value including goodwill. The recoverable amount is estimated as the higher of fair value less costs of disposal and value in use. Several methodologies are applied to arrive at the best estimate of the recoverable amount. Impairment of goodwill, if applicable, is included in the statement of profit or loss in Other operating expenses.
Provisions A provision involves 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. The recognition and measurement of provisions is an inherently uncertain process involving determining when a present obligation exists and estimates regarding amounts and timing of cash flows. Even in consultation with legal experts, the amount provisioned can remain sensitive to the assumptions used which may have a range of outcomes that is difficult to quantify.
To include credit risk in the fair value, ING applies both credit and debit valuation adjustments (CVA, DVA). Own issued debt and structured notes that are measured at fair value are adjusted for credit risk by means of a DVA. Additionally, derivatives valued at fair value are adjusted for credit risk by a CVA. The CVA is of a bilateral nature as both the credit risk on the counterparty as well as the credit risk on ING are included in the adjustment. All input data that is used in the determination of the CVA is based on market implied data. 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 taken into account in the measurement of the valuation adjustment. ING applies an additional ‘funding valuation adjustment’ (FVA) based on the market price of funding liquidity and is applied to the uncollateralised derivatives.
Reference is made to Note 37 ‘Fair value of assets and liabilities’ and the section ‘Risk management – Market risk’, paragraph ‘Fair values of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments and related sensitivities.
Recognition and derecognition of financial instruments Recognition of financial assets All purchases and sales of financial assets classified at fair value through profit or loss, held-to-maturity and available-for-sale that require delivery within the time frame established by regulation or market convention (‘regular way’ purchases and sales) are recognised at trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised at settlement date, which is the date on which the Group receives or delivers the asset.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity for which the Group has the positive intent and ability to hold to maturity and which are designated by management as held-to-maturity assets are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Interest income from debt securities classified as held-to-maturity is recognised in Interest income in the statement of profit or loss using the effective interest method. Held-to-maturity investments include only debt securities.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Loans and receivables include Cash and balances with central banks, Loans and advances to banks, Loans and advances to customers, and Other assets and are reflected in these line items in the statement of financial position. Interest income from loans and receivables is recognised in Interest income in the statement of profit or loss using the effective interest method.
• Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING Group has paid or delivered its side of the trade. Settlement risk mainly relates to the risk arising on disposal of financial instruments that are classified in the statement of financial position as Financial assets at fair value through profit or loss (trading assets and non-trading derivatives) and Investments (available-for-sale and held-to-maturity).
ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU carve out. The EU carve-out macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and underhedging strategies. Under the EU carve-out, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket.
Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the statement of profit or loss, together with fair value adjustments to the hedged item attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative adjustment of the hedged item is, in the case of interest bearing instruments, amortised through the statement of profit or loss over the remaining term of the original hedge or recognised directly when the hedged item is derecognised. For non-interest bearing instruments, the cumulative adjustment of the hedged item is recognised in the statement of profit or loss only when the hedged item is derecognised.
Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the statement of profit or loss. Amounts accumulated in equity are recycled to the statement of profit or loss in the periods in which the hedged item affects net result. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the statement of profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred immediately to the statement of profit or loss.
• The borrower has demonstrated significant financial difficulty, to the extent that it will have a negative impact on the expected future cash flows of the financial asset; • The credit obligation has been restructured for non-commercial reasons. ING Group has granted concessions, for economic or legal reasons relating to the borrower’s financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset; and
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a loss emergence period to default probabilities (also referred to as loss identification period). The loss emergence period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point in time at which those events are captured by the Group’s credit risk systems. Accordingly, the application of the loss emergence period ensures that impairments that are incurred but not yet identified are adequately reflected in the Group’s loan loss provision. Although the loss emergence periods are inherently uncertain, the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises, and retail portfolios) that reflect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the borrower. Loss emergence periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they reflect recent experience and current events.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Contingent consideration arrangements classified as an asset or a liability, are subsequently measured at fair value. Changes in the fair value of the contingent consideration classified as equity, are not recognised.
Until 2009, before IFRS 3 ‘Business Combinations’ was revised, the accounting of previously held interests in the assets and liabilities of the acquired entity were not remeasured at the acquisition date and the acquisition related costs were considered to be part of the total consideration.
Taxation Income tax on the result for the year comprises current and deferred tax. Income tax is recognised in the statement of profit or loss but it is recognised directly in equity if the tax relates to items that are recognised directly in equity.
Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets and liabilities are not discounted.
Changes in the defined benefit obligation that effects Shareholders’ equity and/or Net result, include mainly: • service cost which are recognised as staff costs in the statement of profit or loss; • interest expenses using a high quality corporate bond rate at the start of the period which are recognised as staff costs in the statement of profit or loss; and • remeasurements which are recognised in Other comprehensive income (equity).
As at 31 December 2016, Trading assets include receivables of EUR 56,020 million (2015: EUR 62,221 million) with regard to reverse repurchase transactions.
ING Group holds warrants for 35 million shares and 26 million shares in NN Group N.V. and Voya Financial Inc. respectively.
Other non-trading derivatives mainly includes interest rate swaps and foreign exchange currency swaps for which no hedge accounting is applied. As at 31 December 2016, Other non-trading derivatives includes EUR 175 million (2015: EUR 103 million ) and EUR 19 million (2015: EUR 58 million) related to warrants on the shares of Voya Financial Inc. and NN Group N.V. respectively. Reference is made to Note 22 ‘Valuation results and net trading income’.
Included in the Financial assets designated at fair value through profit or loss is a portfolio of loans and receivables which is economically hedged by credit derivatives. The hedges do not meet the criteria for hedge accounting and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans and receivables included in Financial assets designated at fair value through profit or loss approximates its carrying value. The cumulative change in fair value of the loans attributable to changes in credit risk is not significant.
− equity securities - shares in third party managed structured entities 170 169
Investments held-to-maturity increased by EUR 0.9 billion. The increase is attributable to a new investment in USD government bonds and bonds issued by financial institutions, offset by a decrease in covered bonds.
Debt securities by type and line items per the statement of financial position - Available-for-sale investments and Assets at amortised cost
To/from available-for-sale 3,499 3,499 To/from investment in associates and joint ventures –82 –82
In 2015, EUR 3.5 billion of mainly Government bonds previously classified as Available-for-sale debt securities were classified as Heldto -maturity due to ING’s intent and ability to hold these bonds until maturity.
1 The comparative amounts, as at 31 December 2015, are adjusted as a result of a change in accounting policies and a reclassification for Items to be cleared. Total
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).
Accumulated impairments of EUR 48 million (2015: EUR 24 million) have been recognised. The values presented in the tables above could differ from the values presented in the individual annual accounts of the associates and joint ventures, due to the fact that the individual values have been brought in line with ING Group’s accounting principles. Where the listed fair value is lower than the statement of financial position value, an impairment review and an evaluation of the going concern basis has been performed.
Additions In 2016 additions are mainly due to several smaller investments in associates.
In 2015, Share of results from associates and joint ventures of EUR 492 million as presented in the statement of profit or loss, included: • Share of results, as presented in the table above, of EUR 110 million mainly attributable to results of TMB amounting to EUR 75 million and gain on disposal of Ivy Retail SRL and Ontwikkelingscombinatie Overhoeks C.V. amounting to EUR 10 million and EUR 5 million respectively; • A net gain on Investments in associates held for sale of EUR 382 million, which comprised EUR 367 million from the merger of ING Vysya with Kotak and EUR 15 million on the sale of ING Nationale Nederlanden PTE Polska, S.A.; and
The cost or the purchase price amounted to EUR 1,400 million (2015: EUR 1,551 million). Cost or the purchase price less accumulated depreciation and impairments would have been EUR 625 million (2015: EUR 710 million) had property in own use been valued at cost instead of at fair value.
Changes in the composition of the group and other changes 46 –7 6 –7 52 –14
Gross carrying amount as at 31 December 1,274 1,092 2,432 2,482 3,706 3,574
Changes in the composition of the group and other changes –6 –47 18 1 –47 13
Sensitivity of key assumptions Key assumptions in the goodwill impairment test model are the Price to Book ratios, share price of listed subsidiaries 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.
Disclosures in respect of Net defined benefit assets are provided in Note 35 ‘Pension and other post-employment benefits’.
Other Other assets - Other relates mainly to other receivables in the normal course of business.
Netherlands1 International Total 1 The comparative amounts, as at 31 December 2015, are adjusted as a result of a change in accounting policies. Total Customer deposits, as at 31 December 2015, increased by EUR 163.5 billion from EUR 500.8 billion to EUR 664.2 billion. Reference is made to Note 1 ‘Accounting policies’ – Change in accounting policies in 2016.
The decrease in the trading liabilities is mainly due to a reduction of short positions, expiring contracts, and changes in fair value resulting from market interest rates and exchange rates. Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’ for information on trading assets.
In 2015, Additions to reorganisation provisions was mainly attributable to existing reorganisation initiatives in Retail Netherlands and Belgium.
Changes in the composition of the group and other changes 6 –8 –8 27 –2 19
In 2016, Other provisions – other changes include amounts related to Letters of Credit / Guarantees of EUR 119 million. In general, Other provisions are of a short-term nature. As at 31 December 2016, amounts expected to be settled within twelve months, amount to EUR 322 million. The amounts included in other provisions are based on best estimates with regard to amounts and timing of cash flows required to settle the obligation.
Other Other liabilities – Other relates mainly to year-end accruals. Included in Other liabilities - Other, are accruals related to ING’s contributions to the Deposit Guarantee Scheme (DGS) and the Single Resolution Fund (SRF).
In 2016, the decrease in Debt securities in issue of EUR 18.1 billion is mainly attributable to a decrease in long term maturity bonds of EUR 9.1 billion, a decrease of EUR 6.5 billion in certificates of deposit, decrease of EUR 2.9 billion covered bonds, decrease in other debt securities in issue EUR 2.1 billion, partially offset by an increase in commerical paper of EUR 2.5 billion.
As at 31 December 2016, ING Group has unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 12,015 million (2015: EUR 14,646 million).
In 2014, EUR 1,125 million was received from three external investors (Asian-based investment firms RRJ Capital, Temasek and Sea Town Holdings International) in relation to the IPO of NN Group. This funding, which bears a 4% interest rate, was to be repaid in three tranches of NN Group shares. The number of shares in the repayment was variable, such that the fair value of the shares at repayment date equalled the notional repayment amount, taking into account a discount in the range of 1.5% to 3% of the market price.
In 2016 and 2015 respectively, ING Groep N.V. issued 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 18 ‘Subordinated loans’ and to the Parent company annual accounts, Note 5 ‘Subordinated loans’.
The increase in share premium, as a result of the issue of ordinary shares, is related to share-based employee incentive programmes.
In 2014, Changes in composition of the group and other changes included EUR –502 million related to the deconsolidation of Voya. Reference is made to Note 51 ‘Other events’.
In 2014, Changes in composition of the group and other changes included a decrease of EUR 3,279 million in Retained earnings as result of the transfer of part of the Net defined benefit asset/liability remeasurement reserve due to the financial independence of the Dutch ING Pension Fund. Furthermore, Changes in composition of the group and other changes also included EUR 87 million related to the deconsolidation of Voya.
For further information, reference is made to Note 30 ‘Dividend per ordinary share’ and Note 51 ‘Other events’.
Non-controlling interests In 2015, Non-controlling interests decreased with EUR 7,434 million and was mainly related to the deconsolidation of NN Group. Reference is made to Note 51 ‘Other events’.
Cumulative preference shares - Restrictions with respect to dividend and repayment of capital ING Groep N.V. is subject to legal restrictions regarding the amount of dividends it can pay to the holders of its cumulative preference shares, when issued. Pursuant to the Dutch Civil Code, dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital, and reserves required by law.
Valuation results and net trading income are reflected in the Consolidated statement of cash flows in the line Result before tax - Adjusted for: other.
The Valuation results on assets and liabilities designated as at fair value through profit or loss includes fair value changes on certain issued debt securities. Valuation results on assets and liabilities designated at fair value through profit or loss were mainly due to changes in the fair value of financial liabilities driven by changes in market conditions and changes in own credit risk as disclosed in Note 14 ‘Financial liabilities at fair value through profit or loss’. Market conditions include in particular credit spread developments.
In 2015, the Result on disposal of group companies included EUR 7 million realised deferred profits on divestments in prior periods related to Baring Private Equity Partners and a release of goodwill related to the disposal of the remaining portfolios of ING Lease (UK). Reference is made to Note 9 ‘Intangible assets’.
Net operating lease income comprises income of EUR 21 million (2015: EUR 19 million; 2014: EUR 23 million) and depreciation of EUR 19 million (2015: EUR 17 million; 2014: EUR 18 million).
In 2015, there was a new collective labour agreement in the Netherlands resulting in reduced rights to future benefits. The impact of this was included in Pension and other staff-related benefits costs.
The option rights are valid for a period of ten years. Option rights that are not exercised within this period, lapse. Option rights granted will remain valid until the expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a pre-determined continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Groep N.V. shares at the date on which the options are granted.
Fees as disclosed in the table above relate to the network of the Group’s auditors and are the amounts related to the respective years, i.e. on an accrual basis. The amounts exclude Group’s auditors fees for entities presented as held for sale and discontinued operations.
In 2014, included in this line was the net result of NN Group and the net result of Voya until the deconsolidation at the end of March 2014.
Net result from classification as discontinued operations In 2015, Net result from classification as discontinued operations comprised the impact on the statement of profit or loss of the change in non-current non-financial assets of NN Group presented as assets and liabilities held for sale, prior to deconsolidation at the end of May 2015.
In 2014, goodwill and certain other non-current non-financial assets of EUR 103 million and EUR 367 million respectively were writtenoff as the sale of NN Group was expected to be below the carrying value.
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% (at 31 December 2014) 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.
Net cash flows from discontinued operations The table below represents the net cash flows from businesses classified as discontinued operations, as included in the Consolidated statement of cash flows, until deconsolidation of the respective businesses: Operating cash flow –1,409 –4,006
Treasury bills and other eligible bills included in trading assets 126 228 457
Treasury bills and other eligible bills included in available-for-sale investments 386 135 220
Segment reporting 33 Segments a. General ING Group’s segments are based on the internal reporting structures by lines of business.
Geographical segments Main countries Netherlands Belgium Including Luxembourg Germany Including Austria Other Challengers Australia, France, Italy, Spain, Portugal, Czech Republic and UK Legacy run-off portfolio Growth Markets Poland, Romania, Turkey and Asian bank stakes Wholesale Banking Rest of World UK, Americas, Asia and other countries in Central and Eastern Europe
Net result IFRS attributable to equity holder of the parent 4,227 –50 4,177 474 4,651 1 Comprises for the most part the funding charges of ING Groep N.V. (Holding). 2 Special items in 2016 primarily comprise restructuring charges and impairments related to the intended digital transformation programmes as announced on
IFRS (continuing operations) 17,491 11,588 1,618 75 4,210 Total net result from discontinued operations 441
Net result IFRS (continuing operations) 4,659 –131 4,528 –63 4,466 Total net result from discontinued operations NN Group –779 –779
Net result IFRS attributable to equity holder of the parent 4,659 –131 4,528 –518 4,010 1 Comprised for the most part the funding charges of ING Groep N.V. (Holding). 2 Divestments in 2015 reflected the result from the merger between ING Vysya and Kotak Mahindra Bank. 3 Special items in 2015 comprised additional charges related to previously announced restructuring programmes in Retail Netherlands. 4 Intercompany eliminations between ING Bank and NN Group, prior to deconsolidation at the end of May 2015. 5 Insurance Other comprised mainly the net result relating to warrants on the shares of Voya Financial and NN Group.
IFRS (continuing operations) 16,845 10,673 1,637 70 4,466 Total net result from discontinued operations –456
For information on discontinued operations, reference is made to Note 28 ‘Discontinued operations’.
– Total investment and other income 237 253 51 432 855 –44 1,785
– Total investment and other income 87 243 –27 197 383 –253 630
Special items –63 –957 –1,021 1 Amounts are adjusted for comparison purposes. Czech Republic, previously fully reported within Wholesale Banking Rest of the World is now reported under Other
Rest of Europe Poland ING Bank Slaski S.A. Wholesale banking/Retail banking 8,735 992 26,581 379 90
Branch of ING Bank N.V. Wholesale banking/Retail banking 220 74 3,653 37 7
Bulgaria Branch of ING Bank N.V. Wholesale banking 76 9 274 – –
Portugal Branch of ING Bank N.V. Wholesale banking 11 14 642 10 3
Branch of ING Bank N.V. Wholesale banking/Retail banking 211 75 2,519 41 8
Bulgaria Branch of ING Bank N.V. Wholesale banking 76 10 267 –2 –
Ireland Branch of ING Bank N.V. Wholesale banking 39 64 1,697 36 5
Mexico ING Consulting, S.A. de C.V. Wholesale banking 8 – 1 – –
Malaysia Branch of ING Bank N.V. Wholesale banking 4 – 4 – –
India Branch of ING Bank N.V. Wholesale banking – – 2 – –
The most recent (actuarial) valuations of the plan assets and the present value of the defined benefit obligation were carried out as at 31 December 2016. The present value of the defined benefit obligation, and the related current service cost and past service cost, were determined using the projected unit credit method.
Remeasurements: Actuarial gains and losses arising from changes in demographic assumptions –17 –55 10 8
Amounts recognised directly in Other comprehensive income (equity) were as follows: Opening balance –306 –515
Expected rates of salary increases (excluding promotion increases) – increase/decrease of 0.25% 24 25 –23 –23
The following benefit payments, which reflect expected future service as appropriate, are expected to be made by the plan: Defined benefit obligation
More than 1 year but less than 5 years 383 190 56 7
Realised gains/losses transferred to the statement of profit or loss (reclassifications from equity to profit or loss) 57 39 49
Control framework To determine whether the valuations based upon data inputs have led to an appropriate fair and prudent value, the process of independent price verification (‘IPV’) or price testing is applied. This is done to ensure the appropriate reflection of these valuations in balance sheet and the profit and loss accounts. IPV tests and confirms the reliability of the market data used in these valuations and can lead to adjustments in valuation where data is found to be unreliable. The IPV process is performed at least monthly or more frequently depending on the nature of the market or trading activity. Multiple data sources are used to the extent that such prices are available and taking into account cost-benefit ratio of retrieving such prices. Valuation differences between primary and secondary source data are assessed. When differences resulting from price testing exceed pre-approved thresholds, adjustments to the profit and loss shall be made. Differences and adjustments must be assessed individually, approved by the Local Parameter Committee, and reported back in the meeting minutes. In case a material difference in value is found through the IPV process, it must be fully understood what the underlying cause is for the difference, and if a systematic change is required (e.g. change of source). Pricing and price testing is applied at individual trade level and is organised at a desk level.
Valuation processes are governed by various governance bodies, which include Local Parameter Committees (LPC), Global Price Testing Committee (GP&IC), Market Data Committee (MDC), Trading Pricing Model Committee (TPMC) and others. All relevant committees meet on a quarterly basis or more frequent as required. Key valuation controls including product approval, IPV, valuation adjustments, and model use is monitored on a monthly basis
• Collateral Valuation Adjustment (CollVA) is a derivative valuation adjustment capturing specific features of CSA (Credit Swap Annex) with a counterparty that the regular OIS (Overnight Index Swap) discounting framework does not capture. Non-standard CSA features may include deviations in relation to the currency in which ING posts or receives collateral, deviations in remuneration rate on collateral which may pay lower or higher rate than overnight rate or even no interest at all. Other deviations can be posting securities rather than cash as collateral.
Loans and advances to customers For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a reasonable estimate of the fair value. The fair value of other loans is estimated by discounting expected future cash flows using a discount rate that reflects credit risk, liquidity, and other current market conditions. The fair value of mortgage loans is estimated by taking into account prepayment behaviour. Loans with similar characteristics are aggregated for calculation purposes.
For financial instruments that do not have a reference price available, fair value is determined using a valuation technique (e.g. a model), where inputs in the model are taken from an active market or are observable, such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads.
Financial instruments at fair value The fair values of the financial instruments were determined as follows: Financial Assets
In 2015, there were changes in the valuation techniques driven by current market conditions, with LIBOR being negative.
In 2016, financial assets were transferred out of Level 3 on the basis that the valuation is not significantly impacted by unobservable inputs.
Amounts recognised in the statement of profit or loss during the year 120 –15 –83 22
Financial assets designated as at fair value through profit or loss 76 76
Financial liabilities designated as at fair value through profit or loss –3 –3
Financial liabilities measured at fair value in the statement of financial position as at 31 December 2016 of EUR 99 billion includes an amount of EUR 1.5 billion (1.5%) which is classified as Level 3 (31 December 2015: EUR 1.4 billion, being 1.3%). Changes in Level 3 from 31 December 2015 to 31 December 2016 are disclosed above in the table ‘Changes in Level 3 Financial liabilities’.
Financial assets and liabilities in Level 3 include both assets and liabilities for which the fair value was determined using valuation techniques that incorporate unobservable inputs and assets and liabilities for which the fair value was determined using quoted prices, but have been adjusted to reflect that the market was not actively trading at or around the balance sheet date. Unobservable inputs are inputs which are based on ING’s own assumptions about the factors that market participants would use in pricing an asset or liability, developed based on the best information available in the circumstances. Unobservable inputs may include volatility, correlation, spreads to discount rates, default rates and recovery rates, prepayment rates, and certain credit spreads. Valuation techniques that incorporate unobservable inputs are sensitive to the inputs used.
Furthermore, Level 3 financial liabilities includes approximately EUR 0.1 billion (31 December 2015: EUR 0.2 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 remaining EUR 0.5 billion (31 December 2015: EUR 0.5 billion) of the fair value classified in Level 3 financial liabilities is established using valuation techniques that incorporates certain inputs that are unobservable.
– Rates 486 457 Option pricing model Interest rate volatility (bps) 22 300
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 financial statements are consistent with the valuation methodology used for fair valued financial instruments.
Financial liabilities 1 Loans and advances to customers and Customer deposits, as at 31 December 2015, are adjusted as a result of a changes in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies and Changes in presentation in 2016. 2 Financial assets and liabilities that are on demand are excluded from the fair value hierarchy as their fair value approximates the carrying value, comparative figures have been restated.
As at 31 December 2016, the estimated fair value of Property in own use and Investment properties amounts to EUR 881.0 million (2015: 982 million) and EUR 65 million (2015: EUR 77 million) respectively and is categorised as Level 3 (2015: Level 3) of the fair value hierarchy on the basis of methods applied in determining the fair values.
For amounts recognised in the Statement of profit or loss and other changes in non-financial assets during the year, reference is made to Note 8 ‘Property and equipment’ and Note 10 ‘Other assets’.
As at 31 December 2016, ING Group has no non-financial liabilities (2015: none).
Net accounting ineffectiveness recognised in the Statement of profit or loss 74 14
The fluctuation in balances between 2015 and 2016 relate to the volatility in interest rate movements.
Effective portion of fair value changes on derivatives under cash flow hedges, after tax 111 –65
Cash flow hedge reserve as at 31 December, after deferred tax 777 666
As at 31 December 2016, the fair value of outstanding non-derivatives designated under net investment hedge accounting was EUR 0 million (2015: EUR 1,288 million).
Accounting ineffectiveness recognised in the statement of profit or loss for the year ended 31 December 2016 on derivatives and nonderivatives designated under net investment hedge accounting was EUR 0 million (2015: nil).
– designated as at fair value through profit or loss 326 1,440 1,996 769 568 5,099
5 Included in remaining assets for which maturities are not applicable are property and equipment, investment properties, and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
The tables above include the associated liabilities which are reported after offsetting, compared to the gross positions of the encumbered assets.
Reverse repurchase, securities borrowing and similar agreements 61,245 –19,413 41,832 36 41,555 241
Reverse repurchase, securities borrowing and similar agreements 65,854 –22,569 43,285 242 42,597 446
Financial liabilities at fair value through profit or loss Trading liabilities Derivatives 30,102 –997 29,105 27,852 146 1,107
Deposits from banks Repurchase, securities lending and similar agreements 678 678 677 1
Financial liabilities at fair value through profit or loss Trading liabilities Derivatives 31,317 –930 30,387 30,153 104 130
Guarantees issued by ING Groep N.V. 404 404 month 1–3 months 3–12 months 1–5 years Over 5 years
Guarantees issued by ING Groep N.V. 436 436 1 Excludes commitments and contingent liabilities related to assets classified as held for sale, being NN Group.
In July 2016, investors in derivatives tied to the Singapore Interbank Offer Rate (SIBOR) filed a U.S. class action complaint in the New York District Court alleging that several banks, including ING, conspired to rig the prices of derivatives tied to SIBOR and the Singapore Swap Offer Rate (SOR). The lawsuit refers to investigations by the Monetary Authority of Singapore (MAS) and other regulators, including the U.S. Commodity Futures Trading Commission (CFTC), in relation to rigging prices of SIBOR and SOR-based derivatives. Currently, it is not possible to provide an estimate of the (potential) financial effect of this claim.
ING Bank is the subject of criminal investigations by Dutch authorities regarding various requirements related to the on-boarding of clients, money laundering, and corrupt practices. ING Groep has also received related information requests from U.S. authorities. ING Groep and ING Bank are cooperating with such ongoing investigations and requests. It is currently not feasible to determine how the ongoing investigations and requests may be resolved or the timing of any such resolution, nor to estimate reliably the possible timing, scope or amounts of any resulting fines, penalties and/or other outcome, which could be significant.
47 Principal subsidiaries, investments in associates and joint ventures For the majority of ING’s principal subsidiaries, ING Bank N.V. has control because it either directly or indirectly owns more than half of the voting power. For subsidiaries in which the interest held is below 50%, control exists based on the combination of ING’s financial interest and its rights from other contractual arrangements which result in control over the operating and financial policies of the entity.
For the principal investments in associates ING Group has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies 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.
In 2016, 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 7.2 billion (2015: EUR 7.4 billion) which are funded by third parties.
3. Consolidated ING sponsored Securitisation programme (Mont Blanc) In the normal course of business, ING Group structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling (also referred to as factoring) the clients’ receivables or other financial assets to an ING sponsored SPE.
The liquidity facilities, including programme wide enhancements, provided to Mont Blanc are EUR 812.0 million (2015: EUR 1,072 million). The drawn liquidity amount is EUR 0.0 million as at 31 December 2016 (2015: EUR 276 million).
Assets from ING Bank N.V. mainly comprise long-term funding. Liabilities to ING Bank N.V. mainly comprise short-term deposits.
Expenses paid 1 1 Includes transactions with NN Group until we lost significant influence in January 2016. 2 Includes transactions with ING Vysya until the merger with Kotak Mahindra Bank (‘Kotak’) in April 2015 and transactions with NN Group after deconsolidation at the end of May 2015.
In 2016 and 2015, 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.
The table above shows the fixed remuneration, expense allowances and attendance fees for the Supervisory Board for 2016 and 2015.
Management Board members of ING Bank N.V. 532 532 3.8% 2.6% – 68
1 Dutch legislation changed in 2016. Employee mortgage interest rate discount is no longer deducted from the interest rate but compensated via base salary compensation.
Master claim agreement In 2012, ING Groep N.V., Voya Financial Inc. (formerly ING U.S., Inc.) and ING Insurance Eurasia N.V. entered into a master claim agreement to a) allocate existing claims between these three parties and b) agree on criteria for how to allocate future claims between the three parties. The master claim agreement contains further details on claim handling, conduct of litigation and dispute resolution.
Risk Management Programme (RMP) Settlement Agreement and Outsourcing Agreement ING Groep N.V. and ING Bank N.V. and NN Re (Netherlands) N.V. have entered into an RMP Settlement Agreement which has a purpose to remove from the reinsurer its economic exposure to losses resulting from the RMP claims of the RMP Bank, Voya Financial, Inc. and the LatAm subsidiaries. The Reinsurer and ING Groep N.V. agreed on the Outsourcing Agreement to provide claims handling services in connection with the claims relating to the Voya Entities, the LatAm Entities and RMP Bank. The reinsurer and ING Groep N.V. have agreed that ING Bank N.V. handles the relevant claims on the terms set out in this RMP Settlement Agreement. The terms and conditions for this claims handling have been included in the Outsourcing Agreement.
In May 2013, ING listed its US insurance and investment management business, Voya Financial, on the New York Stock Exchange and divested 25% of its stake. Following a number of follow-on transactions, the remaining stake was sold by March 2015. Following this transaction, ING Group had effectively eliminated its core debt (group leverage), meeting one of our key commitments in the EC Restructuring Plan.
June 2015 – NN Group share repurchase On 30 June 2015, NN Group repurchased 2.1 million ordinary shares from ING Group. This transaction reduced ING Group’s remaining interest in NN Group to 37.61%.
As at 31 December 2015, ING Group no longer had nominees in the Supervisory Board of NN Group. As at 31 December 2015, the remaining interest in NN Group of 25.75% was recognised as an Investment in associate held for sale at EUR 2,153 million.
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 shareholder’s equity or the statement of profit or loss of ING Group.
Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’, Note 11 ‘Assets held for sale’, Note 19 ‘Equity’, Note 28 ‘Discontinued operations’ and Note 49 ‘Related parties’.
Following an amendment to the agreement in April 2016, the transaction closed on 21 June 2016. The available-for-sale equity securities are derecognised from the statement of financial position with a corresponding release of the revaluation reserve recognised in Equity. The transaction resulted in a net profit of EUR 200 million and is recognised in the statement of profit or loss, in the line items Investment income, Share of results of associates and joint ventures and Other income. Reference is made to Note 5 ‘Investments’, Note 7 ‘Share of results of associates and joint ventures’, Note 19 ‘Equity’, Note 23 ‘Investment income’, Note 25 ‘Other income’ and Note 37 ‘Fair value of financial assets and liabilities’.
Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’ and Note 28 ‘Discontinued operations’.
In line with the Restructuring Plan agreed with the European Commission after the financial crisis, ING Group divested all its insurance and investment management businesses around the world. On 14 April 2016, ING Group announced the sale of its remaining 14.1% stake in NN Group and therefore fulfilling the terms of the European Commission restructuring agreement, whereby ING Group was required to fully divest its shareholding in NN Group before the end of 2016.
ING Bank risk management Introduction The Risk Management section describes the key risks that arise from ING Bank’s business model. It explains how the risk management function is embedded within the organisation based on the ‘three lines of defence’. This includes front office as ‘first line of defence’, independent risk management as the ‘second line of defence’ and the internal audit function as the ‘third line 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. ING Bank’s risk management disclosures provide qualitative and quantitative disclosures about credit, market, liquidity and funding, business and non-financial risks.
Board level risk oversight ING Bank has a two-tier board structure consisting of the Management Board Banking (MBB) and the Supervisory Board (SB); both tiers play an important role in managing and monitoring the risk management framework.
• The Risk Committee, which assists and advises the SB in monitoring the risk profile of the company as well as the structure and operation of the internal risk management and control systems.
The global Risk function is composed of the following departments: Credit & Trading Risk, Balance Sheet Risk, Corporate Operational Risk, Bank Compliance Risk and Risk Services. In addition, there is one staff department in place: • Risk & Capital Integration: a staff department that reports functionally to the CRO and is responsible for overarching risk topics as risk appetite, disclosures, recovery and resolution planning and stress testing as well as capital planning. Risk & Capital Integration reports directly to the Head of Capital Management.
The MV department backtests all existing risk models. In addition to (i) evaluating the underlying model parameters, (ii) ensuring continued applicability of the models for the relevant portfolios, and (iii) discussing the model performance with front office and risk users of the models, MV also (iv) tests the observed performance of a model (and its components) with the predicted level. A model where the observed results deviate from the predicted results becomes a candidate for either re-calibration or re-development.
To support the embedding of risk culture into the business practices, ING Bank has initiated different programmes and issued several guidelines. Risk awareness is to be alert on potential threats that can occur during day-to-day business, which can be specific to the sector, the region or the clients ING Bank 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 MBB for all ING Bank employees. With the programme, ING Bank gains a sound risk culture and ensures 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.
or trading counterparties; • Market risk: the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, credit spread, equity, real estate and foreign exchange risks; • Funding and liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Business risk: the exposure to value loss due to fluctuations in volumes, margins and expenses, as well as customer behaviour risk.
These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency, and as such strategic risk is included in business risk.
Risk cycle process ING uses a step-by-step risk management approach to monitor, mitigate and manage its financial and non-financial risks. The approach consists of a cycle of five recurrent activities: risk identification, risk assessment, risk control, risk monitoring and risk reporting. In short, this implies: determine what the risks are, assess which of those risks can really do harm, take mitigating measures to control these risks, monitor the development of the risk and if measures taken are effective and report the findings to management at all relevant levels to enable them to take action when needed.
Risk Appetite Framework ING uses an integrated risk management approach for its banking activities. The MBB uses the Risk Appetite Framework (RAF) to set both boundaries for the Medium Term Plan (MTP) budget process and to monitor and manage the actual risk profile in relation to the risk appetite.
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 the ING Bank credit portfolio and that of all the underlying portfolios as well. 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 Bank level are translated into the organisation. The funding & liquidity risk appetite statements that are defined on ING Bank level are translated into the organisation, taking the funding & liquidity specific situation of each (solo) unit into account. The 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 Bank level is applicable to all divisions and business units. The suite of risk appetite statements serves as input for the Medium Term Planning process as well as for the establishment of key performance indicators and targets for senior management.
Stress testing Stress testing is an important risk management tool that provides input for strategic decisions and capital planning. The purpose of stress testing is to assess the impact of plausible but severe stress scenarios on ING’s capital and liquidity position. Stress test analyses provide insights in the vulnerabilities of certain portfolios, w.r.t. adverse macroeconomic circumstances, stressed financial markets and changes in the (geo)political climate.
As for the previous steps, the calculated impacts of the scenario are first discussed and endorsed in the STSC followed by the BF&RC. Depending on the outcomes of the stress test and the likelihood of the scenario, mitigating actions may be proposed. Approval of these mitigating actions takes place in the MBB.
In June 2016, the United Kingdom’s intention to leave the European Union (‘Brexit’) was a major political and economic event that impacted sentiment. After the announcement, sovereign bond yields dropped as investors fled to safe haven assets due to increased uncertainty and the potential economic fall-out from Brexit. Therefore, the impact was primarily noticeable via a strong increase in volatility in a variety of asset classes, including currencies, equities and bonds. Although ING has activities in the UK through the Wholesale banking business line, no material asset quality deterioration following the Brexit referendum has appeared. But, as the terms of the exit are yet to be negotiated, ING will continuously monitor the developments.
Climate change risk The climate is changing and that is an unparalleled challenge for our world. The causes and the solutions to these challenges are complex, but we realise that it is attributed directly or indirectly to human activity that alters the composition of the global atmosphere, in addition to natural climate variability. As a financial institution, we too have a responsibility and it may ultimately affect our results if our customers are affected.
ING Bank’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 counterparties, counterparty groups and investment activities. The aim is to support relationship-banking activities, while maintaining internal risk/reward guidelines and controls.
Within ING Bank, the ultimate approval authority for credit proposals resides with the MBB. The MBB has delegated authorities based on amounts, tenors and risk ratings to lower levels in the organisation. Transactions are approved via a dual signatory approval system that requires an individual sign-off from both front office and credit risk management. For larger and higher risk credits a committee structure exists whereby the credit risk chair takes the final decision with support of the respective committee members, thereby ensuring accountability. Retail business units have delegated authority to decide within policies and mandates approved by credit risk. Any decisions outside those policies or above the delegated mandate require a specific credit risk approval.
• The ING Bank Provisioning Committee (IPC) is the approval authority for loan loss provisions (LLP) for all ING Bank entities.
• Lending risk: arises when ING Bank grants a loan to a counterparty, or issues guarantees on behalf of a counterparty. This includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured as the accounting value of the financial obligation that the counterparty has to repay to ING Bank, excluding any accrued and unpaid interest, discount/premium amortisations or impairments.
Single name and sector concentration ING Bank has established a concentration risk framework in order to identify, measure and monitor concentrations at country, portfolio and/or counterparty level. It consists of: • Single name concentration: losses due to the unexpected default of a single counterparty. These single name concentrations are capped both at individual single name level and aggregated top-5 single name level. The LGD of a single name concentration is measured against a maximum LGD amount. Large Exposures monitoring and reporting is one of the components of the single name framework.
• Sector concentration (systemic risk): substantial increase of the ING Bank risk profile (expressed in risk-weighted assets at risk) due to the joint deterioration of a group of correlated counterparty/transactions, sensitive to the same external (macro-economic) factor(s) related to their geographic location and exposure class.
ING Bank performs periodical stress tests based on a standardised and pre-determined 1-in-10 year-stress event (i.e. at 90% confidence level and 1 year horizon) which is similar to the one applied in the solvency risk appetite. Based on this confidence level, a through the cycle rating migration for the entire portfolio is simulated. For this simulated portfolio, provisions, RWA and Economic Capital are recalculated to assess what the combined impact of such a year would be. The additional CRWA that ING should allocate in such an event is named CRWA-at-Risk.
As the risk assessment processes are decentralized each front-office team must be highly familiar with ING’s environmental and social framework. Hence, ING makes significant investment in internal training programs to help CDUs, front office and risk management staff in assessing the environmental and social risks. In 2016, 545 colleagues have been specifically trained on the ESR policy framework worldwide.
strategies including asset class mix; 2. Practice-based drivers including approaches to risk management and risk measurement; and 3. Regulatory environment such as supervisory practices, implementing laws and regulations including national discretion and accounting standards.
Practice based drivers ING Bank has a conservative approach to troubled exposures. Non-performing exposures are recognized early based on unlikely to pay triggers. ING typically classifies default based on a borrower rating and not a facility rating which means that a customer will only have one PD (probability of default) regardless of the type(s) of transactions done with ING Bank. As a consequence, if one facility is in default, usually all facilities of the client are in default. Non-performing clients which were granted forbearance measures need to stay non-performing for a minimum of one year starting from the moment they are classified as forborne. Eligibility for a migration back to performing is possible only after this probation period of one year.
Comparing capital levels across banks is a challenging exercise because of different risk profiles, differences in risk based drivers, practice based drivers and regulatory environment (e.g. advanced internal rating based approach or the standardised approach). These factors have a substantial impact on the regulatory capital/RWA of a financial institution. ING Bank continues to work with industry groups and strives to adhere to the latest BCBS and EBA recommendations to improve the transparent reporting of our capital calculations.
An important characteristic of the credit risk infrastructure and framework is that models are built for several purposes, including economic capital, regulatory capital and loan loss provision. These rating models are used throughout the ING Bank organisation which is compliant with the Basel Use Test requirement and ensures active feedback on the risk parameters by business units.
The expected loss (EL) provides a measure of the value of the credit losses that ING Bank may reasonably expect to incur on its portfolio. In its basic form, the expected loss can be represented as: EL = PD * EAD * LGD
Securitisations ING Bank has implemented the AIRB approach for credit risk. As a consequence, ING Bank uses the rating based approach (RBA) for investments in tranches of asset-backed securities (ABS) and mortgage-backed securities (MBS) which have been rated by external rating agencies. Rating agencies which are used by ING Bank under the RBA include: Standard & Poor’s, Fitch and Moody’s.
Pre-settlement measurement models For regulatory capital the pre-settlement (PS) exposure is calculated using a marked to market (MtM) plus regulatory-based add-on. Depending on the location and relevant system capabilities, for internal capital purposes ING Bank uses one of the below mentioned methodologies to calculate its PS exposures: • MtM plus model based add-on approach: In this approach, the PS risk is calculated as the sum of the MtM of the trade and a model-based add-on. The MtM fluctuates through the life of the contract. The model-based add-on is product-specific, and takes into account the remaining time to maturity, profiling per time-buckets etc. Add-ons are updated with a frequency that takes into account major market changes. This methodology is used for pre-deal exposure assessment of all ING Bank financial markets products. Furthermore, it is used for post-deal risk calculations in the case of financial markets portfolios that do not justify the computational efforts and costs associated with implementation of a Scenario Simulation approach; and
ING recognises that the above approaches are insufficiently accurate for certain trading products such as highly structured or exotic derivative transactions. For the assessment of risk exposures of such complex products a bespoke calculation is made.
Credit risk model governance All PD, EAD and LGD models are built according to ING Bank’s internal credit risk modelling methodology standards and model life cycle. After thorough review of the documentation by the Model Development Committee (MDC) and Model Validation (MV), the Credit & Trading Risk Committee (CTRC) approves the models. For certain local models, the approval authority is delegated by the CTRC to the MDC. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CTRC have participation from credit risk officers as well as the front office to ensure maximum acceptance by the organisation. The capital impact from the implementation of approved models is reported to the ECB in a quarterly report. In addition, MV validates each model on an annual basis. During such periodical validation the model performance is analysed via amongst others back-testing and performance assessment. A five-grade colour footprint is assigned to each model during this periodical validation. If a model is considered insufficiently robust or if the backtesting indicates insufficient performance, then the model is re-calibrated or re-developed.
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 the CRDIV, the ECB Supervisory Rules and EBA guidelines. This concerns all counterparty types and segments, including countries. ING Bank’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 Bank rating of 1 corresponds to an S&P/Fitch rating of AAA and a Moody’s rating of Aaa; an ING Bank rating of 2 corresponds to an S&P/Fitch rating of AA+ and a Moody’s rating of Aa1, and so on.
The three first categories (1-19) are risk ratings for performing loans. They are calculated in ING Bank IT systems with internally developed models based on data either manually or automatically fed. Under certain conditions, the outcome of a manually fed model can be challenged through a clearly defined rating appeal process. Risk ratings for non-performing 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 Bank has invested are leading.
Exposure classes The BCBS (Basel Committee) has developed the concept of ‘Exposure Classes’ which has been transposed into CRR/CRDIV. These are essentially groupings of credit risks associated with a common counterparty type, product type and/or cover type. For the AIRB Approach, most of the exposure classes have subcategories. ING Bank has applied the following definitions to determine Exposure Classes: • Sovereigns include Sovereign Government entities, Central Banks and recognised Local / Regional Authorities as well as
Credit risk tools Credit risk policies ING Bank’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 Bank wide credit risk policy and approved by (local) credit risk. All credit risk policies are created according to the policy development standards and reviewed on a regular basis. Each policy has a credit risk sponsor and is created in close consultation with the various stakeholders within credit risk, front office and where applicable other corporate departments. All policies require approval by the Credit & Trading Risk Committee (CTRC) and where applicable by the Global Credit & Trading Policy Committee (GCTP).
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 the Bank’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.
• Capture: ensures that atomic data is captured by business units and is available for exchange according to pre-agreed standards and specifications.
Lending Investment Money Market Pre-Settlement Total Total (ALL) 2015 AIRB SA AIRB SA AIRB SA AIRB SA AIRB SA AIRB + SA
Country risk The concentration increase in the portfolio was mainly observed in Germany, Americas, and Australia. The increase in Americas is explained by the continually positive structured finance business momentum. The portfolio growth was further strengthened by the expanded Australian and German mortgage and structured finance portfolios. The Netherlands showed a significant decrease in the Wholesale Banking portfolio due to lower central bank deposits. The decrease in the Netherlands retail portfolio was driven by the continued transfer of mortgages from WestlandUtrecht (WU) Bank to NN Bank, the run-off of the WU Bank mortgage book and mortgage prepayments.
Cover valuation methodology General guidelines for cover valuation are established to ensure consistency of the application within ING Bank. These general guidelines also require that the value of the cover needs to be monitored on a regular basis, in principle at least annually. Covers are revalued accordingly and whenever there is reason to believe that the market is subject to significant changes in conditions. The frequency of monitoring and revaluation depends on the type of covers.
Total Lending, Investment and Money Market 725,061 614,734 20,498 89,595 125,395 167,511 31.8% 18.1% 50.1%
Consumer lending portfolio The consumer lending portfolio comprises of residential mortgage loans (93.4% in 2016 versus 93.9% in 2015) and other consumer lending loans, which mainly comprise credit cards, term loans and revolvers to consumers. As a result, most of the collateral consists of mortgages. The mortgage values are maintained in ING Bank’s central database (Vortex) and in most cases external data is used to index the market value. On a quarterly basis, the mortgages value is updated in Vortex using the relevant house price index (the NVM Index in the Netherlands, Level Housing Index in Australia, Crif Real Estate Appraisal Company in Italy and Ministerio de Fomento in Spain).
Dutch mortgages valuation When a mortgage loan is granted in the Netherlands, the policy dictates maximum loan to market value (LTMV) for an existing property and for construction property financing of 102% (in 2015: 103%). In 2017 the LMTV will reduce further to 101% and will be 100% in 2018. The cover values are captured in the local systems which are subsequently fed into a central data system (Vortex). All valuations are performed by certified valuators that are registered at one of the ING Bank-accepted organisations. In addition, the valuator must be a member of the NVM (Nederlandse Vereniging van Makelaars – Dutch Association of Real Estate Agents), VBO (Vereniging Bemiddeling Onroerend Goed – Association of Real Estate Brokers), VastgoedPRO (Association of Real Estate Professionals) or NVR (Nederlandse Vereniging van Rentmeesters).
The below tables show the values of different covers and the VTL split between performing and non-performing loans.
Business lending portfolio Business lending is an important business of ING Bank, accounting for 40.0% of ING Bank’s total outstandings. In line with our objective to give stakeholders insight into the portfolio, we present the business lending portfolio per Industry breakdown in accordance with the NAICS definition and per Region and main market. Business Lending presented in this section does not include Pre-settlement and Investment & Money Market exposures, which are separately exhibited in the next sections.
The coverage of the non-performing part improved and an overall decrease was seen in the non-performing outstandings. The majority of this was in the Real Estate industry while some increases were observed in Transportation & Logistics and the Telecom sectors.
Total Business Lending 310,395 128,578 17,004 89,204 98,559 132,672 33.6% 4.1% 5.9% 7.4% 10.7% 38.3% of which Non-performing 9,438 4,352 293 3,210 3,961 3,705 24.1% 4.4% 6.4% 14.2% 13.8% 37.1% 1 Including loans to ING Group. 2 Excluding intercompany positions.
Credit quality Following, the somewhat higher credit risk levels seen as a result of the financial crisis and economic downturn, the credit quality has been improving since 2014 and also continued the improving trend in 2016.
Past-due obligations Retail Banking continuously measures its portfolio in terms of payment arrears. The retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. The methodology is principally extended to loans to private individuals, such as residential mortgage loans, car loans, and other consumer loans. An obligation is considered ‘pastdue ’ if a payment of interest or principal is more than one day late. In practice, the first 5-7 days after an obligation becomes past due are frequently operational in nature for retail loans and small businesses portfolios. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrears continue to exist, the obligor is transferred to a restructuring unit. The obligor is downgraded to risk rating 20 (non-performing) when the arrears exceed 90 days. The table below captures all past due exposures starting from day 1.
Non-performing loans The ING Bank loan portfolio is under constant review. Loans with past due financial obligations of more than 90 days are reclassified as non-performing. For the commercial lending portfolios, there generally are reasons for declaring a loan non-performing prior to being 90 days past due. These include, but are not limited to, ING Bank’s assessment of the customer’s perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection.
Total 13,597 15,325 1 Economic sectors not specified in above overview are grouped in Other.
Exchange rate or other movements -15 122 -19 -26 -18 -25 -52 71
Closing Balance 2,147 2,371 1,884 2,199 1,277 1,216 5,308 5,786 1 At the end of 2016, the stock of provisions included provisions for amounts due from banks: EUR 11 million (2015: EUR 14 million). 2 Includes EUR 119 million provisions for contingent liabilities.
To identify forbearance, ING assesses clients with Early Warning Signals, Watch List, Restructuring, Default or Recovery status. ING Bank reviews the performance of forborne exposures at least quarterly, either on a case-by-case (business) or on a portfolio (retail) basis.
Excluding the policy revision, the forborne assets decreased by EUR 0.3 billion. As the business lending portfolio remained stable, this decrease was attributable to the consumer portfolio and mainly driven by the Dutch residential mortgage portfolio. Additionally, a EUR 0.7 billion move of non-performing to performing forborne assets was observed in the Netherlands, due to clients reaching the one year probation period. Both were the result of a continued improved economic environment, visible by the increasing house prices and improved credit worthiness of our clients.
BSR and C&TR are responsible for determining adequate policies and procedures for actively managing market risk in banking and trading books and for monitoring the compliance with these guidelines. An important element of the risk management function is the assessment of market risk in new products and businesses. Furthermore the two departments maintain an adequate limit framework in line with ING Bank’s Risk Appetite Framework. The businesses are responsible for adhering to limits that ultimately are approved by ALCO Bank. Limit excesses are reported to senior management on a timely basis and the business is required to take appropriate actions to reduce the risk position.
Market risk in banking books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books originate from the market risks inherent in commercial products that are sold to clients, the Bank Treasury exposures and from the investment of own funds (core capital). Both the commercial products, and the products used to hedge market risk exposures in these products are intended to be held until maturity, or at least for the long-term.
Governance The management of interest rate risk follows the interest rate risk in the banking book framework as approved by ALCO Bank. This framework describes roles and responsibilities, risk metrics, and it defines the policies and procedures related to interest rate risk management. Furthermore, on an overall level, ALCO Bank sets the risk appetite for interest rate risk, which is translated into limits for interest rate risk metrics.
The commercial activities can result in linear interest rate risk, for example when re-pricing tenors of assets differ from those of liabilities. Also interest rate risk can arise from customer behaviour depending on the nature of the underlying product characteristics. Customer behaviour risk is defined as the potential future value loss due to deviations in the actual behaviour of clients versus the modelled behaviour towards the embedded options in commercial products. General sources of customer behaviour risk include the state of the economy, competition, changes in regulation, legislation and tax regime, and developments in the housing market. Since these risk factors cannot be (fully) mitigated, ING holds capital to be able to absorb possible losses as a result of changed customer behaviour.
From an interest rate risk perspective the commercial activities can typically be divided into three main product types: savings and demand deposits, mortgages and loans. - Savings and demand deposits are generally invested with the goal to hedge their value and minimize the sensitivity of the margin to market interest rates. Interest rate risk can arise when there is a lag between savings rate adjustments versus adjustments experienced through market rates.The interest rate risk is modelled based on the stability of the deposit and the pass through rate. This takes into account different elements, such as pricing strategies, volume developments and the level and shape of the yield curve. Savings volumes are typically assumed not to be sensitive to interest rate shocks.
ING Group Annual Report 2016 294 downward floored scenario +100 bps downward floored scenario +100 bps By currency Euro -54 186 39 173 US Dollar -14 19 –33 28 Other 8 19 –28 39 Total -60 224 –22 240 downward floored scenario +100 bps downward floored scenario +100 bps By business Wholesale Banking -15 138 -2 165 Retail Banking Benelux -73 -88 9 5 Retail Challengers & Growth Markets 20 58 30 -10 Corporate Line Banking 8 116 –59 80 Total -60 224 –22 240
downward floored scenario +100 bps downward floored scenario +100 bps By currency Euro -55 -1,739 -583 -1,855 US Dollar 65 -62 -12 42 Other 51 -125 -58 36 Total 61 -1,926 -653 -1,777
ING Group Annual Report 2016 295 downward floored scenario +100 bps downward floored scenario +100 bps By business Wholesale Banking -157 -19 –76 53 Retail Banking Benelux -224 -287 –159 –270 Retail Challengers & Growth Markets 328 -435 –640 –274 Corporate Line Banking 115 -1,186 222 –1,286 Total 61 -1,926 –653 –1,777 downward floored scenario +100 bps downward floored scenario +100 bps By accounting category Loans and Receivables & Held to Maturity 114 248 -1,019 210 Available for Sale 115 -2,153 800 -2,248 Fair value through profit and loss -168 -21 -434 261 Total 61 -1,926 -653 -1,777
ING Group Annual Report 2016 296 in EUR thousand 2016 2015 By accounting category Loans and Receivables & Held to Maturity 1,907 4,691 Available for Sale -21,666 -22,798 Fair value through profit and loss 4,863 2,325 Total -14,896 –15,782
cTaR Stress Scenario 2016 2015 2016 2015 Currency US Dollar 0.18% 0.13% 15% 15% Pound Sterling 0.01% 0.01% 15% –15% Polish Zloty 0.00% 0.00% -15% 15% Australian Dollar 0.00% 0.00% 20% 20% Turkish Lira 0.07% 0.07% -25% –25% Chinese Yuan 0.09% 0.09% -15% –15% Korean Won 0.01% 0.01% -15% –15% Indian Rupee 0.03% 0.05% -20% –20% Brazilian Real 0.01% 0.01% -25% –25% Russian Rouble 0.02% 0.01% -20% –20%
Governance ING Bank maintains a strategic portfolio with substantial equity exposure in its banking books. Local offices are responsible for the management of the equity investments positions. Market risk is responsible for monitoring and reporting the regulatory capital for Equity Investments on a monthly basis. Market risk acts independently from the management of the equity investments in monitoring and reporting of the equity investments risk.
2016 2015 Gross unrealised gains 2,675 2,662 Gross unrealised losses -19 –29 Total 2,656 2,633
Year-on-year variance analysis During the year ended 31 December 2016 the revaluation reserve relating to equity securities held in the available-for-sale portfolio fluctuated between a month-end low amount of EUR 2,201 million (2015: EUR 1,931 million) and a high amount of EUR 2,787 million (2015: EUR 2,709 million). The AFS portfolio decreased from EUR 4.4 billion in 2015 to EUR 4.0 billion in 2016, mainly due to the derecognition of Visa Europe shares and the reduction of the stake in Kotak Mahindra Bank, partly offset by an increase in the value of the investment in Bank of Beijing.
Risk profile ING Bank has two main different categories of real estate exposure on its banking books: first, the own buildings ING Bank occupies, and second, development assets, which mostly consists of former Real Estate Development and Real Estate Investment Management activities. The total real estate exposure amounts to EUR 1.1 billion (excluding property from foreclosures and third party interest). ING Bank has EUR 0.1 billion recognised at fair value through profit and loss and EUR 1.0 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.
ING Bank 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 21 million after tax is booked for ING Bank in 2016. On a quarterly basis all valuation adjustments are discussed in the Global Pricing and Impairment Committee (GP&IC). This committee oversees the valuation framework and Independent price verification.
Credit & Trading Risk has the role to challenge the valuation and pricing sources used in the valuation models by the Front Office. Credit and Trading risk performs independent price verification to ensure that valuations are correct. The independent price verification and valuation adjustments are confirmed in the Local parameter committee. To ensure segregation of duties between Front Office and Credit & Trading Risk, the systems for pricing and price testing are secured in order to prevent unauthorised access.
Incremental Risk Charge With the Incremental Risk Charge (IRC) ING Bank calculates an estimate of the default and migration risks for unsecuritised credit products in the trading book over a one-year capital horizon, with a 99.9% confidence level. For the calculation of IRC ING Bank performs a Monte-Carlo simulation based on a Gaussian copula model. The rating change is simulated for all issuers over the different liquidity horizons (i.e. time required to liquidate the position or hedge all significant risks) within one year. The financial impact is then determined for the simulated migration to default, or for the simulated migration to a different rating category, based on LGD or credit spread changes, respectively.
The liquidity horizon has been set to the regulatory minimum of three months for all positions in scope. ING Bank reviews the liquidity horizons regularly based on a structured assessment of the time it takes to liquidate the positions in the trading portfolio.
Risk position changes were also reflected in the 10 day VaR and 10 day Stressed VaR statistics. Compared to 10 day VaR in 2015, in 2016 position changes led to lower average, the wider range between a maximum and a minimum and a lower 10 day VaR at yearend. For 10 day Stressed VaR the average was stable compared to the previous year, while maximum and year-end values increased. The overall decrease in IRC in 2016 was largely caused by decreased debt exposures to a number of sovereigns.
Internal Model Approach amounts in EUR millions RWA Capital requirements RWA Capital requirements 1 VaR (higher of values a and b) 1,123 90 1,797 144 (a) Previous day's VaR (Article 365(1) (VaRt-1)) 449 36 535 43 (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) 1,123 90 1,797 144 2 SVaR (higher of values a and b) 2,546 204 2,931 235 (a) Latest SVaR (Article 365(2) (sVaRt-1)) 1,054 84 969 78 (b) Average of the SVaR (Article 365(2) during the preceding sixty business days
Sensitivities As part of the risk monitoring framework, Credit & Trading Risk actively monitors the daily changes of sensitivities of our trading portfolios. The following tables show the five largest trading foreign exchange positions and interest rate and credit spread sensitivities. The credit spread sensitivities are furthermore split in different risk classes and sectors. Due to the nature of the trading portfolios, positions change from day to day.
Funding and liquidity risk Introduction Funding and liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
Bank Treasury is a 1st line of defence function. Its main funding and liquidity responsibilities are to manage ING’s funding gap and ING’s (regulatory) liquidity position. Bank Treasury is ING’s primary contact to the market for long and short term funding, with exception of capital transactions which are under the responsibility of the Capital Management function and the execution of some specific structured funding products which are executed by Financial Markets under a mandate that provides strict guidance around pricing, volumes, optionalities and tenors.
Management Framework ING’s liquidity risk management framework incorporates all relevant risk principles with regard to the daily and on-going management of funding and liquidity risk. The framework contains the following key elements: • Liquidity risk appetite: This is set by ALCO Bank (which includes all MBB members) in line with ING’s complexity, business mix and liquidity risk profile. The risk appetite is reviewed on an annual basis and forms part of the input of business units in their medium term business plans. The defined risk appetite is allocated to the lower level ALCO’s; • Funding: The Bank Treasury function sets and updates the funding strategy and funding planning, taking into account diversification in sources and tenor of funding; • Intraday Liquidity Management: Bank Treasury actively manages its short term liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions; • Collateral Position Management: Bank Treasury actively manages the liquidity risk of its collateral positions to meet ING’s collateral needs, and resources, under both normal and stressed conditions and in accordance with all internal and regulatory rules; • Liquidity buffers: ALCO Bank ensures that sufficient liquidity is maintained, in accordance with Bank- and regulatory rules and standards, including a buffer of unencumbered, high quality liquid assets, to withstand stress events, such as those involving the loss or impairment of both unsecured and secured funding sources; • Liquidity risk transfer and pricing: ALCO Bank sets and maintains a Funds Transfer Pricing (FTP) framework that optimises Bank-wide funding and liquidity risk management, whereby all business units must transfer their structural funding and liquidity risks to Bank Treasury whilst managing their own customer behaviour liquidity risk costs. Any negative carry resulting from necessity to keep a buffer of liquid assets as contingent liquidity is not captured in FTP, this negative carry is captured and allocated through a separate contingent liquidity charging (CLC) mechanism; • Stress testing: ALCO ensures that liquidity stress tests are planned, designed, conducted and reviewed, to identify sources of potential liquidity strain, to determine how these can and will be addressed and to ensure that current exposures remain within the established liquidity risk tolerance; and
Collateral position management The objective of the Collateral Management is to ascertain that ING Bank can meet collateral requirements for ING’s collateral needs. ING Bank maintains a liquidity buffer existing of cash, cash equivalents and other highly liquid unencumbered assets to facilitate this. Tactical (short term) management of the liquidity buffer is performed, by increasing or decreasing the liquidity coverage with collateral transformation by execution of repos, in order to meet internal and regulatory requirements. Reporting and analysis is performed, providing availability of collateral for emergency financing, its eligibility and its route to cash in an efficient manner.
The liquidity buffer is held as an insurance against a range of stress scenarios, covering the additional need for liquidity that may arise over a defined short period of time under stress conditions. ING’s minimum standards for liquidity buffers are described below: • When local regulatory rules require so, local liquidity buffers can be established. Although locally established, these buffers must be centrally functionally managed by the Bank Treasury function; • The buffer must be aligned in relation to the contractual and expected expiry calendars and other expected or planned developments; • The size of the buffers is supported by estimates of liquidity needs performed under the Bank’s or business entity’s stress testing and be aligned with the liquidity risk appetite; • The liquidity buffer is composed of cash and core assets that are eligible for the Liquidity Coverage Ratio (LCR) and/or highly marketable, which are not pledged to payment systems or clearing houses. For longer term buffer purposes, a broader set of liquid assets might be appropriate, subject to the Bank’s or entity’s ability to generate liquidity from them under stress, within the specified period of time; and
Regulatory developments Based on the Delegated Act on the LCR issued by the European Commission in October 2014, the EBA issued Implementing Technical Standards with regard to the reporting of the LCR as per 1 October 2015. The LCR is currently calculated and reported based on this Delegated Act and the corresponding Implementation Technical Standards. A Corrigendum for the LCR Delegated Act is in the making and is expected to be issued later in 2017.
Risk & Control Self-Assessment Identification and assessment of non-financial risks inherent to ING Bank products, activities, people, processes and systems provide management with an understanding of the operational risk profile. Based on the identification and assessment, internal controls are designed for mitigation of risks to remain within the risk appetite.
External events inventories External non-financial loss data provides valuable information about the losses experienced by other businesses, and assists ING Bank to quantify its exposure to risk events that have not been experienced internally.
The risk appetite (defined as the acceptable and authorised maximum level of risk) is set by the Bank NFRC. Adherence to this risk appetite is monitored quarterly through the NFR Dashboard which reports the key non-financial risk exposures. The NFR Dashboard provides management at country, divisional and bank level with an overview of key risks within the non-financial risk areas including compliance risks, information security risks, continuity risks, control risks, fraud and unauthorised activities risks and personal and physical security risks, enabling management to focus and set priorities.
Cybercrime Cybercrime is a continuous threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks increase on a global scale. Particularly threats from Distributed Denial of Service (DDoS), targeted attacks (also called Advanced Persistent Threats) and Ransomware intensify worldwide. ING Bank builds on its cybercrime resilience, further enhancing the control environment to protect, detect and respond to e-banking 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. During 2016 ING did not experience any cyber incident that can be classified as material. ING provides continuous reporting on cyber incidents to the ECB.
The controls to mitigate the compliance risks associated with the above mentioned risk areas are designed and embedded in the ING business units. The effectiveness of the controls as designed is tested periodically, and senior management is aware about their responsibility to ensure their processes are compliant with applicable laws and regulations, ING Bank’s internal policies and the Orange Code.
Financial Economic Crime (FEC) Policy and Minimum Standards The ING Bank FEC Policy and Minimum Standards directly reflect relevant national and international laws, regulations and industry standards. The ING Bank FEC Policy is mandatory and applies to all ING banking entities, majority owned ING business, businesses under management control, staff departments, product lines and to all client engagements and transactions.
User Access Management (UAM) is an important element of our control framework to mitigate unauthorized and / or inappropriate access to our data and information. The standards of controls on UAM are high and best practices illustrate that the trends are towards further increasing requirements. We have identified control deficiencies related to UAM and a central task force was formed to coordinate, assess, monitor and track remediation efforts that resulted in increased focus by the Executive Board, senior management and ING staff. In 2017, management will continue to enhance the internal controls, mitigation and monitoring the progress of mitigation and remediation.
Compliance Risk Culture Monitoring The Bank Compliance Risk Management function enhanced its control framework by assessing the operation of soft controls in relation to compliance risks in addition to hard controls. The aim of Compliance risk culture monitoring is to assess the risks that might influence the conduct and risk culture, promoting the individual integrity of all employees and enhancing the overall culture that is led by integrity.