Consolidated balance sheet 84 Consolidated profit and loss account 85 Consolidated statement of cash flows 86 Consolidated statement of changes in equity 87 Accounting policies for the consolidated balance sheet and profit and loss account 89 Accounting policies for the consolidated statement of cash flows 106 Notes to the consolidated balance sheet 107 Additional information to the consolidated balance sheet 139 Notes to the consolidated profit and loss account 162 Segment reporting 173 Notes to the consolidated statement of cash flows 179 Risk management 180 Capital management 229 Subsequent events 236 2.2 Parent company annual accounts
Report of the Supervisory Board 52 Corporate governance 55 Report of ING Trust Office 67 Report of ING Continuity Foundation 69 Conformity statement 70 Section 404 Sarbanes-Oxley Act 71 Remuneration report 73 Works councils 83
EXECUTIVE BOARD Michel J. Tilmant (1) (56), chairman Eric F. Boyer de la Giroday (2) (56) Dick H. Harryvan (55) John C.R. Hele (3) (50), CFO Eli P. Leenaars (47) Tom J. McInerney (52) Hans van der Noordaa (47) Koos (J.)V. Timmermans (48), CRO Jacques M. de Vaucleroy (47) (1) Chairman until 26 January 2009. (2) Acting chairman from 26 January until 27 April 2009. (3) Leaving ING on 31 March 2009.
Corporate Governance Committee Jan H.M. Hommen, chairman Eric Bourdais de Charbonnière Henk W. Breukink Claus Dieter Hoffmann Harish Manwani Aman Mehta * You can find more information on the members of the Executive Board on pages 61-62 and on the members of the Supervisory Board on pages 64-65, as well as the names of the nominated candidates for appointment and reappointment at the General Meeting on 27 April 2009.
> Full-year net result EUR –729 million, impacted by unprecedented crisis > Significant impairments and negative revaluations > Adjusting to a new reality > Prioritising customers, capital, risk and costs > Delivering an easier customer experience in EUR billion in EUR billion
Key performance indicators Net return on equity (ROE) –2.1% 24.2% 23.5% 26.6% 25.4% Net result change –108% 20% 7% 25% n.a.
Insurance Value of new life business (in EUR million) 924 1,113 807 805 632 Internal rate of return (life) 13.9% 14.3% 13.3% 13.2% 12.1%
Assets under management (in EUR billion) 551 643 600 547 492
(1) Including inter-company eliminations. (2) Including impact coupon to Dutch State (EUR 425 million with regard to EUR 10 billion).
OUR StRategy ING’s overall mission is to help customers manage their financial future. Capitalising on changing customer preferences and building on our solid business capabilities, ING’s strategic focus is on banking, investments, life insurance and retirement services. We want to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confidence. With our wide range of products, innovative distribution models and strong footprints in both mature and developing markets, we have the long-run economic, technological and demographic trends on our side. We align our business strategy around a universal customer ideal: saving and investing for the future should be easier. While steering the business through turbulent times, we will execute efforts across all our business lines to strengthen customer confidence and meet their needs, preserve a strong capital position, further mitigate risks and bring our costs in line with revenue expectations.
Is a market leader in life insurance and retirement services in the Netherlands and Belgium, and operates life insurance, retirement services and asset management in Hungary, Poland, Czech Republic, Slovakia, Bulgaria, Romania, Russia, but also in Spain, Greece and Turkey. In almost all countries in Europe ING has built its life insurance operations from scratch. This entry strategy has been successful.
Provides insurance, investment, retirement and asset management products and services in the region. ING is ranked third in the defined contribution segment of the US retirement services market as measured by assets. We are also a leading pension company in a number of Latin American countries, including Mexico, Chile and Peru.
Conducts operations for corporations and other institutions. The primary focus of ING’s wholesale banking business is on the Netherlands, Belgium, Poland and Romania, where it offers a full range of products, from cash management to corporate finance. Elsewhere, it takes a more selective approach to clients and products. Wholesale Banking also manages ING Real Estate, the world’s largest real estate investment manager.
Offers retail banking services in the Netherlands, Belgium, Poland, Romania, Turkey, Ukraine, India, Thailand and China. Private Banking is offered in the Netherlands, Belgium, Luxembourg, Switzerland and various countries in Asia and Central Europe. Mid Corporate Clients in the home markets (the Netherlands, Belgium, Poland and Romania), which were formerly part of Wholesale Banking, are now also part of Retail Banking.
Operates direct retail banking activities in Australia, Canada, France, Germany and Austria, Italy, Spain, the United Kingdom and the United States. The main products offered are savings accounts and mortgages, and, increasingly, also mutual funds and payment accounts.
Dear stakeholder, 2008 has been a much more challenging year for ING than was anticipated in February, when we announced a sharpened strategy and were still planning for growth. The magnitude of the crisis has left few companies untouched, and for ING 2008 has been marked by government support and disappointing financial results.
For several years ample liquidity and low interest rates fuelled an economic upturn. The burst of the bubble in real estate markets, especially in the United States, triggered a rapid decline in asset prices. As a result, financial institutions that had been heavily financed with debt had to sell assets to support their liquidity position. The result was a vicious circle of deleveraging, which created a strong, further downward pressure on equities, corporate bonds, real estate and private equity. This culminated in a wave of bank failures, solvency problems, government bailouts and (partial) nationalisation of a number of financial institutions, with significant implications for everyone, including fundamentally healthy companies.
On behalf of both the Executive Board and Supervisory Board, we also want to express our sincere thanks to our employees. Their efforts to demonstrate to customers every day that we take our responsibility to them very seriously are at the heart of this company.
With regard to the future of the financial industry, we expect more modesty in scope and risk profile, greater impact of supervision and regulation, as well as higher capital requirements.
Good things can come from challenging situations. We are steering the business through these turbulent times, focusing on today’s priorities with the discipline that these exceptional times require.
GENERAL MEETING On 27 April 2009 the annual General Meeting will take place in the Elicium building of RAI Convention Centre in Amsterdam. The meeting will be webcast. The meeting documents are available on the ING Group website www.ing.com. Printed versions of the meeting documents can be obtained free of charge at ING Group, Amstelveenseweg 500, 1081 KL Amsterdam as of 26 March 2009.
ING Group will continue to pay dividends in relation to underlying cash earnings, and will take a balanced approach to dividends in a careful and conservative manner in the next few years.
LISTINGS In November 2008, ING Group announced its intention to concentrate the trading of its shares (or the depositary receipts therefor) on the stock exchanges in Amsterdam, Brussels and New York (NYSE). Accordingly, ING has sought voluntary delisting of shares from the stock exchanges in Frankfurt, Paris and Switzerland. All relevant authorities and exchanges have approved the applications to delist and trading was halted as of 20 January 2009 in Paris, as of 26 February 2009 in Frankfurt and as of 3 March 2009 in Switzerland. Options on ordinary shares ING Group (or the depositary receipts therefor) are traded at the NYSE Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
(Depositary receipts for) ordinary shares outstanding in the market 2,026.6 2,099.6
(Depositary receipts for) own preference shares held by ING Group and its subsidiaries 10
Price – year end 7.33 26.75 33.59 Price/earnings ratio* n.a.** 6.2 9.4 * Based on the share price at year-end and underlying net profit per ordinary share for the financial year.
Final dividend – 0.82 0.73 * Announced on 20 October 2008.
* 2008 figures, estimated on information provided by several large custodians.
INVESTOR RELATIONS To be kept informed of press releases and other ING news, you can subscribe to the email service through our Investor Relations section at www.ing.com.
BUSINESS INITIATIVES The challenges we are facing in these exceptional times clearly require thoughtful solutions. Therefore, we are taking a fresh look at our business to seek new ways of doing business. In the Netherlands, the new bank created by combining ING Bank and Postbank began operating under the ING brand from 2009. In Belgium, we continued with the implementation of a new retail branch service concept, transforming traditional branches into outlets with automated self-service cash functions and online banking access. We invested in our retail banking network with a particular focus on Poland, Romania, Turkey and India. Building on our banking business, ING Direct aims to offer a more complete range of products in all countries, instead of offering single savings products. In Germany, ING Direct’s mortgage activities have been strengthened by the acquisition of Interhyp.
Mitigating risk ING has been reducing risk across the balance sheet over the course of 2008. We aim to further reduce our risk exposure in the coming period. In 2008, we have started to reduce our real estate, private equity, corporate bond and interest rate exposure. We sold several equity stakes and implemented hedges. Moreover, we have begun to cap balance sheet growth for the bank and reduced market risk for insurance operations. In Taiwan, ING sold its life insurance business to Fubon Financial Holding, which resulted in a reduction of interest rate risk exposure.
the Benelux, where we aim to become the leading wholesale bank. ING also has ambitions to be a market leader in Poland and Romania, as well as in a number of key products globally, like Structured Finance.
In December 2008, we completed the acquisition of the Turkish voluntary pension company Oyak Emeklilik, which has been integrated in Insurance Europe. Oyak Emeklilik will be re-branded under the ING brand in 2009.
STRATEGY: AdjUSTING To A NEW REAlITY Financial institutions like ING have an important role to play in creating the conditions for social and economic progress, by taking and spreading the financial risks of individuals and companies. Yet, the credit crisis underscores that we can only do this if we are trusted by our customers. Earning and maintaining customer trust is therefore an absolute prerequisite for any financial institution to operate. As the increased complexity of the financial services industry has been a major cause of the crisis, going back to the basics of finance is inevitable.
In January 2009, ING and the Dutch State reached an agreement on an Illiquid Assets Back-up Facility term sheet covering ING’s Alt-A residential mortgage-backed securities. Market prices for these securities had become depressed as liquidity dried up, which affected our results and equity far in excess of reasonably expected credit losses. This transaction with the Dutch State as described in the term sheet would significantly reduce the uncertainty regarding the impact on ING of any potential future losses on 80% of the portfolio. In 2009, we will continue to reduce our risk profile. We believe in a strong risk management function that is fully integrated into the daily management and strategic planning of all our business units. ING aims to close this transaction in the first quarter of 2009, but the closing is dependent on the completion of final documentation and approval of various regulators.
By taking these measures we are bringing expenses in line with the operating environment. This will make ING leaner and more flexible as we position ourselves for an eventual recovery.
long-term priorities We are convinced that it is in the long-term interest of all our stakeholders (customers, employees, communities, and shareholders) to do whatever is necessary to maximise business opportunities whilst maintaining the financial health and growth prospects of our company. Our focus on banking, investments, life insurance, and retirement services, enables us to provide retail customers with the products they need during their lives to grow savings, manage investments and prepare for retirement with confidence. With our wide range of products, innovative distribution models and strong footprints in both mature and developing markets, we have the economic, technological and demographic trends on our side.
But even with the right mindset and structure in place, shielding customers from market risks while managing earnings volatility remains a challenge, especially in the uncertain market environment of today. Therefore, we also want to make sure that we continue to be able to generate a good portion of our own assets as well. Our wholesale banking activities will thus continue to play a fundamentally important role, as our expertise in this field helps us generate the high-quality assets in which we can invest our retail deposits. Our wholesale banking business also provides us with relevant skills in risk management, and gives us access to financial markets around the world. Lastly, our asset management will also remain key to our strategy. In order to optimise our asset management skills we will further strengthen our capabilities and investment expertise to deliver first-class investment performance for our clients.
CoNClUSIoNS ANd AMBITIoNS The global financial crisis made 2008 an extremely challenging year for all financial institutions and ING was no exception. The sharp market decline in 2008 has confronted us with significant impairments and negative revaluations across almost all asset classes. ING is confronting the crisis head-on by putting customers first, preserving a strong capital position, further mitigating risks and lowering costs.
Commercial performance Underlying result before tax of the Insurance operations decreased to a loss of EUR 1,235 million in 2008 from a profit of EUR 6,113 million in 2007. The sharp decline in results was mainly due to the financial market deterioration in the second half of 2008. However, the reported decline in 2008 is somewhat distorted by the fact that EUR 2,087 million in capital gains were booked in 2007. Underlying result before tax of the Banking operations declined by 91.0% to EUR 449 million. Retail Banking and Wholesale Banking remained profitable, while ING Direct turned to a loss of EUR 1,125 million due to impairments on pressurised assets.
Overall, lending growth was robust in 2008, despite a fourth quarter decline in all markets except for the Netherlands. Of the client balance net production, bank lending contributed EUR 59 billion in 2008, excluding currency effects.
Bringing expenses in line with operating environment Underlying operating expenses (i.e. excluding the impact of divestments and special items) from Insurance operations decreased 0.6%. Underlying operating expenses from Banking operations increased 5.0% to EUR 10,002 million mainly at Retail Banking (due to the inclusion of ING Bank Turkey, formerly Oyak Bank) and ING Direct.
ING results 2008* Year-end 2008 in EUR million Bank Insurance Group
Underlying result, excluding market volatility and risk costs 5,263 2,057 7,319
Impairments and FV changes on pressurised assets –2,039 –560 –2,599 Impairments on equity securities –331 –1,376 –1,707 Impairments on other debt securities –255 –520 –775 Impairments and losses –2,625 –2,455 –5,081
Measures to strengthen capital and reduce risk ING has taken several measures to strengthen the company. In October 2008, ING Group received a capital support facility, issuing core Tier-1 securities to the Dutch State for the consideration of EUR 10 billion. The facility significantly enhanced the capital position of ING Group (for more information, please refer to the Capital Management section).
At year-end, all key capital and leverage ratios were within market norms. The debt/equity ratio of ING Group was 13.5%, while the debt/equity ratio of Insurance ended the year at 8.8%. The Tier-1 ratio of ING Bank under Basel II stood at 9.32%. The solvency ratio (BIS ratio for the bank) under Basel II was 12.78%. ING Group’s Available Financial Resources (AFR) at year-end 2008 was EUR 42.1 billion, compared to economic capital of EUR 30.7 billion after diversification, resulting in an AFR/EC Group ratio of 137%.
Underlying result before tax from non-life insurance declined 60.3% to EUR 509 million from EUR 1,282 million last year, due primarily to capital losses and impairments on equities, as well as unfavourable underwriting results in Canada.
Underlying gross premium income from life insurance decreased 3.7%, but was up 3.3% excluding ING Life Taiwan and currency impact, to EUR 38,748 million, mainly driven by the US, Australia, and most countries in Asia. Underlying gross premium income from non-life insurance decreased 8.1%, or 4.1% excluding currency impact, to EUR 4,402 million, largely caused by the sale of the health business in Chile.
New sales, measured in annual premium equivalent (APE), for the life insurance business decreased 10.3%, or 7.8% excluding ING Life Taiwan to EUR 6,568 million primarily due to lower sales in the US, Australia, South Korea and Japan. APE is the sum of regular annual premiums from new business plus 10% of single premiums on new business written during the year. This decrease was in part offset by higher sales in Latin America, the Netherlands and Rest of Asia. The value of new business (VNB) decreased 8.1% to EUR 1,023 million. Excluding ING Life Taiwan, VNB remained flat compared to 2007.
BANKING OPERATIONS Despite the unprecedented impact of the financial crisis and challenging commercial environment, ING’s banking businesses reported commercial growth across all three business lines. Client balances went up EUR 61 billion to EUR 1,073 billion in total. Total result before tax from Banking operations declined 96.7% to EUR 148 million, driven by impairments and fair value changes due to the extreme market volatility and sharp decline in asset prices combined with higher risk costs. Underlying result before tax (excluding the impact of divestments and special items) declined by 91.0% to EUR 449 million. Retail Banking and Wholesale Banking remained profitable, while ING Direct reported a loss of EUR 1,125 million due to impairments on pressurised assets. Risk costs increased significantly due to worsening economic conditions.
Underlying income decreased 19.7% to EUR 11,731 million. The interest result, however, rose 22.3%, driven by higher margins at ING Direct and Wholesale Banking, the inclusion of ING Bank Turkey (formerly Oyak Bank) and an increase in volumes. Loans and advances to customers increased by EUR 72.0 billion, or 13.7%, to EUR 598.3 billion. Customer deposits and other funds on deposits increased by EUR 9.5 billion, or 1.8%, to EUR 537.7 billion. The total interest margin rose to 1.07% from 0.94% in 2007. Commission income decreased 1.1% driven by lower asset management fees and lower income from the securities business. Investment income fell from EUR 891 million in 2007 to EUR -2,459 million in 2008, mainly due to impairments on bonds and equities, and negative revaluations on real estate. Other income dropped 88% as a result of negative trading income and losses from associates.
Underlying operating expenses increased 5.0% to EUR 10,002 million mainly at Retail Banking due to the inclusion of ING Bank Turkey, and at ING Direct. The underlying cost/income ratio increased to 85.3% from 65.2% in 2007 driven by the sharp decline in income. The underlying net addition to the provision for loan losses increased to EUR 1,280 million from EUR 125 million in 2007. Risk costs in 2008 were 48 basis points of average credit-risk weighted assets, as gross additions to loan loss provisions of 62 basis points were offset by 14 basis points in releases.
LOOKING AhEAD In 2009, ING will operate in a difficult economic climate. Some of the main uncertainties are the development of the financial markets, the residential and commercial real estate markets, and a further deteriorating global economy, which will keep loan loss provisions and impairments at elevated levels. As we steer our business through these turbulent times, ING aims to mitigate risk, put in place measures to preserve capital and to reduce costs in line with the operating environment.
Shareholders’ equity 17,334 37,208 + Core Tier-1 securities 10,000 + Group hybrid capital 11,655 8,620 + Group leverage (core debt) 7,170 4,728 Total capitalisation (Bank + Insurance) 46,159 50,556 –/– Revaluation reserves fixed income and other –6,769 963 –/– Group leverage (core debt) (d) 7,170 4,728 Adjusted equity (e) 45,758 44,865 Debt/equity ratio (d/(d+e)) 13.5% 9.5%
EC ING Group 30,675 36,000 AFR ING Group 42,135 49,715 AFR/EC ratio 137% 138%
Adjusted equity (e) 23,903 27,036 Core debt (d) 2,301 4,267 Debt/equity ratio (d/(d+e)) 8.8% 13.6% Available capital (a) 22,010 22,965 EU required regulatory capital (b) 8,582 9,405 Capital coverage ratio (a/b) 256% 244%
Core Tier-1 24,934 23,374 Hybrid Tier-1 7,085 6,397 Available capital Tier-1 32,019 29,772 Other capital 11,870 11,792 BIS capital 43,889 41,564 Risk-weighted assets (1) 343,388 402,727 Required capital Basel II 27,471 Required capital floor based on Basel I 34,369 Core Tier-1 ratio (1) 7.26% 5.80%
AFR ING Bank 34,849 31,733 (1) Based on Basel II as of 2008.
GROUP EQUITY Adjusted equity of ING Group rose from EUR 45 billion to EUR 46 billion, but shareholders equity declined from EUR 37 billion to EUR 17 billion. ING Group received a capital injection from the Dutch State of EUR 10 billion. The two tables below explain these developments: ING Group’s Shareholders’ equity movement in 2008
Group raised EUR 1.5 billion and USD 2 billion of hybrid Tier-1 capital during 2008. The EUR issue was on-lent to Insurance and Bank on a 50/50 basis. The USD issue was on-lent to Insurance and Bank on a 75/25 basis. Also during the year a net USD 600 million of hybrids were moved from Bank to Insurance.
The debt/equity ratio of Insurance decreased from 14% to 9% in spite of significant capital injections into operating subsidiaries throughout the year, especially in the fourth quarter. The amount was a net EUR 4 billion, compensated, however, by capital injections from Group and the on-lending of hybrid Tier-1 capital. At the end of the year Insurance had a hybrid ratio slightly above the 25% target.
AFR Insurance declined in light of the adverse market circumstances (higher credit spreads, lower interest rates and lower equity markets) and the incurred loss of over EUR 1 billion from EUR 23 billion to EUR 14 billion during the year. EC Insurance, however, decreased as well from EUR 23 billion to EUR 14 billion, given the sale of ING Life Taiwan and other actions implemented to reduce risk in spite of lower interest rates. This means that there was a small free surplus at Insurance at the end of the year. AFR and EC are adjusted to reflect illiquidity in the insurance portfolios as reporting AFR and EC with MVLs discounted at swap rates results in an asymmetry between the assets and liabilities in terms of reflection of illiquidity premiums. This has been approximated by applying a AAA covered bond spread to the valuation of the insurance liability cash flows, adjusted for the US and Japan with the difference between the local AAA corporate spreads and the European corporate spreads. At year-end 2007 the swap rate was used.
AFR ING Group decreased from EUR 50 billion to EUR 42 billion during 2008, while EC ING Group decreased from EUR 36 billion to EUR 31 billion. Thus the free surplus declined from EUR 14 billion to EUR 11 billion. This means that the capital buffer decreased from 138% at the end of 2007 to 137% at the end of 2008. Going forward we expect the AFR and EC numbers, given that they are market value based, to continue to be quite volatile.
THE INVESTMENT OF CAPITAL AND THE METHOD OF CHARGING FOR IT Banks have developed methods of partitioning the balance sheet’s assets and liabilities in books where assets are matched against liabilities. This allows for more granular risk management of the balance sheet. The surplus assets that offset equity are separated and it is good practice for these assets to be (at least notionally) invested risk free. This stems from the idea that risks are best run (with the most return) in the business and that the surplus assets representing equity are there to support the business risks and should not themselves be at risk. Insurance companies have developed this discipline of matching assets against liabilities and equity to a much lesser extent, in part due to the fact that the time horizons of insurers are longer than those of banks.
For many years, as part of its capital management policy, RAROC methodology and transfer pricing business model, ING Bank has used a system of capital investment rules and of capital charging and benefits to manage the balance sheet and make business results comparable. Capital is invested credit risk free (notionally) and the returns on the assets in the capital book are charged away from the business units in return for the euro risk free rate on the Economic Capital they employ. Business units with this method become insensitive to the local capital they actually hold but become sensitive to the Economic Capital they employ. Capital can no longer be used as free funding to support earnings. This management accounting method makes all business units comparable as it includes the adjusted return over Economic Capital, irrespective of the amount of capital they hold and currency conditions they operate in. This then facilitates optimal allocation of capital as the returns on Economic Capital reported by the business units are comparable.
CAPITAL MARKET OPERATIONS In 2008, the following issues were done: For ING Groep N.V. EUR 10,000 million core Tier-1 securities• EUR 1,000 million 5-year senior unsecured bond• EUR 1,500 million hybrid Tier-1 capital in retail market• USD 2,000 million hybrid Tier-1 capital in retail market, fixed rate•
For ING Bank N.V. EUR 1,000 million 5-year covered bond• EUR 4,000 million 2-year senior unsecured bond• EUR 2,000 million 10-year covered bond• EUR 3,500 million 3-year senior unsecured bond• EUR 1,000 million lower Tier-2• GBP 800 million lower Tier-2• USD 1,250 million extendible, institutional market•
LIQUIDITY FACILITIES Although demand from international investors for securitised assets has all but disappeared and securitisations of a bank’s own assets have become less effective under Basel II, 2008 was a very active year for securitisations. Under Basel I the sale of (super) senior tranches of securitisations to investors led to a significant reduction of RWAs on the bank balance sheet without a significant transfer of risk taking place. This arbitrage is no longer possible under Basel II. Also, after the summer of 2007 the market for securitisations dried up, even for the most highly rated senior tranches of securitisations. However, lack of liquidity in the unsecured money markets has since then raised the demand for eligible collateral and this has created a new use for securitisations.
On 19 February 2009 we completed the sale of our stake in ING Canada via a secondary offering for proceeds of CAD 2.2 billion (EUR 1.35 billion).
RISK MANAGEMENT IN TIMES OF CRISIS Taking measured risks is part of ING’s business. As a financial services company active in banking, investments, life insurance and retirement services, ING is naturally exposed to a variety of risks. To ensure measured risk-taking ING has integrated risk management in its daily business activities and strategic planning. Risk Management assists with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout the Group on risk-related issues. Investment and trading decisions are based on extensive internal research.
Like other financial institutions, ING has not been immune to the market turmoil. The turmoil started in the US subprime mortgage market in early 2007 and intensified over 2008 as prices fell across most major asset classes throughout the world. Equity markets lost significant ground; over the course of the year the S&P 500 declined by 38% and the Dutch Amsterdam Exchange index (AEX) by 52%. Real estate prices were generally under pressure. In the US the S&P Case-Shiller Index showed a cumulative decline in housing prices of 18.6% over 2008. Credit spreads in the corporate and financial sectors widened significantly, both in the US and Europe. As liquidity became tight, central banks around the world were quick to provide funding to prevent the interbank market from drying up. There were also a number of financial institutions that failed during the year. As the turmoil spread beyond the financial sector it also affected consumer confidence, other sectors and economic growth. All of these factors placed major strains on risk management departments in financial services companies, including ING, and emphasised the importance of having a robust risk management organisation in place that can take forceful measures to reduce risk.
US subprime RMBS, Alt-A RMBS and CDO/CLO exposures and revaluations at year-end 2008 in EUR million Market value
ING is careful in mortgage underwriting and does not originate subprime mortgages. Moreover, ING has generally not been in the business of manufacturing subprime RMBS or Collateralised Debt Obligations (CDOs) nor has it purchased a material amount of CDOs backed by US subprime mortgages.
Reduction of equity exposure (available-for-sale) Direct public equity exposure was reduced from EUR 15.8 billion at the end of 2007 to EUR 5.8 billion at year-end 2008. The portfolio contains EUR 1.9 billion strategic banking stakes, mainly in Bank of Beijing and Kookmin Bank. ING Insurance has the remaining EUR 3.9 billion balance sheet exposure which was partially hedged against further market losses. In addition, a temporary hedging programme was put in place to reduce earnings volatility as a result of deferred acquisition cost (DAC) unlocking.
IMPACT ON ING’S ASSET BASE ING primarily collects retail savings around the world and invests them in the economy. As one of the world’s largest savings banks, ING built up a substantial and high-quality balance sheet of EUR 1,332 billion at the end of 2008. There are three major blocks of assets in ING’s core loan book. There is EUR 620 billion consisting of well-rated or collateralised corporate loans and mortgages. Another EUR 258 billion is in investments, 97% of which is invested in debt securities and 3% in equity securities. Finally, ING has EUR 281 billion in financial assets at fair value.
(annualised) 48 basis points of average credit risk-weighted assets. Especially in the second half of 2008 risk costs increased due to higher additions to loan loss provisions in Wholesale Banking and ING Direct US.
Debt securities Some EUR 73 billion of the investment portfolio concerns Asset Backed Securities (ABS) which include US subprime RMBS, US Alt-A RMBS, US CDOs and US Collateralised Loan Obligations (CLOs). The ABS portfolio comprises mainly AAA (85%) and AA-rated securities (9%) and is well-diversified due to limits, investment policies and mandates for every portfolio. The Illiquid Assets Back-up Facility reduces the ABS portfolio by EUR 15 billion to EUR 58 billion.
Alt-A RMBS portfolio Alt-A mortgage loans are regular residential mortgage loans in the US market which are frequently packaged into a RMBS. Notwithstanding the widespread existence of Alt-A RMBS a single standardised definition does not exist. As such ING uses a broader definition than some other financial institutions.
Under the ‘broad’ definition of Alt-A RMBS, the applicable RMBS contains at least one of the following three characteristics: • on average a loan-to-value ratio between 70-100%; or • a so-called FICO credit score between 640-730; or • low quality or no documentation (referring to reduced requirements regarding personal income and/or asset verification) of 50% of the debt holders in the portfolio or more.
On average, the ING Direct Alt-A RMBS portfolio is near prime and of high quality with a loan-to-value ratio of 72% and an average FICO score of 723. The negative pre-tax revaluation at 31 December 2008 was EUR 6,155 million for ING Direct (and EUR 7,474 million for ING as a whole).
In the second half of 2008 ING Direct impaired Alt-A RMBS bonds for the first time; 99 of the 734 Alt-A RMBS bonds in the portfolio were impaired. ING Direct recorded EUR 1,776 million of pre-tax impairments on the Alt-A RMBS portfolio in 2008 (and EUR 2,064 million for ING as a whole). The impairments are driven by a relatively small credit loss. ING continues to review its RMBS portfolio, and performs structural monitoring activities at the level of the individual security.
As mentioned above, ING took steps in January 2009 to reduce the risk on its Alt-A RMBS portfolio by entering into an agreement with the Dutch State, whereby the Dutch State absorbs 80% of the risk and returns of ING’s Alt-A RMBS portfolio and ING’s risk is limited to the remaining 20%.
At year-end the Group’s net exposure to CDOs and CLOs was EUR 3.5 billion, or 0.3% of assets. Net impairments and trading losses combined taken on CDOs/CLOs totalled EUR 394 million. At the end of the year the portfolio was valued at 85% of cost, with a negative pre-tax revaluation of EUR 352 million.
Real estate ING has EUR 15.5 billion of real estate exposure of which EUR 9.8 billion is subject to revaluation through the profit and loss account. In 2008, ING recorded EUR 1,184 million pre-tax negative revaluations and impairments. ING’s real estate portfolio has high occupancy rates and is diversified over sectors and regions, but is clearly affected by the negative real estate markets throughout the world.
Individual business units benefit from being part of a globally diversified group. Risk Management helps them lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk, allowing business units to focus on their core expertise with the goal of making ING’s businesses more competitive in their markets.
ING’S RISK MANAGEMENT ORGANISATION ING Risk Management’s mission is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. The following principles support this objective: products and portfolios are structured, underwritten, priced, • approved and managed appropriately, and compliance with internal and external rules and guidelines is monitored; ING’s risk profile is transparent, with ‘no surprises’, and • consistent with delegated authorities; transparent communications are maintained with internal • and external stakeholders on risk management and value creation; and, the market turmoil underscores the importance of living by • this risk mission statement.
Determining the risk appetite Financial Risk Dashboard The risk appetite, or the willingness of the Group to take risks, is defined by the Executive Board and measured through three key metrics: Earnings at Risk and Capital at Risk which are measured in the Financial Risk Dashboard, and Economic Capital. Business line managers aim to maximise value relative to these measures, while Risk Management monitors and controls the actual risk profile against the Group’s risk appetite. The metrics enable the Executive Board to identify risk concentrations and potential risk-mitigating actions. They provide an overview of risks inherent in all the banking and insurance businesses and facilitate monitoring the adherence of risk-taking with respect to the Groups’ risk appetite. It thereby allows ING to take strategic decisions using comparable risk measures and to maximise efficient capital allocation. The current crisis demonstrates the importance and value of these
Underlying result before tax 651 1,840 –64.6% Total result before tax* 651 2,300 –71.7%
The value of new business was virtually flat at EUR 397 million although new sales (annual premium equivalent or APE) increased by 4.2% to EUR 1,010 million, due in particular to higher sales in the Netherlands after inclusion of group contract renewals in the definition of new sales. APE is the sum of regular annual premiums from new business plus 10% of single premiums on new business written during the year. The Romanian second-pillar pension fund, which was launched in September 2007, contributed EUR 73 million in value of new business and EUR 40 million in new sales in 2008.
Central and Rest of Europe’s 2008 underlying profit before tax of EUR 329 million was essentially unchanged in comparison with last year. Continued business growth, predominantly in the first half of 2008, generated higher commissions and direct investment income which were offset by higher operating expenses and negative revaluations and impairments on investments.
Cost containment and capital Cost containment in the Netherlands was reflected in lower staffing levels and increased operational efficiency. Underlying operating expenses decreased by 6% excluding the one-off release of employee benefits provision of EUR 89 million in the fourth quarter of 2007. Life insurance operations in Belgium are continuing their operational efficiency efforts.
Leveraging solid distribution power The life insurance market in the Benelux remains highly competitive. ING is focused on maintaining profitability and returns by enhancing its multi-channel distribution platform, reducing costs and reinforcing its market position as the specialist in retirement services.
AZL, a Dutch provider of pension fund management services which was acquired in 2007, has been successfully incorporated into the Group life business and is now operating as an integrated pension provider. This enables ING to provide integrated service offerings – fiduciary asset management and administration capabilities – to company pension funds, which are increasingly outsourcing these activities.
Settling of dispute In mid-November 2008 ING reached an outline agreement with consumer organisations in the Netherlands to resolve a dispute regarding individual universal life insurance products sold to customers in the Netherlands by ING’s Dutch insurance subsidiaries. It was agreed ING’s Dutch insurance subsidiaries will offer compensation to policy holders where individual universal life policies have a cost charge in excess of an agreed maximum. The costs of the settlement have been valued at EUR 365 million. Although the agreement is not binding for policyholders, ING believes a significant step was set towards resolving the issue.
Nationale-Nederlanden further demonstrated its commitment to improve customer confidence and transparency by ceasing production of its individual unit-linked life insurance policies, and by launching a new generation of fully transparent variable annuity products in the course of 2008.
Stable growth in Central and Rest of Europe Based on market share, ING is the number one pension and life insurance provider in Central Europe. Markets in Central Europe tend to be sizable, with a growing middle-class: demographic conditions that are conducive to growth in life insurance and retirement services. In 2008, ING in Central and Rest of Europe showed solid financial results and sales in general were up.
Solid performance in pensions A growing number of customers and increasing wages resulted in a solid performance in the pensions business in Central Europe. In Poland, ING is the number two ranked pension provider with 2.6 million customers (24% market share) and over EUR 9 billion in assets under management (AuM). Strong inflows continued and the market share has increased.
New operations ING entered the Turkish market by acquiring Oyak Bank in 2007, and in 2008 integrated it into the ING Group, rebranding it ING Bank Turkey. In December 2008, ING completed the acquisition of Turkish voluntary pension company Oyak Emeklilik, providing the opportunity to enter the growing Turkish pension market. Turkey is a sizeable market, with a population of approximately 70 million. Oyak Emeklilik is Turkey’s sixth largest pension company with over EUR 150 million AuM. The acquisition was financed entirely by internal financial resources. Oyak Emeklilik will be integrated into Insurance Central and Rest of Europe and was rebranded under the ING brand in February 2009.
Ukrainian life insurance greenfield postponed In July 2008, ING received approval from the relevant authorities to start life insurance operations in Ukraine. However, economic circumstances in Ukraine have deteriorated drastically due to the global financial turmoil. As a result of this instability, ING decided to postpone its greenfield life insurance operation there. ING still considers Ukraine to be an attractive emerging market, with strong growth indicators and potential and will continue to monitor Ukraine’s commercial climate. This is witnessed by the fact that ING launched retail banking operations in Ukraine in 2008, based on the successful Romanian self-banking concept.
ING Group Annual Report 2008 1.2 Report of the Executive Board
Retirement Services business > Shift towards traditional insurance lifts sales > Top-line growth in Latin America solid but returns lower > Canada weathers turmoil reasonably well
FINANCIAL DEVELOPMENTS Underlying result before tax declined to a loss of EUR 534 million in 2008 from EUR 2,062 million profit in 2007. The US recorded a loss of EUR 1,117 million compared to a profit of EUR 1,356 million in 2007, following the severe impact of the turbulent financial environment. This result included investment losses of EUR 965 million, of which EUR 811 million related to credit losses. In addition, deferred acquisition costs (DAC) unlocking had a negative impact of EUR 1,180 million in 2008, compared with a positive impact of EUR 14 million in 2007. The underlying result was also impacted by negative alternative asset returns and lower fee income, as positive net flows could not overcome asset under management erosion and higher hedging costs. Underlying profit before tax in Canada decreased 22.6%, or 17.7% excluding currency effects, to EUR 364 million, driven by a lower underwriting result due to unfavourable claims experience, which was partially offset by higher investment results and lower impairments on fixed interest securities. Underlying profit before tax in Latin America decreased by 6.8%, or 2.3% excluding currencies, to EUR 220 million. The life business posted EUR 44 million lower profit, triggered by lower investment gains in Mexico. The profit from the non-life business improved by EUR 28 million, due to higher results in Brazil, including a tax reserve release of EUR 24 million.
Operating expenses increased by 3.0% to EUR 2,340 million, or 10.5% excluding currency effects. Operating expenses in the US increased 10.1% excluding currency impact due to the acquisition of CitiStreet, and were partly offset by lower personnel-related expenses. Excluding CitiStreet and the currency impact, operating expenses in the US rose modestly by 0.7%. The increase in Latin America of 29.9% excluding currency impacts was mainly driven by the acquired pension businesses and higher sales, and was partly offset by the divestment of the Chile health business. Excluding the impact of acquisitions and the sale of the Chile health business and currency effects, operating expenses in Latin America increased by 1.5%. In Canada, operating expenses rose by 4.3% excluding currency impact, related to the direct distribution network and claims processing.
Underlying result before tax –534 2,062 –125.9% Total result before tax* –589 2,152 –127.4%
Value of new life business (EUR million) 304 270 Internal rate of return 12.6% 11.8% New sales (EUR million) 3,503 3,671 Economic Capital (EUR billion) 6.0 6.5
The value of new business (VNB) increased by 12.6%, driven by higher pension fund sales and better quality of business in Latin America. VNB in the US fell 7.9% due to reduced spread-related products sales and pressure on variable annuity margins and sales.
Sales of fixed annuities improved 35% as customers sought fixed-rate products in the volatile market environment. These products provide stability of principal sum and guaranteed returns. In addition, higher crediting rates made fixed annuities more attractive to customers.
Meeting the needs of customers, sponsors and distribution partners during a difficult economic period remains a major priority in Annuities, as well as Retirement Services.
In February 2009, ING completed the sale of its entire 70% stake in ING Canada as part of the company’s strategy to focus on its core savings and investment businesses.
Individual Life also increased the number of policies it issued, which helped reduce per policy costs. More than 156,000 new policies were issued during 2008, up 87% from a year earlier.
Lower returns in Latin America mask solid sales ING’s strong market positions in life and pension businesses across Latin America allowed the company to post solid top-line growth, but investment returns declined due to the financial market crisis.
ING is one of the largest pension providers in Latin America. In Peru, ING is the largest pension provider by market share; in Mexico and Chile, the third largest; and in Uruguay and Colombia the company ranks among the top-five providers.
In Peru, ING increased its stake in AFP Integra to 80%, the number one pension fund company in Peru, and also increased its shareholding in ING Fondos, a Peruvian mutual fund provider, under the holding company of ING Wealth Management.
Canada ING Canada remains the number one property & casualty insurer in the country, and its scale and disciplined pricing has enabled the company to be at the forefront of the industry. The conservatively managed property & casualty business has been relatively unaffected by the financial crisis.
On 20 October 2008, ING reached an agreement with Fubon Financial Holding Co. Ltd. to sell ING Life Taiwan for a consideration of USD 600 million (EUR 447 million). The transaction was completed on 11 February 2009 and the total net loss of the transaction, comprising of the loss on divestment and results from the divested unit, was EUR 292 million. The transaction significantly reduced the Economic Capital attributed to Insurance. Taiwan was separately reported from Insurance Asia/Pacific’s results in the fourth quarter of 2008. ING recorded zero underlying result before tax for Taiwan in the first nine months of 2008, as in 2007, due to strengthening of reserves in a low interest rate environment.
Gross premium income decreased 12.6%, or 3.3% excluding Taiwan and currency effects, to EUR 11,040 million. Double-digit growth was recorded in local currency terms in Australia, South Korea and Rest of Asia, but this was more than offset by a sharp decline in single premium variable annuity premiums in Japan. Assets under management decreased by 22.6% to EUR 82 billion at year-end 2008.
Underlying operating expenses fell 6.7%, but were up 7.0% excluding Taiwan and currency impact to EUR 1,040 million as cost containment helped to offset most of the increased expenses from a higher in-force base in some countries and continued investment in greenfield operations, to support the growth in premium income in these markets.
New sales decreased 23.3%, or 18.3% excluding Taiwan, to EUR 2,055 million as investment markets deteriorated and consumer preference for more cautious investment alternatives eroded demand for investment-linked products. The decline in sales was mainly attributable to Australia and Japan, whereas sales were stable or up in local currency terms in South Korea and Rest of Asia. The value of new business (VNB) decreased 27.4%, or 14.6% excluding Taiwan, to EUR 321 million, broadly consistent with the decline in sales. The 2008 VNB figures reflect the full-year impact of a change in methodology which excludes start-up in EUR million
Premium income 11,040 12,632 –12.6% Operating expenses 1,040 1,115 –6.7% Underlying result before tax 116 576 –79.9% Total result before tax* –213 576 –137.0%
* Total result before tax is defined as underlying result before tax including divestments and special items.
Value of new life business (EUR million) 321 442 Internal rate of return 14.0% 16.8% New sales (EUR million) 2,055 2,680 Economic Capital (EUR billion) 2.8 7.0
In Japan, underlying result before tax decreased EUR 191 million from a profit of EUR 24 million in 2007 to a loss of EUR 167 million in 2008. The turnaround was driven primarily by adverse hedge results on the variable annuities business due to extraordinary market volatility, especially in October. This was partially offset by an increase in profits on the Corporate Owned Life Insurance (COLI) business on an increased premium base and improved investment results. The turbulent financial market environment severely affected single premium variable annuity (SPVA) sales. Premium income declined 14.2% to EUR 4,026 million from EUR 4,693 million in 2007. Despite this decrease, ING is a top-3 player in the COLI segment and a top-4 player in the SPVA segment.
In South Korea, underlying result before tax decreased 45.7%, or 33.3% excluding currency effects, to EUR 163 million in 2008 from EUR 300 million in 2007. The decline was mainly due to market related impacts, comprising negative revaluations on an equity derivative fund and credit-linked securities and impairments on fixed income securities. Results in 2007 had also been supported by the one-off recognition of EUR 10 million in dividend income from consolidation of equity funds. Premium income decreased 8.8%, but was up 13.8% excluding currency effects, to EUR 3,291 million in 2008 from EUR 3,607 million in 2007 due to favourable retention rates and stable new sales. Operating expenses decreased 9.5%, but were up 13.6% excluding currency effects, to EUR 229 million in 2008 from EUR 253 million in 2007.
In Rest of Asia (India, China, Hong Kong, Thailand and Malaysia), underlying result before tax from life insurance decreased by EUR 43 million to a loss of EUR 9 million in 2008, compared with a profit of EUR 34 million in 2007 due to negative revaluations on credit linked securities, debt impairments and an adjustment to the deferred acquisition cost balance in Thailand. Results in 2007 had also been supported by a one-off positive deferred acquisition cost adjustment in Malaysia of EUR 10 million. Greenfield operations in China, India and Thailand recorded losses as ING continued to invest for future growth in these markets. New sales grew 36.3% in China, 20.9% in India and 15.0% in Thailand, excluding currency effects, on the strength of increased distribution reach through agency force expansion and successful bank partnerships. In Malaysia, ING’s largest market in the Rest of Asia, ING became the third-largest insurer in Individual Life business, up from fifth in 2007 and maintained first place in Group Life business.
Continued strengthening of distribution channels Broadening distribution methods and increasing the efficiency of existing channels continues to be a strategic priority for ING in Asia. Traditionally, the tied agent channel has been the largest, but distribution through banks is on the rise. The number of tied agents grew from 75,000 in 2007 to over 100,000. This growth took place mainly in India, South Korea and Thailand. Insurance Asia/Pacific’s bank distribution takes place through partnerships with other banks as well as through ING’s retail banking presence in the region. ING entered into a number of new distribution agreements and selectively invested in distribution initiatives and infrastructure enhancements to expand its presence across the region.
In Australia, ING operates a retail wealth management and life insurance business through ING Australia, a joint-venture with ANZ Group. ING Australia expanded its distribution reach with the acquisition of both Pinnacle Partners and Financial Lifestyle Solutions. These acquisitions position ING Australia as one of the top-three in the country in terms of distribution capacity with over 1,500 aligned advisers. ING Australia is one of the country’s leading financial institutions, providing financial services to over 1 million customers through aligned and open market advisers and ANZ.
In South Korea, Insurance Asia/Pacific operates two life insurance companies, ING Life and KB Life. KB Life is a bancassurance joint-venture with Kookmin Bank. In 2008, life sales by these two companies quickly reached the government-enforced 33% ceiling for how much share of Kookmin Bank sales these two companies (which have ING as a common substantial shareholder) can have. They led the market in terms of new business production through banks with a market share of about 11%, as of September 2008. On 29 December 2008, ING Group completed the purchase of the remaining minority interest of 14.9% held by Kookmin Bank in ING Life Korea for KRW 339 billion (approximately EUR 190 million), lifting ING’s ownership interest to 100%.
In Japan, ING Life was selected as one of the principal product providers by the newly privatised Japan Post Group. Sales through Japan Post commenced in the second quarter of 2008.
In the year ahead, ING will continue to focus on maintaining its market share and managing for value rather than growth. In addition to initiatives for cost containment and repositioning of product portfolios, new measures to strengthen capital and risk management, as well as compliance are under way. Throughout the business line, efficiency will be increased through the standardisation of key operational processes.
Products In Japan, ING launched a new single premium variable annuity product with guaranteed income benefits. In addition, the next generation of ING’s ‘Smart Design’ product, which offers a guaranteed return after 10 years, was launched. In Malaysia, ING further expanded its unit-linked product offering in response to government deregulation. In Hong Kong, ING’s investment-linked iWealth product performed well for a second year in a row. In South Korea, ING launched retirement services in July.
Well-performing products were launched through Public Bank in Malaysia, a long-term alliance which became active in early 2008. Public Bank has an extensive distribution network of 241 branches across Malaysia and 15 commercial branches in Hong Kong. Through Public Bank, ING launched a single-premium capital guaranteed investment-linked product, with premium income of approximately EUR 30 million within a month of launch.
In line with customers’ preferences, product design is shifting towards simpler, easier, and more channel-specific products. In Australia, ING expanded its direct distribution channel approach by exploring direct response TV and web options. In New Zealand, the KiwiSaver programme, a work-based savings scheme, has reached over 150,000 clients since July 2007 through a variety of channels. ING is one of the few government-appointed default providers of this type of product. In Australia, a flexible term-deposit option was added to the wealth management platform to compete against higher deposit rates offered by banks. In South Korea, a product was launched that allows customers a choice between asset-linked performance (with a capital guarantee) or a fixed interest rate every six months.
Additions to loan loss provisions 596 –142 n.a. Underlying result before tax 609 2,059 –70.4% Total result before tax** 609 1,965 –69.0%
After-tax RAROC 4.9% 19.8% Economic Capital (in EUR billion) 9.3 6.9
Key points > Solid commercial performance with income growth in General Lending and Structured Finance > Result before tax down due to market turmoil, negative revaluations in Real Estate and Financial Markets > Improved market penetration, lead bank position and landmark deals in home markets > Expenses down and under control, but risk costs rising
FINANCIAL DEVELOPMENTS Wholesale Banking results were severely affected by the deepening global recession. Underlying result before tax declined 70.4% to EUR 609 million, driven by impairments, negative fair value changes and higher risk costs. With the exception of Financial Markets, all product groups recorded lower results. Underlying result before tax from Financial Markets increased 18.3% to EUR 355 million thanks to the strong performance in the first half of the year, offsetting the effect of impairments and credit-related markdowns in the second half. The results of General Lending & Payments and Cash Management (PCM) and Structured Finance declined by 39.9% and 18.2% respectively, entirely because of higher risk costs. Excluding risk costs, results were up by 53.9% and 50.8% respectively, driven by volume growth and higher margins. Leasing & Factoring profit declined 22.2% to EUR 119 million, while ING Real Estate and Other Wholesale Products recorded losses in 2008.
Risk costs increased significantly to EUR 596 million compared with a net release of EUR 142 million in 2007. The risk costs in 2008 included provisions triggered by the collapse of three Icelandic banks as well as relatively high risk costs in Structured Finance, ING Real Estate and the General Lease activities due to worsening economic conditions.
ING Real Estate recorded an underlying loss before tax of EUR 297 million compared with a profit of EUR 664 million in 2007 due mainly to negative revaluations caused by declining property values. Compared with 2007, ING Real Estate’s total portfolio declined marginally, by 0.7%, to EUR 106.4 billion as growth in the Finance loan portfolio during the first nine months of the year helped to offset declines in assets under management. Higher results before tax were recorded in the Finance and Development activities, while Investment Management reported a decline of 48.7%. The Investment Portfolio posted a loss before tax of EUR 695 million due to negative revaluations on real estate
General Lending & PCM 26% 1,083 Structured Finance 23% 957 Leasing & Factoring 10% 406 Financial Markets 26% 1,064
Wholesale Banking conducts operations for corporations – from large companies to major multinationals – as well as for governments and financial institutions. It also provides selected products and services for mid-corporate clients, a segment managed by ING Retail Banking from early 2008. Wholesale Banking’s primary focus is on the Netherlands, Belgium, Poland and Romania, where it offers a full range of products, from cash management to corporate finance. Elsewhere, it takes a more selective approach to clients and products. Wholesale Banking has six business units: General Lending & PCM, Structured Finance, Leasing & Factoring, Financial Markets, Other Wholesale Products, and ING Real Estate.
Volume growth in General Lending & PCM General Lending is used as an entry product across all regions to attract customers and to cross-sell other high-value products. Volumes increased in General Lending over the course of the year as the turbulent market circumstances offered the possibility to pursue selective asset growth, at higher margins and fee levels. General Lending results were particularly strong in the Netherlands and in Central Europe. The balance between loan portfolio growth and margin increases continues to be strictly managed given the market circumstances. The favourable trend in income for General Lending was offset by high loan loss provisions, including EUR 83 million for Icelandic banks in the second half of 2008, compared to net releases in 2007.
ING Real Estate As a result of the financial market crisis, real estate markets deteriorated during 2008, making it a tough year for ING Real Estate. ING Real Estate incurred a loss before tax of EUR 297 million, while maintaining the size of its total portfolio at EUR 106 billion. This was largely a result of the impact of EUR 712 million of unrealised fair value losses on its investment portfolio, from a total exposure of approximately EUR 5 billion (including a 100% interest in Summit: ING Real Estate owns 50% of Summit. However, in results before tax Summit is fully consolidated and the remaining 50% is offset via third-party interest). The fair value losses were somewhat compensated by EUR 49 million of positive revaluations in ING Real Estate’s development activities. Excluding the revaluation changes, profit before tax was slightly lower than the previous year at EUR 366 million. Turn to the Asset Management section, page 43, for further details.
Winning a number of landmark deals Wholesale Banking completed a number of high profile transactions in 2008. ING served as adviser to Vedior, and bookrunner on the public offer by Randstad to acquire Vedior, creating the second-largest human resources services company in the world. In a transaction in May valued at EUR 2.8 billion, ING’s Corporate Finance was a joint underwriter of the bridge facility and syndicated credit facilities for the acquisition of Vedior. ING also served as adviser and bookrunner to the Nederlandse Gasunie for a bridge facility for the acquisition of BEB Erdgas und Erdöl GmbH.
In Belgium, ING was a bookrunner and mandated lead arranger to InBev for the underwriting and credit facilities for the approximately EUR 32 billion acquisition of Anheuser-Busch in the US. Furthermore, the Financial Markets team also provided EUR 6.2 billion in IRS / FX swaps for the acquisition. ING also won a mandate to help Leaseplan Corporation, the car leasing affiliate of Volkswagen AG, raise up to EUR 1.5 billion with a two-year bond. In December, ING also participated in the successful completion of a EUR 7.2 billion rights issue by Santander.
CONCLUSIONS AND AMBITIONS 2008 was an unusually difficult year for the industry. Wholesale Banking kept its focus on its customers, and despite the turmoil managed to record solid commercial performance across most of its businesses. ING continues to secure important mandates and transactions. It is managing expenses carefully, in part to compensate for higher risk costs and impairments, and has adjusted its strategic focus to key markets and product areas where it already has a competitive advantage. Wholesale Banking is an essential part of the Group, and has a clearly defined focus and ambition to be a full-service Benelux bank and a specialist products provider globally.
In December, Leveraged Finance and Sponsor Coverage (LF&SC) Asia-Pacific won Finance Asia’s award for the best leveraged finance deal of 2008 and best private equity buyout for serving as the mandated lead arrangers and bookrunners to KKR for facilities used for its public-to-private buyout of Unisteel Technology.
Volumes in Factoring grew as the business benefited from being viewed as an attractive alternative to general lending, although margin pressure remained. There were higher factoring volumes in all markets, with ING strengthening its leadership position in the Netherlands and Poland. The short-term nature of these transactions and Basel II implications make this an interesting area for banks.
Declining markets Already weak financial markets declined further towards the end of 2008, leading to unprecedented conditions around the world. The failure of several major financial institutions triggered a rise in credit spreads and general risk aversion, causing paralysis in the interbank lending markets. The drastic deterioration of financial and corporate asset prices resulted in material marked-to-market credit losses and impairments on Lehman Brothers, Washington Mutual and one specific CDO. Asset & Liability Management continued to perform strongly in the face of interest rate volatility. The difficult market conditions also negatively affected results in proprietary trading.
Retail Banking Keeping the customer at the heart of our strategy
Additions to loan loss provisions 401 198 102.5% Underlying result before tax 1,691 2,402 –29.6% Total result before tax* 1,420 2,078 –31.7%
* Total result before tax is defined as underlying result before tax including divestments and special items
Netherlands 4,346 Belgium 1,842 Central Europe* 878 Asia* 333 Total 7,399 * Mainly the retail banking operations in Romania, Ukraine, India (ING Vysya Bank), Private Banking Asia, the ING participations in Bank of Beijing, TMB and Kookmin Bank.
Key points > Steady performer in difficult environment > Postbank and ING Bank merged into new retail bank in the Netherlands > Transformation branch network in Belgium > Rebranding Oyak Bank into ING Bank
Turkey successfully completed > Economic slowdown affected assets under management in Private Banking
FINANCIAL DEVELOPMENTS Retail Banking’s result was severely affected by increased margin pressure from intense competition for savings and the negative effects of the worldwide recession on commission income and risk costs. Underlying result before tax declined 29.6% to EUR 1,691 million in 2008, mainly due to an increase in underlying expenses and risk costs, while income declined slightly. Total result before tax declined 31.7% to EUR 1,420 million, as 2008 included EUR 271 million of charges recognised as special items related to the implementation of the Retail Netherlands strategy.
Total underlying income declined slightly, by 0.8%, to EUR 7,399 million. Income for Central Europe grew in 2008 by 77.4% due to the inclusion of ING Bank Turkey and as a result of marketing initiatives. The Netherlands, Belgium and Asia recorded negative growth as underlying income was affected by intensified competition for savings which had a severe impact on margins, while volumes continued to increase. Income was also affected by a decline in asset management fees due to deteriorating equity markets.
Underlying operating expenses increased 9.3% to EUR 5,307 million, predominantly in Central Europe due to the inclusion of ING Bank Turkey and investments in distribution channels and advertising campaigns. In the Netherlands, underlying operating expenses were up 0.2%. In Belgium, expenses increased by 3.3% because of the inflationary effect on salaries and investments in the branch network. In Asia, expenses decreased by 0.9% resulting from lower costs in Private Banking. The underlying cost/income ratio increased to 71.7% in 2008 from 65.1% in 2007.
The underlying risk-adjusted return on capital (RAROC) after tax from Retail Banking decreased to 21.7% in 2008 from 37.0% in 2007. Average Economic Capital increased EUR 1.2 billion to EUR 5.9 billion in 2008, of which EUR 0.7 billion is explained by the inclusion of ING Bank Turkey.
COuNTry DEVELOPMENTS In the Netherlands, underlying result before tax declined 25.4%, driven by a 7.6% fall in income combined with higher risk costs. In Belgium, result before tax fell 24.8% due to 3.6% lower income and 3.3% higher expenses. In Central Europe, result before tax decreased to EUR 17 million from EUR 124 million in 2007, mainly because of a EUR 65 million net addition to the loan loss provisions compared with a net release of EUR 24 million in the previous year.
New service models in the Benelux In 2007, ING announced a substantial investment in its retail banking direct channels and branch network in the Netherlands by combining the successful direct banking model of Postbank with the professional advice capabilities of ING Bank. Preparations were finalised to combine ING Bank and Postbank in the first quarter of 2009. All post offices, Postbank service shops, ATMs and branch interiors have been rebranded. As of January 2009, all branches started working according to ING’s new ‘bankshop’ formula. The new bank will improve services and maintain a strong focus on cost-effective execution. It serves more than 8 million retail clients and 600,000 business customers. Improvements in operating efficiencies and an expected reduction of 2,500 full-time equivalents following the integration of Postbank and ING Bank will significantly reduce operating costs.
ING Belgium continued the roll-out of a new service and distribution model in which traditional branches are being transformed into outlets with self-service cash functions and online banking access. 130 adjusted branches were up and running at the end of 2008 out of the 260 planned to be opened by the end of 2009.
Continued volume growth in Central Europe and Asia Retail Banking is well positioned in Poland, Romania, Turkey and the important Asian markets of India and China. In 2008, ING invested in its distribution network with a focus on Poland, Romania, Turkey and India. Towards the end of the year, Retail Banking adapted its growth plans given the overall economic climate. ING remains committed to growth in emerging markets but will slow down the expansion. Given the current environment, ING will put more emphasis on cost reduction and de-risking in all markets.
ING entered the Turkish market by acquiring Oyak Bank in 2007. In 2008 it was integrated into ING Group and rebranded as ING Bank Turkey. The bank has some 1.3 million retail and 300,000 small and medium-sized enterprise customers and a network of 366 branches and outlets. In addition to full-service branches, ING Bank Turkey opened 15 express branches: relatively small, cost-efficient branches with fewer staff and efficient operations.
In India, ING has a 44% stake in ING Vysya Bank. It expanded its distribution network with the opening of new branches and ATMs which will contribute to more growth.
In Thailand, ING has a presence through its 30% stake in TMB Bank, a universal banking platform with a nationwide network. It was a transition year for TMB: a new chief executive officer was
In China, ING holds a 16% stake in the Bank of Beijing. The priority is to support the growth of the bank through strategic partnerships with other ING units and technical assistance projects. Bank of Beijing continued its expansion within and outside its home city.
ExPANSION OF MID COrPOrATE CLIENTS Mid Corporate Clients expanded in its home markets of the Netherlands and Belgium, as well as in Poland, Romania and Turkey. In Belgium and the Netherlands, a service model was introduced which focuses on efficiently distributing a full range of business products. In Poland and Romania customer satisfaction significantly improved. European Business Desks developed a stronger position in ING’s network and cooperated closely with local relationship managers to win new international business, predominantly in payments and cash management.
CONCLuSIONS AND AMBITIONS Retail Banking proved to be a steady performer and a good contributor to the Group results. The new service models in the Netherlands and Belgium are fully on track. In Central Europe and Asia ING expanded its distribution network and consolidated its acquisition of Oyak Bank in Turkey. In Private Banking, ING sharpened its focus on Europe and Asia.
Key points > Two million customers added in 2008, bringing the total to 22.2 million worldwide > Positive commercial results; total client retail balances production up EUR 24.4 billion to EUR 322.7 billion > Impairments of EUR 1,891 million on investment portfolio > Illiquid Assets Back-up Facility in early 2009 reduces impact of Alt-A RMBS future losses > Strong brand and customer focus are key components of strategy
FINANCIAL DEVELOPMENTS Although commercial performance remained positive, ING Direct posted an underlying loss before tax of EUR 1,125 million compared with a profit of EUR 530 million in 2007. The loss was brought about mainly by the substantial deterioration in the US housing market. Rising delinquencies, falls in house prices and a revision to the ultimate loss outlook led to an estimated credit loss of EUR 384 million, primarily on ING Direct’s Alt-A RMBS portfolio. This triggered a EUR 1,891 million impairment through the profit and loss account as IFRS requires a write-down to market value at reporting date.
The Illiquid Assets Back-up Facility arrangement in early 2009 with the Dutch State has reduced the uncertainty of the impact of any future losses on 80% of the Alt-A RMBS portfolio. ING aims to close this transaction in the first quarter of 2009, but this is dependent on the approval of various regulators.
The addition to the provision for loan losses increased to EUR 283 million from EUR 68 million in 2007, driven by an increase in the US reflecting higher delinquencies in the mortgage market and lower recoveries. The addition in 2008 was 63 basis points of average credit-risk-weighted assets.
The underlying risk-adjusted return on capital (RAROC) after tax fell to -18.2% from 14.3% in 2007 due to the impairments of the investment portfolio. Average Economic Capital rose 24% to EUR 3.4 billion, reflecting the more volatile and higher-risk environment.
United Kingdom (2003) –72 –120 n.a. Japan** –40 –22 n.a. Subtotal 766 559 37.0% Impairments –1,891 –29 Total –1,125 530 –312.3%
COUNTry DEVELOPMENTS Excluding impairments, ING Direct’s underlying result before tax rose 37.0% to EUR 766 million. In the US, result before tax increased to EUR 343 million from EUR 78 million in 2007, while Canada rose to EUR 59 million from EUR 30 million. The UK made good progress by reducing its loss to EUR 72 million from a EUR 120 million loss in 2007. All other countries reported lower results due to the intensified competition for retail funds and an increase in risk costs.
BUSINESS DEVELOPMENTS ING Direct is the world’s leading direct bank. It sells a limited number of simple banking products at very low cost to retail customers in nine major developed countries. ING Direct’s vision is to become the world’s most preferred consumer bank by being our customers’ primary bank. ING Direct will therefore continue to put customers first and gradually expand its product offering while maintaining outstanding customer satisfaction levels.
In line with these priorities, it was decided early 2009 not to launch ING Direct operations in Japan. ING Direct will reduce expenses in 2009 by about EUR 150 million through lower operating and marketing expenses, and a headcount reduction of around 600 FTEs.
Sources of growth ING Direct is focusing on different sources of future growth. First, it aims at continued growth in customer numbers and savings deposits in countries where it is already present. Our current market share in existing markets is around 2% in savings and less than 2% in mortgages, leaving ample room to grow.
ING Direct used to offer only a single, simple savings product, but it refined its savings products in all countries to win new customers and new funds from existing customers in a more competitive market. An example are fixed-term savings products, which performed well in 2008; the total number of these accounts increased by 0.5 to 3.1 million (+21%). The new product offering also allows us to better meet customers’ needs.
A focal point in 2008 was to better balance the growth in savings and in mortgages and this will remain a priority for 2009. ING Direct also sharply monitors the quality of the new mortgage portfolio and has tightened its underwriting criteria accordingly.
The overall US portfolio consists of quality customers with an average loan-to-value ratio of 75% (indexed for changes in property values), and 97% of the mortgages are to owner-occupiers.
In 2008, ING Direct acquired a 99.15% stake in Interhyp, Germany’s largest independent distributor of residential mortgages. Interhyp offers residential mortgages from over 70 banks, building societies and insurance companies, using a state-of-the-art internet platform. In 2008, it distributed EUR 5.9 billion of mortgages that represent a market share of 3.3%.
Payment accounts – showing growth potential Payment accounts help to develop a broader relationship with the customer and increase the share of a customer’s total potential business. It has also become a client acquisition tool; by offering a broader range of products, ING Direct can effectively compete with local competitors and diversify its income stream.
An example of strong net inflows is ING Direct’s US-based online brokerage platform, ShareBuilder. It showed strong growth during its first full year of operation with ING Direct, welcoming 315,000 new customers, bringing the total number of customers to 1.2 million at year-end. Of new accounts, 21% resulted from cross-sell efforts to ING Direct’s customer base, evidencing the synergies between the two companies. Net asset inflows totalled EUR 655 million (USD 914 million).
Clients in thousands Funds entrusted, residential mortgage portfolio and off-balance sheet funds in EUR billion
The strengthening of risk controls and risk reporting procedures across the regions was improved.
ING Investment Management became a signatory to the United Nations Principles for Responsible Investing (UNPRI), which is designed to guide investment decision-making with a view to corporate responsibility considerations. (See also the Corporate responsibility section.)
Europe Assets under management fell 15% to EUR 129.5 billion. Thirdparty AuM declined by 19% to EUR 81.6 billion and proprietary business AuM was 8% lower at EUR 48 billion. Limited outflows from mutual funds were recorded as a result of the market turbulence. The business unit strengthened its position in the fiduciary market through a series of new relationship agreements and the acquisition of Altis Investment Management. Altis is a leading multi-manager specialist team based in Switzerland. The acquisition was in line with the business’ ambition to be a leading solutions provider. In addition, the institutional business in the Netherlands was strengthened with ING/AZL entering into agreements to provide fiduciary management services to two major pension funds, Pension Fund Social and Economic Council of the Netherlands (SER) and Public Authorities, and the Will Niemeijer Pension Fund as well as TVM Verzekeringen. ING acquired AZL, a Dutch provider of pension fund management services, in 2007 to boost its scale and market strength in the European pension business.
Despite the difficult market situation, ING IM established its presence in the Middle East, which included local investment capabilities, taking advantage of investment opportunities arising from global economic changes as well as growth opportunities in the region.
Americas Assets under management fell 8% to EUR 139.4 billion. Third-party AuM declined by 7% to EUR 74.9 billion and proprietary business AuM declined 10% to EUR 64.5 billion. The financial turmoil dampened the willingness of both retail and institutional clients to add to their portfolios during the year. The business focused its strategy on raising the visibility of three significant franchise strengths – Senior Bank Loans and Small and Mid-Cap Equity. The Senior Loan team was selected by the USD 190 billion California Public Employees Retirement System (CalPERS) as one of three bank loan managers to manage future CalPERS allocations to senior bank loans. ING IM’s Senior Loan team also won a EUR 193 million mandate from the Massachusetts Pension Reserves Investment Management Board during 2008. In addition, the fundamental equity teams in the US and the Canadian equity group continued to be bright spots with recent sales wins.
In the coming year the business will place increasing emphasis on returning to its basic core strengths and improving its investment performance and product development for its customers. In addition, the business’s already strong risk management resources will be further improved.
At the year-end, ING Real Estate’s total business portfolio was EUR 106 billion, marginally lower than 2007. A 15% increase to EUR 37 billion in the loan portfolio was offset by a decrease in assets under management from EUR 75 billion to EUR 70 billion. Despite an inflow of new client money, the decrease in assets under management occurred as a result of lower values in listed and unlisted funds as well as adverse currency movements.
ING Real Estate Finance The Real Estate Finance business held up well, given the market circumstances. The loan portfolio grew by 15%, and although risk costs increased quite substantially, volumes and margins rose as well. The loan portfolio remained diversified both by geography, of which 53% was Dutch, and by asset class. Following the substantial growth in recent years it became clear towards the end of 2008 that Real Estate Finance would be unable to sustain its current growth particularly in the light of ING Group’s overall risk strategy.
On the retail front, major fund launches included a Real Estate Fund in Hong Kong and the Taiwan Focus Fund, which will be marketed around the region. The launch of the High Yield Currency Fund in Japan resulted in record net inflows (EUR 3.58 billion). ING IM expanded its geographic footprint by opening a representative office in Beijing.
Risk management was a major focus in the business. Risk controls were strengthened and a more frequent risk reporting process was conducted to consolidate risk issues for management. In 2009, there are plans to further strengthen risk awareness and regional investment risk governance.
ING IM is committed to further strengthening partnerships with ING businesses and developing third-party business opportunities. The business also strives to increase investment performance for clients and to maximise the use of ING’s risk management skills.
With the likelihood of difficult market conditions continuing in 2009, cost containment measures have been taken with due care to preserving the investment expertise and full commercial growth capabilities of the business.
PRIVATE BANKING Private Banking reported a decline in asset accumulation to EUR 62 billion from EUR 68 billion at the end of 2007. Costs were well contained. Underlying profit before tax fell 57.8% to EUR 111 million. Loan loss provisions in Asia were made as a result of the exceptional market circumstances in 2008.
In January 2009, Private Banking announced it would transfer the ownership of its investment business to ING Investment Management Europe. This effectively means the European business will become the investment management service provider of choice for ING Private Banking globally. Despite this move, open architecture – providing a wide range of third-party funds for portfolios – remains one of the cornerstones of Private Banking’s strategy.
Key points > Winning Performance Culture Survey of 85,000 people yields positive results > Retain talent and get best people in the right places > Dealing with changing environment > More business alignment and involvement, sharing of best practices
To manage the change of the business landscape and to continue to run our business well, it is essential to develop and engage our employees in the best possible way. The strong alignment between HR and the business was proven midway through 2008 when the global financial markets took a dramatic turn for the worse. From being focused on supporting business growth, HR switched emphasis to help the company deal with the effects of the unpredictable market events on the company and its employees.
HR IN SUPPORT OF BUSINESS The human resources discipline is closely aligned with ING’s business strategy. This is partly the result of a continuous interaction that engages HR, the business and its leadership in building ING’s overall people strategy. In 2008, HR continued to foster the highest standards of behaviour and professionalism and this was a significant factor in driving the business. We aim to provide staff with the opportunities and tools to allow them to engage in the business and excel in their career development. ING’s workforce of 125,000 people worldwide is diverse and talented. Our global on-boarding programme, Get Orange, instills our values in new staff while the development and education programmes for existing staff help them get more engaged.
Increased engagement ING continued to implement its Winning Performance Culture (WPC) programme across the organisation. Set up in 2005, its objective is to establish a culture in which the company’s shared values, beliefs and practices create and sustain superior business performance. Progress is measured by a regular WPC Survey and 2008 was the first time all ING employees were invited to participate. More than 85,000 employees (73% of all those invited) completed it halfway through 2008. Overall, engagement rose to 71%, which gave ING a higher score than the average scored by other multinational companies that have conducted similar surveys.
‘Engagement’ is defined in a number of ways, including the intention to stay with the company. High levels of engagement were also apparent in the open feedback section, where 63,000 comments were posted. Other positive findings were that ING provides a stimulating work environment, and 79% of respondents indicated they had a good understanding of ING’s strategy. Reported areas for improvement included processes, cost management and opportunities for career development.
Diversity ING recognises that diversity is about creating an inclusive corporate culture that embraces the differences of its employees. This understanding contributes to our winning performance culture, it values collective wisdom in business decision-making and ultimately helps us to better connect with our current and potential customers as well as to each other.
Talent acquisition and retention In spite of the financial crisis, recruiting and managing executives and strengthening succession planning continued in 2008. The main focus of the leadership acquisition team is to benefit from past and on-going recruitment initiatives world-wide. The added value of this is the sharing of information on a wealth of potential candidates across business lines and, by doing so, providing senior management with timely access on a global basis to these candidates. An added benefit of this approach is that ING will capitalise on executive search firm fees. This resulted in a heightened interest for a central coordination platform for all external searches that are to a lesser extent still taking place.
ING attracts graduates for all business lines and has defined a global profile to do so. Applicants are measured against elements such as a ‘can-do’ mentality, unpretentious, result-driven, passion for teamwork, academic background, two years of working experience at the most and fluency in English. Our graduate profile demonstrates ING’s commitment to attracting and retaining talented people from diverse backgrounds. The same criteria have been defined for people who enter the ING International Graduate Programme, a four-year curriculum for talents starting with ING.
In 2008, a new tool was selected as next-generation system for global recruitment and selection. It makes it easier to share information about internal and external applicants across the company. This supports ING’s leadership acquisition and talent management aim to create a global platform for all vacancies. Given the reduced budgets for recruitment, there was growing appetite for this platform.
Learning and developing ING takes a structured approach to executive training and development and is convinced that the development and education programmes for existing staff help them get more engaged. The ING Business School expanded its range of courses in 2008. The school enlisted 2,550 participants, compared to 2,800 in 2007 and also delivered its programmes regionally (in the US, Central Europe and Asia). In the course of 2008, the leadership training programme refocused to the subject of crisis leadership.
In addition, the Business School increased the business impact learning initiatives. In Thailand, Central Europe and within Investment Management, these initiatives created extra business. An important shift took place from learning programmes related to managing for value to process management (‘Lean Six Sigma’) courses, also reflecting the changed business environment.
Strengthening the human resources footprint at a global level The human resources function within ING strives to increase value and service quality to the business. The governance model was changed in 2008 and is now based on two pillars: reaching out to the business lines and making global projects more transparent. A business line forum was established with 20 key HR positions from the business lines. Its purpose is to further reach out to the business lines when developing human resources strategy. In addition, two new steering committees were put in place, with representatives from the HR Business Line Forum and the Corporate HR Expert Centers, in order to facilitate global HR projects in key areas like IT Application Strategy, Talent & Development and Performance & Reward.
Dealing with changing environment As in 2008, the company will also have to deal with the effects of the unpredictable market events in 2009. In early 2009, ING announced the necessity to cut operating expenses by EUR 1 billion in 2009. 35% of this amount will come from a reduction of the workforce by approximately 7,000 full-time positions, involving 2,800 people within our banking operations and 4,200 within insurance. ING remains committed to managing its people with respect and will support those affected by this shift in priorities. Given current concerns in society that incentive structures may have contributed to the emergence of the financial crisis, and as agreed with the Dutch State, the ING Supervisory Board will review the remuneration policy for the Executive Board and senior management. Further information is to be found in the Remuneration report.
Chances for Children programme > Independent sustainable benchmarks and indices, such as Dow Jones Sustainability Index and the FTSE4Good Index, recognise ING’s effort in the field of CR by increasing our individual sustainability scores
The current financial crisis has damaged trust in our industry. We believe that responsible behaviour is crucial in earning and maintaining the confidence of our stakeholders. Clarity about financial strength, business models and products is essential, as is a clear customer focus and transparency about the way we operate. This includes our responsibilities to our employees and our duty to manage the broader social and environmental impact of our business activities.
We lend and invest responsibly We offer our customers sustainable products We are inclusive and clear We play an active role in the community We manage our impact on the environment We engage our employees in sustainability
Sustainable products We strive to meet the growing demand from customers for products and services that are environmentally friendly and socially responsible in addition to generating a good return. To cater to those needs, ING offers several funds and products that allow them to do this. Examples are sustainable investment funds including the so-called thematic funds that offer clients the opportunity to invest in topics such as water, renewable energy and microfinance. Green deposits or notes and eco-efficient Car Lease opportunities for clients are also part of ING’s sustainable product range. The amount of sustainable assets under management was EUR 2,295 million in 2008.
Financial inclusion and education We now more than ever need to be accessible, easy to understand, transparent and ready to serve our customers with professional advice in order to help them manage their financial future. At the same time, the choice and complexity of products and delivery channels has increased substantially throughout the financial sector. Therefore, easy access, reducing complexity and clear and transparent information are essential parts of our commitment to treating our customers fairly and being responsive to their needs.
Community commitment ING feels it has a responsibility to make a positive contribution to society by donating and sponsoring projects in the field of education in particular. Through our main global charity programme ING Chances for Children, and in cooperation with UNICEF, we give children a real chance of securing a better future by providing them with education. Our employees are the cornerstone of the programme’s success, either through their donations (which are matched by ING) or by providing voluntary help. In 2008, we provided thousands of children with primary education through the programme.
On 20 November 2008, the UN Day of the Child, ING Chances for Children held its first global charity event, the ING Global Challenge. Staff from 29 countries volunteered more than 29,000 hours, raised EUR 986,400 and promoted the importance of supporting education in their communities.
Impact on the environment ING supports the thesis that healthy economic growth and environmental care are two sides of the same coin. Environmental protection is a fundamental part of our commitment to conduct our business responsibly.
Economic value (in EUR million) Total assets 1,331,663 1,312,510 Capital and reserves 17,334 37,208 Total income 66,291 76,587 Result before tax –1,487 11,043 Net result –729 9,241 Personnel expenses: salaries 5,885 5,696 Personnel expenses: other 2,879 2,565 Employee engagement index (4) 83% 77%
Green energy KWH (in thousands) of electricity purchased by ING that is derived from renewable resources 344,448 259,780 Dow Jones Sustainability Index 71 62 FTSE4Good Index Included Included (1) The audit firm Ernst & Young has audited the KPIs for reasonable assurance. (2) For a detailed overview, see the 2008 Corporate Responsibility Performance
(ACSI) methodology, adapted for the financial services market and based on a combination of questions related to overall satisfaction, customer delight and ideal provider. This score is not weighted by market.
(4) ING engagement index is the percentage of ING employees that have indicated that they are proud to work for ING. The research is done by Kenexa (April 2008).
If the environmental and social performance associated with the transaction is reasonable but needs improvement, conditional advice is given. If a transaction is not in line with the specific policies, ING will withdraw from it.
Over the last two years, our employees have become much more attuned to environmental issues such as climate change, deforestation and the protection of endangered species. The ‘Orange Goes Green’ programme was a response to this development and invites employees around the world to start up local initiatives and get involved in the preservation and promotion of a cleaner environment. In eight countries, ING volunteers planted trees in 2008 as part of the ‘Orange Goes Green’ campaign.
CONCLUSIONS AND AMBITIONS ING will continue its focus on the main strategic priorities based both on our business principles and dialogue with our stakeholders. We believe financial education will become increasingly important. Moreover, we will continue to monitor, track and improve our performance in the area of sustainability on the basis of our Key Performance Indicators (KPIs). We believe all these initiatives contribute to building our clients’ and investors’ confidence in ING.
In 2008 the Supervisory Board and the Executive Board met through regular and additional meetings. Many important issues were discussed, with strategy and the financial crisis high on the agenda due to the unprecedented circumstances. Committees of the Supervisory Board discussed a range of subjects on which the Supervisory Board received advice, the main ones being the quarterly results, the financial crisis, the external auditors tender, IT, corporate governance and human resources.
Supervisory Board meetings While the execution of the strategy was an important subject in the first half of 2008, the implications of the financial crisis for ING were the main topic on the agenda of the Supervisory Board meetings in the second half of 2008.
2008 started off with a Supervisory Board Knowledge Day in January, a full day of presentations and discussions around several important ING subjects. The Supervisory Board members discussed the ING Direct strategy going forward and an extensive presentation was given on the business opportunities in Asia. The market developments regarding the financial crisis and liquidity management at ING were also discussed at the Knowledge Day.
In February 2008, the 2007 annual figures were discussed, including the related reports from the internal and external auditors and the assessment of the Executive Board of the adequacy and effectiveness of the risk management and control systems of ING as well as the significant changes made thereto. In this meeting the draft agenda of the annual General Meeting as well as the proposed final 2007 dividend were also discussed and approved.
Following the facility of the Dutch government to make capital available to financial enterprises that are fundamentally sound and viable, the Supervisory Board approved the agreement with the Dutch government to strengthen the capital position of ING with EUR 10 billion at the end of October, creating a buffer to navigate through the severe financial market and economic environment that had emerged. In connection with this transaction, the Dutch government was granted the right to recommend two candidates for appointment to the Supervisory Board. The Dutch government announced that it recommended Peter Elverding, already a Supervisory Board member, and Lodewijk de Waal for appointment to the Supervisory Board. Lodewijk de Waal has been nominated as a Supervisory Board member for appointment by the annual General Meeting in April 2009. Until his appointment, Mr. de Waal will participate as an observer in the Supervisory Board meetings.
The Supervisory Board visited some of the ING operations in the US at the end of May. In August, a strategic framework for the business opportunities for ING in Asia was presented and discussed, and the delisting of ING shares from the stock exchanges in Frankfurt, Paris and Switzerland was approved by the Supervisory Board. The annual update of the ING Regulation on Financial Instruments was approved in the November meeting.
audit Committee meetings In 2008, the Audit Committee met five times to discuss the annual and quarterly results and the Annual Report on Form 20-F. In an additional meeting the effects of the financial crisis on ING were reviewed.
Other important subjects in 2008 were: the evaluation of the acquisition of the TMB, variable annuity products and IT. Other topics discussed in the meetings were risk, governance, capital management and regulatory matters. The volatility of the results in Japan was frequently discussed during the Audit Committee meetings.
In February 2008, the 2007 performance of the Executive Board members was discussed on the basis of the group performance criteria and the individual targets. The Executive Board compensation structure for 2008 was also discussed as well as the adjustment of the compensation and performance peer group towards a European financial industry peer group consisting of 14 financial sector companies. In an additional meeting the succession of the CFO was discussed as well as the proposal to split the Remuneration and Nomination Committee into two separate committees to comply with the Tabaksblat Code.
Corporate Governance Committee meetings The Corporate Governance Committee discussed the agenda for the 2008 annual General Meeting, which included the appointment of Ernst & Young as the auditor for ING Group, ING Bank and ING Insurance. The Committee discussed the position of the ING Trust Office.
Following the envisaged appointment of Jan Hommen as the CEO of ING Group, the Supervisory Board decided to appoint Peter Elverding as successor to Jan Hommen as chairman of the Supervisory Board effective after the annual General Meeting in April 2009. In light of this appointment, the Dutch State has recommended Tineke Bahlmann as a member for the Supervisory Board. Eric Bourdais de Charbonnière and Wim Kok will retire from the Supervisory Board after the 2009 annual General Meeting.
retirement of Wim Kok Wim Kok was appointed as a member of the Supervisory Board in 2003. He contributed substantially to the Audit Committee and in 2008 he was asked to stay on for one year longer to succeed Jan Hommen as the chairman of the Audit Committee.
Information on the members of the Supervisory Board and the nominated members is provided on page 64-65.
Currently, only one Supervisory Board member, Piet Hoogendoorn qualifies as ‘non-independent’ as defined in best-practice provision III.2.1 of the Dutch Corporate Governance Code. Mr. Hoogendoorn is considered to be not independent, because of his position with Deloitte Touche Tohmatsu until 1 June 2007, taking into account the important relationship between Deloitte Touche Thomatsu and ING.
appreCiation for the exeCutive Board and the inG employeeS The Supervisory Board would like to thank the Executive Board members for the very hard work done in the extremely challenging circumstances on the financial markets. The Supervisory Board would also like to express its appreciation to the 125,000 employees of ING who each serve the interests of the customers, the shareholders and other stakeholders of ING.
ING Group is now considering the revised Code and to what extent it can be implemented. As recommended by the Frijns Committee, the implementation of the revised Code will be discussed at the 2010 General Meeting as a separate agenda item.
In 2008, several changes of EU origin relating to listed company disclosure and transparency were proposed to be implemented in Dutch law. These especially affect annual and interim financial reporting, a mandatory corporate governance statement in the annual report and – for public interest entities – the introduction of a mandatory audit committee. Subsidiaries of a public interest entity which complies with the mandatory audit committee requirement are exempt. ING Group, ING Bank N.V, and ING Verzekeringen N.V. have an audit committee, whereas the other ING Group subsidiaries in the Netherlands make use of this exemption.
Furthermore, also as a result of EU legislation, the rules on the maintenance and alteration of capital of public limited liability companies were amended. The amended rules, among others things, facilitate the issue of shares against contribution in kind, the repurchase of shares, and the provision of financial support for the acquisition of a company’s own stock by third parties.
A legislative proposal to implement the EU Shareholder Rights Directive was submitted to the Dutch Parliament in November 2008. It primarily addresses matters of logistics in the build-up to a general meeting, such as the disclosure and distribution of the meeting materials, the record date, shareholders’ proposals and the asking of questions.
Following a consultation procedure, a legislative proposal was submitted to the Dutch Parliament in November 2008 to facilitate the introduction of the one-tier board into Dutch company law. The proposal will clarify the rules on the division of tasks in a board of directors. This proposal also includes a revised version of the conflict of interest rules and will abolish the required second candidate within the context of a binding nomination, recommended by the Tabaksblat Committee in 2003.
Transactions with the Dutch State On 12 November 2008, ING Group issued 1 billion core Tier-1 securities (‘Securities’) to the Dutch State against payment of EUR 10 per Security resulting in an increase of ING Group’s core Tier-1 capital of EUR 10 billion. The Securities do not form part of ING Group’s share capital; accordingly they do not carry voting
In the framework of these transactions, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million Securities, as long as the Back-up Facility continues or any of the Bonds is outstanding. These arrangements entail that: the Dutch State may recommend two candidates (‘State • Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Nominees (these decisions are specified in the section ‘Supervisory Board’ below); ING Group will develop a sustainable remuneration policy for the • Executive Board and Senior Management that is aligned to new international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for ‘rewards for failure’. The new remuneration policy will among others include objectives relating to corporate and social responsibility; members of the ING Executive Board will not receive any • performance-related payment – either in cash, options, shares or depositary receipts – for 2008, 2009 and subsequent years until the adoption of the new remuneration policy mentioned above; severance payments to Executive Board member will be limited • to a maximum of one year’s fixed salary, in line with the Tabaksblat Code.
For more information on the State Nominees, reference is made to the section on the Supervisory Board; for more information on the other arrangements, reference is made to the Remuneration report, starting on page 73.
Shareholder participation and position of the Trust Office As announced earlier, the Executive Board and the Supervisory Board intend to reconsider the position of the Stichting ING Aandelen (the ‘Trust Office’) and depositary receipts once the number of votes on ordinary shares and depositary receipts of ordinary shares, including proxies and excluding the votes which are at the discretion of the Trust Office at a General Meeting is at least 35% of the total votes that may be cast for three consecutive years.
The following deviations from the Tabaksblat Code are to be reported for 2008: best-practice provision II.1.1: Michel Tilmant, being appointed • as an Executive Board member before 1 January 2004, was appointed for an indefinite period of time. He stepped down from the Executive Board effective 26 January 2009; best-practice provision II.2.3: Executive Board members may sell • shares awarded to them without financial consideration within the five-year retention period in order to cover the wage tax which is to be withheld over the vested award, so as to avoid the total wage tax being withheld in the month of vesting exceeding the gross salary payment of that month; best-practice provisions II.2.3, II.2.10 and II.2.11: although ING • Group’s policy is to disclose the performance criteria for variable remuneration only to the extent that this information is not share price sensitive or competition-sensitive, this is not relevant for 2008 as no variable remuneration will be paid to Executive Board members with respect to performance in 2008; best-practice provisions II.2.8, II.3.2 and II.3.3: Executive Board • members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that apply to all employees. These may include services in which the granting of credit is of a subordinate nature, e.g. credit cards and overdrafts in current accounts. These exceptions are based on a lack of materiality; best-practice provision III.2.2: if a Supervisory Board member • does not meet the independence criteria of the Code, the
Deviations from the Tabaksblat Code by the Trust Office are reported in the Trust Office’s own report (see page 67).
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: ING Group has a two-tier board structure, in contrast to the • one-tier board structure used by most US companies. In the Netherlands, a Naamloze Vennootschap (public limited liability company) has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general, Executive Board members are employees of the company while members of the Supervisory Board are often former state or business leaders and sometimes former members of the Executive Board. Members of the Executive Board and other officers and employees cannot simultaneously be a member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Executive Board. Under the Tabaksblat Code, all members of the Supervisory Board with the exception of not more than one person, must be independent. The present members of ING Group’s Supervisory Board with the exception of one member, are independent within the meaning of the Tabaksblat Code. The definitions of independence under the Tabaksblat Code, however, differ in their details from the definitions of independence under the NYSE listing standards. In some cases the Dutch requirements are stricter and in other cases the NYSE listing standards are the stricter of the two. The Audit Committee, Corporate Governance Committee and Remuneration and Nomination Committee of ING Group are comprised of members of the Supervisory Board. In contrast to the Sarbanes-Oxley Act of 2002, the Tabaksblat • Code contains an ‘apply-or-explain’ principle, offering the possibility to deviate 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 in full compliance with the Code. Dutch law requires that the company’s external auditors • be appointed at the general meeting and not by the Audit Committee.
The ING Group’s Articles of Association provide that there are • no quorum requirements to hold a General Meeting, although certain shareholder actions and certain resolutions may require a quorum. The shareholder approval requirements for equity compensation • plans under Dutch law and the Tabaksblat Code differ from those applicable to US companies which are subject to the NYSE’s listing standards. Under Dutch company law and the Tabaksblat Code, shareholder approval is only required for equity compensation plans (or changes thereto) for members of the Executive Board and Supervisory Board, and not for equity compensation plans for other groups of employees.
Issue of shares ING Group’s authorised capital is the maximum amount of capital allowed to be issued under the terms of its Articles of Association. New shares in excess of this amount can only be issued if the Articles of Association are amended. An amendment has to be passed by notarial deed, and this in turn requires a declaration of no objection to be issued by the Minister of Justice. For reasons of flexibility, the authorised capital in the Articles of Association of ING Group has been set at the highest level permitted by law.
Share issues are to be decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to take up new ordinary shares, both with and without a right of first refusal for existing shareholders.
Transfer of shares and depositary receipts and transfer restrictions Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. Pursuant to the Articles of Association, there are no restrictions for the transfer of ordinary shares, whereas transfer of cumulative preference shares is subject to prior approval of the Executive Board.
For the preference A shares (currently no longer in existence) the authorisation applicable for 2008 provided for a minimum price of one eurocent and a maximum price equal to 130% of the amount, including share premium, that was paid on such a share, or 130% of the highest stock price on the Euronext Amsterdam by NYSE Euronext either on the date on which an offer for the preference A shares was made or on the date of the purchase contract or the preceding day on which this stock market was open.
Meetings are convened by public notice. As of the date of convening a General Meeting, all information relevant for shareholders and holders of depositary receipts, is made available to them on ING Group’s website (www.ing.com) and at ING Group’s head office, mentioned in the notice.
Proposals by shareholders/holders of depositary receipts Proposals to include items on the agenda for a General Meeting can be made by shareholders and holders of depositary receipts representing a joint total of 0.1% of the share capital or representing together, on the basis of the stock prices on the Euronext Amsterdam by NYSE Euronext, a share value of at least EUR 50 million. Given the period of notice required for proxy voting, proposals have to be submitted in writing at least 50 days before the date of the meeting. Properly submitted proposals will be included on the agenda for the General Meeting.
Record date It is standard practice with ING Group to set a record date for attending a General Meeting and voting on the proposals in that General Meeting. Shareholders and depositary receipt holders who hold shares and/or depositary receipts at the record date are entitled to attend the General Meeting and to exercise other rights related to the General Meeting in question on the basis of their holding at the record date, notwithstanding a subsequent sale or purchase of shares or depositary receipts. The record date is published in the notice to the General Meeting.
Shareholders and depositary receipt holders who do not attend the General Meeting, may nevertheless follow the course of affairs in the meeting by internet webcast.
Holders of depositary receipts may vote as they see fit. Holders of depositary receipts not attending a meeting can also issue binding voting instructions to the Trust Office. The Trust Office has made it easier for votes to be cast in this way by putting arrangements in place for proxy voting and E-voting. The restrictions under which the Trust Office will grant a voting proxy to holders of bearer receipts are: the relevant holder of depositary receipts must have announced • his or her intention to attend the General Meeting observing the provisions laid down in the Articles of Association of ING Group; the relevant holder of depositary receipts may delegate the • powers conferred upon him or her by means of the voting proxy, provided that the relevant holder of depositary receipts has announced his or her intention to do so to the Trust Office observing a term before the commencement of the General Meeting, which term will be determined by the Trust Office.
The depositary receipts and the Trust Office structure outlined above would prevent a small minority, which coincidentally may form the majority in the meeting, from taking decisions purely to suit themselves in the absence of other parties at the General Meeting.
Moreover, the approval of the General Meeting is required for Executive Board decisions that are so far-reaching that they would greatly change the identity or nature of ING Group or its enterprise. This includes resolutions to transfer or assign otherwise all or virtually all of the enterprise of ING Group or its subsidiaries as a consequence of which ING Group or the group over which ING Group exercises central control ceases to engage in either insurance or banking activities.
Ancillary positions/Conflicting interests To avoid potential conflicts of interest, ING Group has a policy that members of its Executive Board do not accept corporate directorships with listed companies outside ING. The only exception is currently Jacques de Vaucleroy, who is on the Board of Directors of Delhaize Group in Belgium. He held this position prior to his appointment to the Executive Board of ING Group.
Transactions involving actual or potential conflicts of interest Details of relationships that members of the Executive Board have with ING Group subsidiaries as ordinary, private individuals are not
INFORMATION ON MEMBERS OF THE EXECUTIVE BOARD Michel J. Tilmant, chairman (until 26 January 2009) (Born 1952, Belgian nationality; male; appointed in 1998, stepped down on 26 January 2009, retirement date 1 August 2009) Michel Tilmant graduated from Louvain University with a Licence in Business Administration. He is also a graduate of Louvain School for European Affairs. He started his career with Morgan Guaranty Trust Company in New York. In 1992 he joined Bank Brussels Lambert, where he was appointed chairman of the Executive Board in 1997. After the acquisition of BBL by ING in 1998, Michel Tilmant was appointed vice-chairman in May 2000. He was appointed chairman in April 2004. Five Group staff departments reported directly to Michel Tilmant: Corporate Legal Department, Corporate Human Resources, Corporate Development, Corporate Communications & Affairs and Corporate Audit Services.
Eric F. Boyer de la Giroday (acting chairman from 26 January-27 April 2009) (Born 1952, Belgian nationality, male; appointed in 2004, term expires in 2012) After completing his degree in commercial engineering at the Free University of Brussels and a master in Business Administration at the Wharton School, University of Pennsylvania, Eric Boyer started his career with Citibank in 1978. In 1984 he joined Bank Brussels Lambert, which was acquired by ING Group in 1998, where he held various management positions in the fields of capital markets, treasury and corporate and investment banking. He was appointed a member of the Executive Board of ING Group in April 2004. He is responsible for Wholesale Banking and ING Real Estate.
John C.R. Hele, CFO (until 31 March 2009) (Born 1958, Canadian nationality, male; appointed in 2007) John Hele graduated from the University of Waterloo, Canada, in 1980 with a bachelor’s degree in Mathematics. He joined ING in 2003 as general manager and chief insurance risk officer, responsible for global insurance risk management. He also functioned as the Group actuary. Before he joined the Executive Board, John Hele had been deputy chief financial officer of ING Group since 2006. Before joining ING, John Hele held various positions at Crown Life in Canada, Merrill Lynch in the United States and at Worldinsure, Bermuda. He is responsible for Group Capital Management, Group Tax, Group Finance and Control, Group Finance Bank and Group Finance Insurance.
Hans van der Noordaa (Born 1961, Dutch nationality, male; appointed in 2006, term expires in 2010) Hans van der Noordaa graduated in Public Administration at the University of Twente, the Netherlands. After a career in retail banking at ABN AMRO, he joined ING in 1991, where he held various management positions. He was CEO of the Retail Division of ING Netherlands, responsible for Postbank, ING Bank and RVS, before his appointment to the Executive Board in 2006. Hans van der Noordaa is responsible for Insurance Asia/Pacific and ING Investment Management Asia/Pacific.
1.3 Our Governance is responsible for Insurance Europe and ING Investment Management Europe.
In connection with the issue of Securities to the Dutch State, it was agreed between ING Group and the Dutch State that the Dutch State may recommend candidates for appointment to the Supervisory Board in such a way that upon appointment of all recommended candidates by ING Group’s General Meeting, the Supervisory Board will have two State Nominees among its members. The Dutch State may recommend a Supervisory Board member already in office. The recommendation right of the Dutch State is subject to applicable law and to corporate governance practices, generally accepted under stock listing regimes applicable to ING Group and continues as long as the Dutch State holds at least 250 million Securities, as long as the Back-up Facility continues or any of the Bonds is outstanding. Should the holding of the Dutch State decrease below 250 million Securities, and both the Back-up Facility and the Bonds have expired, the State Nominees will remain in office and complete their term of appointment.
On 22 October 2008 the Dutch State announced that it recommended Lodewijk de Waal for appointment to the Supervisory Board. Also Peter Elverding, already member of the Supervisory Board, was appointed as State Nominee. On 11 March 2009 the Dutch State announced that it recommended Tineke Bahlmann to replace Peter Elverding, who will no longer be available as State Nominee upon his appointment as chairman of the Supervisory Board as from 27 April 2009.
Members of the Supervisory Board may be suspended or dismissed at any time by the General Meeting. A resolution to suspend or dismiss members of the Supervisory Board which has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast which majority represents at least one-third of the issued share capital.
As part of its supervisory role, certain resolutions of the Executive Board specified in the Articles of Association and in the Supervisory Board Charter are subject to Supervisory Board approval.
Pursuant to the transactions with the Dutch State mentioned above, certain Supervisory Board resolutions are subject to the condition that no State Nominee voted against the proposal. It has been agreed with the Dutch State that these approval rights will become effective as from the 2009 General Meeting. These resolutions relate to the following matters: a. the issue or acquisition of its own shares by ING Group (other than related to or in connection with the Securities issue – including, for the avoidance of doubt, for the purpose of conversion or financing of a repurchase of Securities – and other than as part of regular hedging operations and the issuing of shares according to employment schemes); b. the cooperation by ING Group in the issue of depositary receipts for shares; c. the application for listing in or removal from the price list of any stock exchange of the securities referred to in a. or b.; Corporate governance (continued)
d. the entry into or termination of lasting cooperation between ING Group or a dependent company and another legal entity or partnership or as general partner in a limited partnership or general partnership where such cooperation or termination thereof has material significance for ING Group, i.e. amounting to one-quarter or more of ING’s issued capital and reserves as disclosed in its balance sheet and notes thereto; e. the acquisition by ING Group or a dependent company of a participating interest in the capital of another company amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto or a material increase or decrease in the magnitude of such a participating interest; f. investments involving an amount equal to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; g. a proposal to wind up ING Group; h. filing of a petition for bankruptcy or moratorium of ING Goup; i. a proposal to reduce the issued capital of ING Group (other than related to the Securities issue); j. a proposal for merger/split-off, dissolution of ING Group; k. a proposal to the General Meeting to change ING Group’s remuneration policy; and l. appointment of the chief executive officer of ING Group’s
Committees of the Supervisory Board On 31 December 2008, the Supervisory Board had three standing committees: the Audit Committee, the Remuneration and Nomination Committee and the Corporate Governance Committee. On 1 January 2009, the Remuneration and Nomination Committee was split into a Remuneration Committee and a separate Nomination Committee.
The organisation, powers and modus operandi of the Supervisory Board are detailed in the Supervisory Board Charter. Separate charters have been drawn up for the Audit Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. These charters are available on the ING Group website (www.ing.com). A short description of the duties for the Committees follows below.
The Remuneration and Nomination Committee advised the Supervisory Board, among other things on the composition of the Supervisory Board and Executive Board, on the compensation packages of the members of the Executive Board and on stockbased compensation programmes for top senior management, including the Executive Board. On 31 December 2008, the members of the Remuneration and Nomination Committee were: Jan Hommen (chairman), Eric Bourdais de Charbonnière, Piet Klaver, Joan Spero and Karel Vuursteen, with Lodewijk de Waal participating as observer, awaiting his appointment to the Supervisory Board.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting of this in the Annual Report and to the General Meeting, and advises the Supervisory Board on improvements. On 31 December 2008, the members of the Corporate Governance Committee were: Jan Hommen (chairman), Eric Bourdais de Charbonnière, Henk Breukink, Claus Dieter Hoffmann, Harish Manwani and Aman Mehta, with Lodewijk de Waal participating as observer, awaiting his appointment to the Supervisory Board.
Profile of members of the Supervisory Board The Supervisory Board has drawn up a Profile to be used as a basis for its composition. The Profile was submitted for discussion to the annual General Meeting in 2005. It is available at the ING Group head office and on the ING Group website (www.ing.com).
Details of transactions involving actual or potential conflicts of interest Details of any relationships that members of the Supervisory Board may have with ING Group subsidiaries as ordinary, private individuals are not reported, with the exception of any loans that may have been granted to them (see page 82).
Independence Annually, the Supervisory Board members are requested to assess whether the criteria of independence set out in the Tabaksblat Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board, except Piet Hoogendoorn, are to be regarded as independent on 31 December 2008. Members of the Supervisory Board to whom the independence criteria of the Tabaksblat Code do not apply, and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
Remuneration and share ownership The remuneration of the members of the Supervisory Board is set by the General Meeting and is not dependent on the results of the company. Details of the remuneration are provided in the Remuneration Report on pages 81-82. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the company for long-term investment purposes. Details are given on page 82. Transactions by Supervisory Board members in ING Group shares and depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the ING Group website (www.ing.com).
Other business activities: until 22 April 2009, non-executive chairman of Reed Elsevier Group plc and Reed Elsevier PLC (UK) and until 8 April 2009, member of the Supervisory Board of TNT N.V. (listed companies). Chairman of the Supervisory Board of Academisch Ziekenhuis Maastricht (hospital).
Eric Bourdais de Charbonnière, vice-chairman (until 27 April 2009) (Born 1939, French nationality, male; appointed in 2004, retirement in 2009) Former managing director of JPMorgan France and chief financial officer of Michelin. Other business activities: chairman of the Supervisory Board of Michelin and member of the Supervisory Board of Thomson (listed companies). Member of the Supervisory Board of each of Oddo et Cie, American Hospital of Paris and Associés en Finance.
Aman Mehta (Born 1946, Indian nationality, male; appointed in 2008, term expires in 2012) Former CEO of Hong Kong & Shanghai Banking Corporation in Hong Kong. Other business activities: non-executive director of each of Tata Consultancy Services Ltd., Jet Airways Ltd. , PCCW Ltd., Vedanta Resources Plc, Wockhardt Ltd., Godrej Consumer Products Ltd., Cairn India Ltd., Max Healthcare Institute Ltd. and Emaar MGF Land Ltd. Governing board member of Indian School of Business and of Indian Centre for International Economic Relations. Member of the International Advisory Council of INSEAD.
Jackson P. Tai (Born 1950, American nationality, male; appointed in 2008, term expires in 2012) Former vice-chairman and chief executive officer of DBS Group Holdings. Former managing director in the Investment Banking Division of JPMorgan. Other business activities: non-executive director of MasterCard Incorporated and CapitaLand. Chairman of the Board of Directors of Brookstone, Inc. Member of the Bloomberg Asia Pacific Advisory Board and of the Harvard Business School Asia Pacific Advisory Board. Trustee of Rensselaer Polytechnic Institute.
Changes in the composition Eric Bourdais de Charbonnière and Wim Kok will retire after the 2009 General Meeting. At the same meeting, Godfried van der Lugt is nominated for reappointment.
At the 2009 General Meeting, Tineke Bahlmann (born 1950, Dutch nationality, female), Jeroen van der Veer (born 1947, Dutch nationality, male) and Lodewijk de Waal (born 1950, Dutch nationality, male) are nominated for appointment as new Supervisory Board members. Tineke Bahlmann and Lodewijk de Waal were recommended for appointment by the Dutch State. Lodewijk de Waal has already attended the Supervisory Board Meetings as an observer since October 2008.
As Jan Hommen is nominated for appointment to the Executive Board, he will, following this appointment, step down from the Supervisory Board. As chairman of the Supervisory Board, he will be succeeded by Peter Elverding as from 27 April 2009. More information can be found in the convocation for the 2009 General Meeting, available on the ING Group website (www.ing.com).
EXTERNAL AUDITORS At the annual General Meeting on 22 April 2008, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2008 to 2011 inclusive, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2008.
The external auditors attended the meetings of the Audit Committee and the General Meeting held in 2008.
The external auditors may be questioned at the annual General Meeting about their audit opinion on the annual accounts. The external auditors will therefore attend and be entitled to address the meeting.
Ernst & Young may only provide audit and non-audit services to ING Group and its subsidiaries with the permission of the Audit Committee. The Audit Committee has generally pre-approved certain types of audit, audit-related, tax and non-audit services to be provided by ING Group’s external audit firms on an annual basis. Services that have not been generally pre-approved by the Audit Committee should not be provided by the external auditor or should be specifically pre-approved by the Audit Committee after recommendation of local management.
The Audit Committee also sets the maximum annual amount that may be spent for pre-approved services. Throughout the year the external audit firms and ING monitor the amounts paid versus the pre-approved amounts. The external auditor provides the Audit Committee with a full overview of all services provided to ING, including related fees, supported by sufficiently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
More details of ING Group’s policy on external auditor’s independence are available on the website of ING Group (www.ing.com).
The following report is issued in compliance with the provisions of article 15 of the Trust Conditions for registered shares in the share capital of ING Groep N.V.
Pursuant to its articles of association, the object of Stichting ING Aandelen (‘ING Trust Office’), a foundation organised under the laws of the Netherlands, established in Amsterdam is: a. to foster the interests of the holders of depositary receipts for shares in the capital of ING Groep N.V. (‘ING Group’), while having regard for the interests of (i) ING Group itself, (ii) the enterprises carried on by ING Group and companies associated with it in a group and (iii) all other stakeholders in ING Group, such that all those interests are balanced and safeguarded as effectively as possible; b. to acquire and administer for the purposes of management registered shares in the capital of ING Group and any bonus shares which may be distributed thereon or shares acquired as stock dividend or by the exercise of subscription rights and to issue exchangeable depositary receipts for these shares to exercise voting rights and all other rights attaching to the shares, to exercise subscription rights and to receive dividends and other distributions, including proceeds of liquidation, subject to the obligation to distribute the income to the depositary receipt holders, save that depositary receipts shall be issued for bonus shares, shares acquired as stock dividend and shares acquired on behalf of depositary receipt holders by virtue of the exercise of subscription rights; c. to foster the exchange of information between ING Group on the one hand and the depositary receipt holders and shareholders in ING Group on the other; d. to promote and organise the solicitation of proxies of shareholders other than the foundation itself and of specific proxies and/or voting instructions of depositary receipt holders, 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 22 April 2008 the Board convened before the annual General Meeting of ING Group to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda. During this meeting the Board also signed and adopted the 2007 balance sheet and statement of income and expenditure of ING Trust Office.
On 3 November 2008 the Board held an additional meeting given the developments in the financial markets and the position of ING. In this meeting the Board discussed with the general counsel of ING the position of ING, in particular the transaction agreed between the Dutch government and ING Group.
As stated above, given the developments in the financial markets and the position of ING, the Board held an additional meeting on 3 November 2008. Furthermore, the Board followed the developments very closely and, where necessary, obtained further clarification on the specific choices ING Group made, including the nature of the capital injection by the Dutch government, the decision on the final dividend, the appointment and the powers of two members of the Supervisory Board and the changes to the remuneration policy of the members of the Executive Board. Where the Board thought it useful, it has asked ING Group to provide greater clarity, especially on the question whether the capital injection by the Dutch government was under the circumstances the best option for all holders of depositary receipts and all other stakeholders. ING Trust Office informed the shareholders and holders of depositary receipts of ING Group about the foregoing by way of an additional column of the chairman of the Board in the magazine ING Shareholder nr. 4.
ING Trust Office organises the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. The Board encourages the greatest possible participation of shareholders and holders of depositary receipts.
ING Trust Office takes the position that abandoning depositary receipts will be considered when the turnout at the General Meeting of ING Group reaches a level of at least 35% of the votes that can be cast on ordinary shares (excluding the multiple voting rights on the former preference shares) during three consecutive years. The level of 35% was exceeded during the General Meetings of 2007 and 2008.
On 31 December 2008 the nominal value of administered ordinary shares amounted to EUR 494,923,263.12 for which 2,062,180,263 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts cancelled for ordinary shares ran to 163,583,975.
The decrease came about as follows: Add: from exercise of warrants 18,013,226; from conversion of shares into depositary receipts 1,931,005; Less: from conversion of depositary receipts into shares 370,189; cancellation as a result of share buy-back programme 183,158,017.
All members of the Board stated that they meet the conditions regarding independence as referred to in the Dutch Corporate Governance Code and the Articles of Association of ING Trust Office.
In 2008 the costs of proxy voting amounted to EUR 118,088.94.
In 2008 ING Trust Office obtained an advice from NautaDutilh N.V. regarding guidelines with respect to the performance of duties by the Board.
ING Trust Office may consult holders of depositary receipts in a separate meeting. This possibility was not made use of. The Board is of the opinion that a meeting of holders of depositary receipts is not the right medium, because the holders of depositary receipts that will appear at such a meeting will as a rule also attend the General Meeting of ING Group. In that meeting they can voice their opinion and vote themselves. Their interests can therefore be looked after by themselves and not by ING Trust Office.
In 2008 the Board of ING Continuity Foundation (the ‘Board’) met three times, namely on 28 January, 2 April and 3 December.
The composition of the Board is currently as follows: Sebastian Kortmann, who was appointed chairman of the Board as of 2 April 2008, Allard Metzelaar, who was reappointed as of 12 May 2008, Wim van Vonno and Peter Wakkie, who was appointed as of 1 August 2008. Ad Timmermans, the former chairman of the Board, retired as of 1 January 2008 reaching the age limit of 70 as referred to in the Articles of Association of ING Continuity Foundation.
Conformity statement pursuant to section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act (Wet op het financieel toezicht)
Eric Boyer de la Giroday Acting CEO, member of the Executive Board
aMSteRdaM, 16 MaRch 2009 eric boyer de la giroday Acting CEO, member of the Executive Board
RepoRt of independent RegiSteRed public accounting fiRM to the Shareholders, the Supervisory board and the executive board of ing groep n.v.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Remuneration structure Total compensation throughout ING consists of three basic components: Fixed or base salary which represents the total guaranteed • annual income. Short-term incentive (STI) in cash, which compensates for past • performance measured over one year. Long-term incentive (LTI) in stock options and performance • shares, which compensates for performance measured over multiple years and is forward-looking.
To ensure that base-salary levels are in line with the relevant market for talent, the Supervisory Board reviews the base-salary levels of the Executive Board on an annual basis.
Short-term incentive plan The short-term incentive plan (STIP) is a key component of ING’s performance-driven culture. The short-term incentive is paid in
Top senior management in business 15% of total bonus 85% of total bonus
Top senior management in Group staff 30% of total bonus 70% of total bonus
The ING stock options have a total term of ten years and a vesting period of three years after which they can be exercised for the remaining seven years. After three years, the options will vest only if the option holder is still employed by ING. The exercise price of the stock options is equal to the Euronext Amsterdam by NYSE Euronext market price of the ING depositary receipts on the grant date. For members of the Executive Board the grant date is a specific date during the first ‘open period’ after the General Meeting.
Performance shares are conditionally granted. The number of ING depositary receipts that is ultimately granted at the end of a three-year performance period depends on ING’s Total Shareholder Return (TSR) performance over three years (return in the form of capital gains and reinvested dividends that shareholders receive in that period) relative to the TSR performance of a predefined peer group. The criteria used to determine the performance peer group are: a) considered comparable and relevant by the Supervisory Board; b) representing ING’s current portfolio of businesses (e.g. banking, insurance and asset management) and ING’s geographical spread; c) global players; and d) listed and with a substantial free float.
On the basis of these criteria the performance peer group established in 2004 and adjusted in 2007 is composed as follows: Citigroup, Fortis, Lloyds TSB (bank/insurance companies);• Unicredito Italiano, Bank of America, BNP Paribas, Banco • Santander, Credit Suisse, Deutsche Bank, HSBC (banks); Aegon, AIG, Allianz, Aviva, AXA, Prudential UK, Hartford • Financial Services, Munich Re (insurance companies); and Invesco (asset manager).•
ING’s TSR ranking within this group of companies determines the final number of performance shares that vest at the end of the three-year performance period. The initial number of performance shares granted is based on a mid-position ranking of ING. This initial grant will increase or decrease (on a linear basis) on the basis of ING’s TSR position after the three-year performance period as specified in the table below.
In line with ING’s overall remuneration policy, the Supervisory Board has focused on increasing variable (performance-driven) pay components which has resulted in a gradual convergence of the Executive Board total compensation to the median benchmark. The mix of total target compensation (in case of at-target performance) is divided equally between each component (i.e. 1/3rd base salary, 1/3rd short-term incentives, and 1/3rd long-term incentives).
Pensions Executive Board members At the General Meeting on 25 April 2006, it was agreed to amend the Executive Board remuneration policy with respect to pensions. This revised pension plan applies to all members of the Executive Board regardless of the time of appointment to the Executive Board except for John Hele and Tom McInerney. The revised pension plan does not apply to John Hele and Tom McInerney as they participate in the US pension plans. The pensions of the Executive Board are now based on a defined-contribution plan, which are insured through a contract with Nationale-Nederlanden Levensverzekering Maatschappij N.V. Starting in 2006, members of the Executive Board have been required to pay a portion of their pension premium. The Employment Contract will terminate by operation of law in case of retirement (‘Standard Retirement’), which will take place on the first day of the month that the individual reaches the age of 65. The retirement age has been changed from previous years (age 60) as a result of the Dutch tax reform.
Employment contract for newly appointed Board members The contract of employment for Executive Board members appointed after 1 January 2004 provides for an appointment for a period of four years (the appointment period) and allows for reappointment by the General Meeting.
Under the terms of the agreement reached with the Dutch State to trengthen ING’s capital position, the individual Executive Board members will not receive their 2008 STI payout.
Executive Board long-term incentive plan 2008 Under the LTIP for the Executive Board, two instruments are used: stock options and performance shares. As mentioned earlier, an identical plan has been adopted by the Executive Board for the top senior managers across ING. As a result, approximately 7,000 senior leaders participate in a similar plan.
The target level for the 2008 LTIP was set at 100% of base salary for each Executive Board member. The final grant level depends on the Group STIP performance and will vary between 50% of the target level (if Group STI would be 0%) and 150% (if Group STI would be 200%).
Michel Tilmant (1) Dick Harryvan, Tom McInerney, Hans van der Noordaa and Jacques de Vaucleroy were appointed to the Executive Board on 25 April 2006. The figures for these members reflect compensation earned in their capacity as Executive Board members. Thus, the figures for 2006 reflect the partial year as Executive Board members.
(2) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The figures for these members reflect compensation earned in their capacity as Executive Board members. Thus, the figures for 2007 reflect the partial year as Executive Board members.
(3) John Hele and Tom McInerney get their compensation in US dollars. For each year the compensation in US dollars was converted to euros at the average exchange rate for that year.
Short-term performance-related bonus 0 1,319 1,477 Total cash compensation 892 2,169 2,327
Short-term performance-related bonus 0 842 710 Total cash compensation 665 1,476 1,133
Short-term performance-related bonus 0 956 1,102 Total cash compensation 665 1,590 1,736
Base salary 665 423 Short-term performance-related bonus 0 637 Total cash compensation 665 1,060
Short-term performance-related bonus 0 956 710 Total cash compensation 665 1,590 1,133
Compensation in cash of former members of the Executive Board who are not included in the above table amounted to nil in 2008, to EUR 729 thousand in 2007, and to EUR 5,353 thousand in 2006.
Long-term incentives of the individual members of the Executive Board (1)
(2) The fair market value of a long-term incentive award reflects the estimated fair market value of the long-term incentive award based on a fair value calculation. The valuation is calculated on the last trading day of the year for grants made to the Executive Board members for performance over the specified year and is not updated for current market values.
(4) John Hele and Koos Timmermans were appointed to the Executive Board on 24 April 2007. The figures for these members reflect compensation earned in their capacity as Executive Board members.
Number of options 0 132,054 132,163 Number of performance shares 0 31,293 27,650 Fair market value of long-term incentive (2) 0 1,521 1,734
Number of options 0 64,967 43,347 Number of performance shares 0 15,396 9,069 Fair market value of long-term incentive (2) 0 748 569
Number of options 0 43,312 Number of performance shares 0 10,264 Fair market value of long-term incentive (2) 0 499
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 December 2008 number of options
Eric Boyer de la Giroday 2,000 2,000 26.10 28 May 2009
Eric Boyer de la Giroday 21 4.3% 3 24 4.3% 4 28 4.3% 3
Michel Tilmant 31,663 24,764 7,764 (1) The shares held by Tom McInerney are American Depositary Receipts. He also holds 2,382 units in a Leveraged Stock Fund.Eric Boyer de la Giroday 11,588 7,126
EXECUTIVE BOARD REMUNERATION STRUCTURE 2009 In October 2008, ING reached an agreement with the Dutch State to strengthen its capital position. Under the terms of the agreement, the ING Supervisory Board will review the remuneration policy for the Executive Board and senior management to align it with new international standards. This will include linking incentive schemes to long-term value creation and risk.
The Supervisory Board has taken notice of the preliminary recommendations published by some financial authorities and will continue to monitor developments in this area. For ING as a global company it is essential to work from one set of global recommendations. As soon as international standards are determined ING will review and amend the current remuneration policy as appropriate. Any changes to the remuneration policy will require approval by the annual General Meeting. The reviewed remuneration policy is expected to be proposed to the General Meeting in 2010 and to be effective as of compensation year 2010.
Executive Board short-term incentive plan 2009 Under the terms of the Illiquid Assets Back-up Facility agreed with the Dutch State in January 2009, the individual Executive Board members will not receive a 2009 short-term incentive.
Supervisory Board members receive an additional fee of EUR 2,000 per attended Supervisory Board or Committee meeting in the event the meeting is held outside the country of residence of the Supervisory Board member, or an additional amount of EUR 7,500 per attended Supervisory Board or Committee meeting if intercontinental travel is required for attending the meeting.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2008 and previous years.
Compensation of the members of the Supervisory Board amounts in thousands of euros 2008 2007 2006
Jan Hommen (1) 89 67 57 (1) Jan Hommen is a member of the Supervisory Board as of June 2005 and chairman as of January 2008.
(2) Eric Bourdais de Charbonnière is a member of the Supervisory Board as of April 2004 and vice-chairman as of February 2005.
(4) Peter Elverding is a member of the Supervisory Board as of August 2007. The compensation figure for 2007 reflects the partial year as member of the Supervisory Board.
(7) Harish Manwani, Aman Mehta, Joan Spero and Jackson Tai are members of the Supervisory Board as of April 2008. The compensation figure for 2008 reflects the partial year as members of the Supervisory Board.
(8) Luella Gross Goldberg retired in April 2008. The compensation figure for 2008 reflects the partial year as member of the Supervisory Board.
Compensation of former members of the Supervisory Board who are not included in the above table amounted to nil in 2008, to EUR 102 thousand in 2007, and to EUR 160 thousand in 2006.
ING depositary receipts for shares and options held by members of the Supervisory Board number of shares 2008 2007 2006
Piet Klaver 7,430 7,430 5,430 (1) Luella Gross Goldberg retired in April 2008. The shares held by her are American Depositary Receipts.Karel Vuursteen 1,510 1,510 1,510
Rob Eijt, chairman Paul de Widt, secretary Bernard Wempe, deputy chairman René van der Linden, deputy secretary Goof Bode, Bernardt Bodt, Hans de Boer, Ron Brands, Anneke Dalger, Petra Delhez, Rudi van Doorn, Petra Hartendorp, Winie den Hartog, Thea van der Heide, Piet Hoekstra, Alex Hoogendoorn, Aad Kant, Maarten Kramer, Rinus Koster, Peter van Oord, Gerrit Riphagen, Frans Rose, Rob de Winter, Peter van Weissenbruch, Paul Zoet.
Mathieu Blondeel, chairman, Belgium Marcel Koopman, secretary, the Netherlands Norbert Lucas, deputy chairman, Germany Gerlinde Korterink, deputy secretary, the Netherlands Werner Fözö, Austria Jean-Claude Van Den Abeele, Leo D Antuono, Jean Pierre Lambert, Belgium Kaloyan Marinov, Bulgaria Lenka Mysakova, Czech Republic Mourad Benzaaza, France Carolin Simonis, Germany Nikolaos Ploumis, Greece Csilla Dobos, Hungary Marta Gasparoli, Italy Arsène Kihm, Luxembourg Bernard Bodt, Jeffrey Dinsbach, Thea van der Heide, Dave Kooijman, Maarten Kramer, Robert Milewski, Gerrit Riphagen, Bernard Wempe, Jelte Wiersinga, Paul Zoet, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Jakub Dzianowicz, Poland Mihai Ailincai, Ane-Mona Giurgiteanu, Romania Ana Baron, Araceli Rodriguez, Spain Sam Chaudhuri, Rina Goldenberg, United Kingdom
Consolidated balance sheet of ING Group as at 31 December amounts in millions of euros 2008 2007
EQUITY Shareholders’ equity (parent) 12 17,334 37,208 Non-voting equity securities 12 10,000
Debt securities in issue 15 96,488 66,995 Other borrowed funds 16 31,198 27,058 Insurance and investment contracts 17 240,790 265,712 Amounts due to banks 18 152,265 166,972 Customer deposits and other funds on deposit 19 522,783 525,216 Financial liabilities at fair value through profit and loss 20 – trading liabilities 152,616 148,988 – non-trading derivatives 21,773 6,951 – designated as at fair value through profit and loss 14,009 13,882
References relate to the notes starting on page 107. These form an integral part of the consolidated annual accounts.
Consolidated profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2008 2008 2007 2007 2006 2006
Interest income banking operations 97,011 76,749 59,170 Interest expense banking operations –85,969 –67,773 –49,978 Interest result banking operations 34 11,042 8,976 9,192
Net gains/losses on disposals of group companies 17 430 1 Gross commission income 7,504 7,693 6,867 Commission expense –2,539 –2,866 –2,551
Valuation results on non-trading derivatives 38 2,300 –561 89 Net trading income 39 –749 1,119 1,172 Share of profit from associates 6 –404 740 638
Addition to loan loss provisions 5 1,280 125 103 Intangible amortisation and other impairments 42 464 15 35
Attributable to: Equityholders of the parent –729 9,241 7,692 Minority interests –37 267 341 amounts in euros 2008 2007 2006
Basic earnings per ordinary share 47 –0.36 4.32 3.57 Earnings – after attribution to non-voting equity securities – per ordinary share 47 –0.56 4.32 3.57 Diluted earnings per ordinary share 47 –0.36 4.28 3.53 Dividend per ordinary share 48 0.74 1.48 1.32
References relate to the notes starting on page 162. These form an integral part of the consolidated annual accounts.
Consolidated statement of cash flows of ING Group for the years ended 31 December amounts in millions of euros 2008 2007 2006
Proceeds from issuance of subordinated loans 2,721 1,764 865 Repayments of subordinated loans –600 Proceeds from borrowed funds and debt securities 391,915 455,629 304,228 Repayments of borrowed funds and debt securities –354,015 –464,982 –283,728 Issuance of ordinary shares 448 397 5 Issuance of non-voting equity securities 10,000 Payments to acquire treasury shares –2,388 –3,446 –1,422 Sales of treasury shares 252 846 373 Dividends paid –3,207 –3,039 –2,716 Net cash flow from financing activities 45,726 –12,831 17,005
Cash and cash equivalents at beginning of year –16,811 –1,795 3,335 Effect of exchange rate changes on cash and cash equivalents –464 40 –385 Cash and cash equivalents at end of year 53 31,271 –16,811 –1,795
References relate to the notes starting on page 179. These form an integral part of the consolidated annual accounts.
Unrealised revaluations after taxation –1,135 –1,135 –109 –1,244 Realised gains/losses transferred to profit and loss –3,186 –3,186 –3,186 Changes in cash flow hedge reserve –925 –925 –925 Transfer to insurance liabilities/DAC 1,132 1,132 5 1,137 Employee stock option and share plans 104 104 104 Exchange rate differences (3) –1,381 –1,381 23 –1,358 Other revaluations 31 31 Total amount recognised directly in equity –5,391 –5,391 –50 –5,441
(1) 2005 final dividend of EUR 0.64 per ordinary share and 2006 interim dividend of EUR 0.59 per ordinary share. (2) 2006 final dividend of EUR 0.73 per ordinary share and 2007 interim dividend of EUR 0.66 per ordinary share. (3) Exchange rate differences include Exchange rate differences for the year of EUR –952 million (2007: EUR –1,153 million; 2006: EUR –1,335 million) and Realised gains/losses transferred to profit and loss of nil (2007: EUR –228 million; 2006: nil). Reference is made to Note 12 ‘Shareholders’ equity/non-voting equity securities’.
(4) 2007 final dividend of EUR 0.82 per ordinary share, 2008 interim dividend of EUR 0.74 per ordinary share and EUR 0.425 per non-voting equity security.
Reserves include Revaluation reserve of EUR –8,502 million (2007: EUR 4,937 million; 2006: EUR 9,453 million), Currency translation reserve of EUR –1,918 million (2007: EUR –1,354 million; 2006: EUR –473 million) and Other reserves of EUR 18,077 million (2007: EUR 24,352 million; 2006: EUR 20,408 million). Changes in individual components are presented in Note 12 ‘Shareholders’ equity (parent)/ non-voting equity securities’.
AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2008 were authorised for issue in accordance with a resolution of the Executive Board on 16 March 2009. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Group are described in the section ‘ING at a glance’ in section 1.1.
International Financial Reporting Standards as adopted by the EU provide several options in accounting policies. ING Group’s accounting policies under International Financial Reporting Standards, as adopted by the EU and its decision on the options available, are set out in the section ‘Principles of valuation and determination of results’ below.
The presentation of, and certain terms used in, the consolidated balance sheet, the consolidated profit and loss account, consolidated statement of cash flows, consolidated statement of changes in equity and certain notes has been changed to provide additional and more relevant information.
CRITICAL ACCOUNTING POLICIES ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to insurance provisions and deferred acquisition costs, the loan loss provision, the determination of the fair values of real estate, financial assets and liabilities, impairments and employee benefits. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items necessarily involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce materially different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information below under ‘Principles of valuation and determination of results’.
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS (DAC) AND VALUE OF BUSINESS ACQUIRED (VOBA) The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, significant assumptions related to these items that could have a material impact on financial results include interest rates, mortality, morbidity, property and casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This impact is dependent upon the difference between the potential minimum benefits payable and the total account balance, expected mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about factors such as inflation, investment returns, policyholder behaviour, and mortality and morbidity trends. The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense.
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by ING Insurance risk management governance as described in the ‘Risk management’ section.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair values of financial assets and liabilities are determined using quoted market prices where available. Market prices are obtained from independent market vendors, brokers, or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations, credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
See Note 33 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments and related sensitivities.
All debt and equity securities (other than those carried at fair value through profit or loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may be unlikely to pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline of fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities; generally 25% and 6 months are used as triggers.
Upon impairment, the full difference between amortised cost and fair value is removed from equity and recognised in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.
The actuarial assumptions may differ significantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a significant impact on the defined benefit plan liabilities and future pension costs. The effects of changes in actuarial assumptions and experience adjustments are not recognised in the profit and loss account unless the accumulated changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets and the excess is then amortised over the employees’ expected average remaining working lives. See Note 21 ‘Other liabilities’ for the weighted averages of basic actuarial assumptions in connection with pension and other post-employment benefits.
PRINCIPLES OF VALUATION AND DETERMINATION OF RESULTS CONSOLIDATION ING Group (‘the Group’) comprises ING Groep N.V. (‘the Company’), ING Verzekeringen N.V., ING Bank N.V. and all other subsidiaries. The consolidated financial statements of ING Group comprise the accounts of ING Groep N.V. and all entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and financial policies through situations including, but not limited to: Ability to appoint or remove the majority of the board of directors;• Power to govern such policies under statute or agreement; and• Power over more than half of the voting rights through an agreement with other investors.•
The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Group controls another entity. For interests in investment vehicles the existence of control is determined taking into account both ING’s financial interests for own risk and its role as investment manager.
USE OF ESTIMATES AND ASSUMPTIONS The preparation of the consolidated financial statements necessitates the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of the assets and liabilities and the amounts of the contingent liabilities at the balance sheet date, as well as reported income and expenses for the year. The actual outcome may differ from these estimates.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Refer to Note 39 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of Available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned in Group companies below any exchange rate differences deferred in equity are recognised in the profit and loss account in Net gains and losses on disposals of group companies. Refer also to Note 12 ‘Shareholders’ equity (parent)/non-voting equity securities’, which discloses the amounts included in the profit and loss account.
Available-for-sale financial assets Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income from banking operations and Investment income in the profit and loss account using the effective interest method. Dividend income from equity instruments classified as available-for-sale is generally recognised in Investment income in the profit and loss account when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as investment income. For impairments of available-for-sale financial assets reference is made to the section ‘Impairments of other financial assets’. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classified as available-for-sale.
At the inception of the transaction ING documents the relationship between hedging instruments and hedged items, its risk management objective, together with the methods selected to assess hedge effectiveness. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.
Non-trading derivatives that do not qualify for hedge accounting Derivative instruments that are used by the Group as part of its risk management strategies, but which do not qualify for hedge accounting under the Group’s accounting policies, are presented as non-trading derivatives. Non-trading derivatives are measured at fair value with changes in the fair value taken to the profit and loss account.
IMPAIRMENTS OF LOANS AND ADVANCES TO CUSTOMERS (LOAN LOSS PROVISIONS) The Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired: The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance or delays repayment • of the financial asset; The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain • period; 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 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 Historical experience, updated for current events where necessary, provides evidence that a proportion of a group of assets is impaired • although the related events that represent impairment triggers are not yet captured by the Group’s credit risk systems.
The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and then individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
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 confirmation period’ to default probabilities. The loss confirmation 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 confirmation period ensures that impairments that are incurred
2.1 Consolidated annual accounts but not yet identified are adequately reflected in the Group’s loan loss provision. Although the loss confirmation 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 confirmation 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.
IMPAIRMENT OF OTHER FINANCIAL ASSETS At each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the specific case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities; generally 25% and 6 months are used as triggers. If any objective evidence exists for available-for-sale debt and equity investments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in net result – is removed from equity and recognised in the profit and loss account. Impairment losses recognised on equity instruments can never be reversed. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the profit and loss account, the impairment loss is reversed through the profit and loss account.
INVESTMENTS IN ASSOCIATES Associates are all entities over which the 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.•
The Group’s investment in associates (net of any accumulated impairment loss) includes goodwill identified on acquisition. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the profit and loss account, and its share of post-acquisition changes in reserves is recognised in equity. The cumulative post-acquisition changes are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
The fair values of land and buildings are based on regular appraisals by independent qualified valuers. Subsequent expenditure is included in the asset’s carrying amount when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
Property under development for third parties Property under development where there is not yet a specifically negotiated contract is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and the Group’s own directly attributable development and supervision expenses less any impairment losses. Profit is recognised using the completed contract method (on sale date of the property).
LEASES The Group as the lessee The leases entered into by ING are primarily operating leases. The total payments made under operating leases are charged to the profit and loss account on a straight-line basis over the period of the lease.
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profits. Amortisation is adjusted when estimates of current or future gross profits, to be realised from a group of products, are revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on flexible insurance contracts the approach is that in determining the estimate of future gross profits ING assumes the short-term and long-term separate account growth rate assumption to be the same. Higher/lower expected profits (e.g. reflecting stock market performance or a change in the level of assets under management) may cause a lower/higher amortisation of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recognised in the profit and loss account of the period in which the unlocking occurs.
Preference shares, which carry a mandatory coupon or are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities. The dividends on these preference shares are recognised in the profit and loss account as Interest expense using the effective interest method.
Claims provision The Claims provision is calculated either on a case-by-case basis or by approximation on the basis of experience. Provisions have also been made for claims incurred but not reported (IBNR) and for future claims handling expenses. The adequacy of the Claims provision is evaluated each year using standard actuarial techniques. In addition, ‘IBNR’ reserves are set to recognise the estimated cost of losses that have occurred but which have not yet been notified to the Group.
Deferred profit sharing liability For insurance contracts with discretionary participation features a deferred profit sharing liability is recognised for the full amount of the unrealised revaluation on allocated investments. Upon realisation, the profit sharing on unrealised revaluation is reversed and a deferred profit sharing liability is recognised for the share of realised results on allocated investments that is expected to be shared with policyholders. The deferred profit sharing liability is reduced by the actual allocation of profit sharing to individual policyholders.
EARNINGS PER ORDINARY SHARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: Own shares held by group companies are deducted from the total number of ordinary shares in issue;• The computation is based on daily averages;• In case of exercised warrants, the exercise date is taken into consideration.•
Amounts held at central banks 16,432 8,376 Cash and bank balances 5,052 3,664 Short term deposits insurance operations 561 366 2 AMOUNTS DUE FROM BANKS
Loans and advances to banks 15,234 14,451 25,556 31,339 40,790 45,790 Cash advances, overdrafts and other balances 4,800 1,065 2,942 2,033 7,742 3,098
As at 31 December 2008, Amounts due from banks included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 3,005 million (2007: EUR 2,472 million) and receivables related to finance lease contracts amounting to EUR 100 million (2007: EUR 232 million).
As at 31 December 2008, Trading assets included receivables of EUR 57,968 million (2007: EUR 114,897 million) with regard to reverse repurchase transactions.
The large increase in Trading assets–derivatives in 2008 is substantially offset by a similar increase in Trading liabilities–derivatives.
The fair value of credit derivatives included in investments for risk of policyholders and held to mitigate exposure to credit risk was EUR –12 million (2007: EUR –7 million), and the change in their fair value in the period was EUR –5 million (2007: EUR –7 million).
Derivatives used in: – fair value hedges 3,862 1,952 – cash flow hedges 5,771 3,417 – hedges of net investments in foreign operations 670 281 Other non-trading derivatives 6,181 1,987
The increase is substantially mitigated by a similar increase in Other non-trading derivatives (liabilities) as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’.
Available-for-sale – equity securities 8,822 19,947 – debt securities 234,030 255,950
The fair value of the securities classified as held to maturity amounts to EUR 15,566 million as at 31 December 2008 (2007: EUR 16,354 million).
As of the reclassification date, the (weighted average) effective interest rates on reclassified assets were in the range from 4.10% to 20.95% and expected recoverable cash flows were EUR 1,646 million. Unrealised fair value losses recognised in shareholders’ equity amounted to EUR 69 million. This amount will be released from equity and amortised to the profit and loss account over the remaining life of the assets on an effective interest rate basis. From 1 January 2008 until the reclassification date EUR 79 million of unrealised fair value losses were recognised in shareholders’ equity, no impairment was recognised.
As at 31 December 2008, the carrying value in the balance sheet and the fair value of the reclassified financial assets amounted to EUR 1,565 million and EUR 1,592 million respectively.
If the reclassification had not been made, profit before tax would have been unchanged and shareholders’ equity would have been EUR 28 million lower due to unrealised fair value losses.
After the reclassification, the reclassified financial assets contributed EUR 9.2 million to income before tax for the period ended 31 December 2008, which fully consisted of Interest income. No provision for credit losses was recognised.
In 2007 the reclassification from Available-for-sale debt securities to Financial assets designated as at fair value through profit and loss relates to debt securities backing insurance contracts where current market assumptions were implemented in the measurement of the insurance contracts.
On 12 January 2009 ING Group reclassified certain European RMBS, ABS, CMBS and covered bonds for which it has an intention to hold for foreseeable future from Available-for-sale investments to Loans and advances. The fair value of the assets as of the reclassification date amounted to EUR 22.8 billion. The negative revaluation reserve in equity as of the reclassification date amounted to approximately EUR 0.9 billion (after tax). This reclassification is recognised in 2009.
As at 31 December 2008, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 182 million (2007: EUR 13 million) and nil (2007: nil), respectively, and debt securities which were lent or sold in repurchase transactions amounting to EUR 9,822 million (2007: EUR 4,114 million) and EUR 35,795 million (2007: EUR 38,214 million), respectively.
Borrowed equity securities and convertible bonds are not recognised in the balance sheet and amounted to nil as at 31 December 2008 (2007: nil).
Investments in connection with the insurance operations with a combined carrying value of EUR 47 million (2007: EUR 69 million) were non-income-producing for the year ended 31 December 2008.
Loans to, or guaranteed by, public authorities 16,288 14,678 10,099 8,961 26,387 23,639
Loans guaranteed by credit institutions 295 1,951 253 591 548 2,542
Loans and advances to customers analysed by subordination – banking operations
As at 31 December 2008, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 964 million (2007: EUR 4,569 million).
Changes in loan loss provisions relating to insurance operations are presented under Investment income. Changes in the loan loss provisions relating to banking operations are presented on the face of the profit and loss account.
ING Logistics Property Fund Europe 25 65 530 269 –5 21 ING Re Nordic Property Fund 16 64 979 579 16 62 ING Property Fund Central and Eastern Europe 20 55 791 519 32 60
Accumulated impairments of EUR 46 million (2007: EUR 29 million) have been recognised.
ING Dutch Office Master Fund C.V. 24 348 1,718 257 202 24
Retail Property Fund France Belgium (RPFFB) 15 81 1,597 1,069 304 189 ING Logistics Property Fund Europe 25 78 574 263 76 31
ING Retail Property Partnership Southern Europe 23 66 1,150 857 111 78 ING Property Fund Central and Eastern Europe 23 66 761 478 40 39
In 2007, Change in composition of the group relates mainly to the deconsolidation of Real estate funds as a result of the reduction of ING’s shareholding in these funds.
ING’s exposure to real estate is included in various balance sheet lines: Real estate exposure
The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that generated rental income for the year ended 31 December 2008 was EUR 71 million (2007: EUR 64 million). The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that did not generate rental income for the year ended 31 December 2008 was EUR 36 million (2007: EUR 20 million).
Most recent appraisal in 2008 99 Most recent appraisal in 2007 0 Most recent appraisal in 2006 1 Most recent appraisal in 2005 0 Most recent appraisal in 2004 0
Gross carrying amount as at 31 December 2,701 2,943 Accumulated depreciation as at 31 December –755 –708 Accumulated impairments as at 31 December –105 –166 Net book value 1,841 2,069
Gross carrying amount as at 31 December 4,466 5,177 28 70 4,494 5,247 Accumulated depreciation as at 31 December –1,324 –2,291 –20 –58 –1,344 –2,349 Accumulated impairments as at 31 December –2 –2
More than 1 year but less than 5 years 2,072 1,844 More than 5 years 4 6
Amortisation –298 –229 –173 –221 –157 –18 –628 –468 Impairments –155 –27 –14 –44 –1 –226 –15 Effect of unrealised revaluations in equity 555 32 555 32 Changes in the composition of the group –730 25 –3 –28 5 9 229 390 –499 396 Exchange rate differences 158 –261 –340 –71 –17 –5 –113 –18 –312 –355 Disposals –6 –1 –12 –13 –1 –19 –14
Insurance Americas – Latin America 543 473 Insurance Americas – United States 501 Insurance Americas – Canada 71 84 Insurance Asia/Pacific – South Korea 164 107 Insurance Asia/Pacific – Rest of Asia 186 224 Insurance Europe – Benelux 49 49 Insurance Europe – Rest of Europe 124 54 Retail Banking – Central Europe 839 1,015 Retail Banking – South West Europe 49 49 Retail Banking – Netherlands 1 ING Direct 456 94 Wholesale Banking Leasing & Factoring 61 65 Wholesale Banking Real Estate 11 16 Wholesale Banking Other 15 15
As a result of the nationalisation of AFJP Pension in Argentina goodwill of EUR 155 million was written off.
Goodwill is tested for impairment by comparing the book value of the reporting unit (including goodwill) to the best estimate of the fair value of the reporting unit. As a first step the best estimate of the fair value is determined based on a Sum of the Parts valuation (SOP). If the outcome of the SOP indicates that there is not a significant margin between fair value and book value, a more thorough analysis of the fair value is determined. The main assumptions in the SOP valuation include forecast results, business growth, discount rates, value of new business, market value surplus, etc. For listed companies the relevant market price is used. The more detailed analysis uses valuation models similar to those of the original valuation of an acquisition, European embedded value, peer reviews, etc. The valuation models are validated and include development of the business following the acquisition, the latest management forecasts of income and expenditure and updates of future projections, review of discount rates and terminal growth rates, etc. Peer reviews include analysis of Price/Earnings and Price/Book multiples of comparable listed companies. Assumptions are generally based on past experience, management’s best estimate of future developments and, where available, relevant external information. Market developments during 2008 have significantly impacted estimated fair values of the reporting units. However, the goodwill impairment test as at 31 December 2008, using best estimate assumptions and reasonable likely changes therein, have not resulted in impairment (2007: nil).
Changes in the composition of the group –34 –1,289 –104 –5 –1,427 –5 Exchange rate differences –16 –1 461 –938 –35 10 410 –929 Disposal of portfolios –39 –15 –54
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2008 is 6.4% gross and 5.6% net of investment management fees (2007: 6.6% gross and 5.6% net of investment management fees).
Reinsurance and insurance receivables 3,683 3,664 Deferred tax assets 8,034 2,723 Property held for sale 3,143 2,993 Income tax receivable 776 974 Accrued interest and rents 20,156 17,818 Other accrued assets 1,758 1,099 Pension assets 1,781 439 Taiwan – assets held for sale 15,312 Other receivables 8,334 10,389
Accrued interest and rents includes EUR 7,980 million (2007: EUR 8,844 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
Receivables on account of direct insurance from: Reinsurance receivables 742 1,170
Property held for sale 640 530 Other: – property obtained from foreclosures 91 48 – property developed for sale 2,412 2,415
Cash and bank balances 80 Financial assets at fair value through profit and loss 1,552 Available-for-sale Investments 9,801 Loans and advances to customers 1,341 Property and equipment 41 Intangible assets 671 Deferred acquisition costs 1,164 Other assets 662 Taiwan – assets held for sale 15,312
Reference is made to Note 29 ‘Companies acquired and disposed’. As at 31 December 2008 ING Life Taiwan is classified as held for sale in the consolidated balance sheet. Amounts as at 31 December 2007 are presented in the relevant balance sheet lines.
Revaluation reserve –8,502 4,937 9,453 Currency translation reserve –1,918 –1,354 –473
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Group increased in 2008 from 3,000 million shares to 4,500 million shares as a result from an amendment made to the Articles of Association on 8 October 2008. As at 31 December 2008, 2,063 million of ordinary shares were issued and fully paid.
The holder of a depositary receipt is entitled to receive from the Trust Office payment of dividends and distributions corresponding to the dividends and distributions received by the Trust Office on an ordinary share.
Unrealised revaluations after taxation 8 –1,087 –1,079 Realised gains/losses transferred to profit and loss –804 –804 Changes in cash flow hedge reserve –690 –690 Transfer to insurance liabilities/DAC 820 820
Cancellation of preference shares During 2008, ING Group repurchased 5,296,015 (depositary receipts for) preference A shares (2007: 57,016,572) at an average price of EUR 3.60 per share or EUR 19.1 million in total (2007: EUR 3.64 per share or EUR 207.5 million). The preference A shares (for which the depositary receipts were) thus repurchased and 10 million preference A shares for which the depositary receipts were acquired from ABN AMRO in 2007, were cancelled in two blocks on 29 February 2008 and 4 September 2008 respectively.
The remaining 716,824 preference A shares were redeemed and cancelled in accordance with ING Groep N.V.’s Articles of Association against payment of EUR 3.40 plus accrued dividend, effective 4 September 2008. From that date, there were no preference shares of ING Groep N.V. outstanding anymore.
Pursuant to an amendment of ING Groep N.V.’s Articles of Association, effected on 8 October 2008, the authorised share capital of ING Groep N.V. was adjusted in such a way that it no longer provided for preference A shares and/or preference B shares, so that such shares may no longer be issued by ING Groep N.V.
The cumulative preference shares rank before the preference shares and the ordinary shares in entitlement to dividend and to distributions upon liquidation of ING Groep N.V.
Moreover, ING Groep N.V.’s ability to pay dividends is dependent on the dividend payment ability of its subsidiaries. ING Groep N.V. is legally required to create a non-distributable reserve insofar profits of its subsidiaries are subject to dividend payment restrictions which apply to those subsidiaries themselves. Such restrictions may among others be of a similar nature as the restrictions which apply to ING Groep N.V. or may be the result of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, or other limitations which may exist in certain countries.
More than 1 year but less than 2 years 2,448 4,156 More than 2 years but less than 3 years 2,410 1,738 More than 3 years but less than 4 years 2,429 2,057 More than 4 years but less than 5 years 4,332 2,374 More than 5 years 6,290 5,870 Total fixed rate debt securities 68,903 51,377
Subordinated loans of group companies 553 1,058 1,502 1,706 652 10,398 15,869 Preference shares of group companies 1,071 1,071
Provision for non-participating life policy liabilities 67,120 70,401 4,822 4,481 71,942 74,882 Provision for participating life policy liabilities 55,266 54,645 217 175 55,483 54,820 Provision for (deferred) profit sharing and rebates 147 1,601 2 5 149 1,606 Provision for life insurance for risk of policyholders 84,279 100,753 541 639 84,820 101,392
Provision for unearned premiums and unexpired risks 1,756 2,614 13 99 1,769 2,713
For insurance contracts with discretionary participation features a deferred profit sharing liability is recognised for the full amount of the unrealised revaluation on allocated investments. Upon realisation, the profit sharing on unrealised revaluation is reversed and a deferred profit sharing liability is recognised for the share of realised results on allocated investments that is expected to be shared with policyholders. The deferred profit sharing liability is reduced by the actual allocation of profit sharing to individual policyholders. The change in the deferred profit sharing liability (net of deferred tax) is recognised in equity in the Revaluation reserve. The deferred profit sharing liability is included in Provision for (deferred) profit sharing and rebates and amounts to EUR –876 million as at 31 December 2008 (2007: EUR 318 million).
To the extent that the assuming reinsurers are unable to meet their obligations, the Group remains liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible. The life reinsurance market is highly concentrated and, therefore, diversification of exposure is inherently difficult. To minimise its exposure to significant losses from reinsurer insolvencies, the Group evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer. Reference is also made to the ‘Risk management’ section.
As at 31 December 2008, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounted to EUR 6,539 million (2007: EUR 7,044 million) after the provision for uncollectible reinsurance of nil (2007: EUR 5 million).
Changes in the composition of the group –643 –194 –93 3 –736 –191
Changes in the composition of the group –401 –667 –135 –18 –536 –685
– for prior years –322 –282 –12 14 –334 –268 – interest accrual of provision 30 32 30 32
ING Group had an outstanding balance of EUR 52 million as at 31 December 2008 (2007: EUR 66 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean-up, the management of ING Group considers facts currently known and current legislation and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when sufficient information has been obtained to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
Exchange rate differences –1,111 –1,147 Other changes 196 149 Closing balance 21,085 23,652