Despite the deconsolidation of ING Vysya Bank the total ING portfolio increased modestly by 2%. FX movements were the main driver for the increase. The combined non-performing and past due but not impaired portfolio decreased in 2014. However, due to the enforcement of forbearance regulations, there was an increase seen in the non-performing portfolio. More details on this are provided in the Forbearance section.
The decrease in the real estate industry reflects the further improvement in this market and the fact that ING Bank has been able to sell several distressed real estate assets in 2014. The increase in the sector natural resources (77%) is mainly due to the economic deterioration in Ukraine and Russia.
The definition of forbearance is: “Forbearance occurs when the client is considered to be unable to meet its financial commitments under the contract due to financial difficulties, and based on these difficulties ING decides to grant concessions towards the client by either loan modification or refinancing”. Modification is defined as changing the terms and conditions of the contract to enable the client to service the debt. Refinancing relates to putting in place a new loan contract to ensure the total or partial repayment of an existing loan contract, of which the debtor is unable to comply with. Examples of forbearance measures are: postponement and/or reduction of loan principal and/or interest payments, extended payment terms, debt consolidations and deferral of foreclosures.
2) The two- and one-year probation periods (the minimum reporting period for performing and non-performing forborne assets) were implemented in 2014. Compared to last year these probation periods will substantially diminish the outflow of the forborne assets, while inflow of new forborne assets will continue.
3) New portfolios came into scope for screening, such as clients with ‘Early Warning Signals’, the Commercial Banking portfolio under EUR 3 million (threshold of EUR 3 million was applicable in 2013) and the investment portfolio.
The forborne assets in the performing portfolio increased by EUR 1.5 billion. The increases were visible in almost all regions, but mainly in the Netherlands and Rest of Europe. Also the industries Real Estate and Builders & Contractors were mostly impacted. Performing forborne assets in Asia/Pacific declined during the year.
Retail Banking As per end 2014, Retail Banking forborne assets amounted to a total of EUR 4.1 billion, which represents 1.4% of the total Retail Banking portfolio.
Credit risk mitigation ING Bank’s lending and investment businesses are subject to credit risk. As such, the creditworthiness of our customers and investments is continually monitored for their ability to meet their financial obligations to ING Bank. In addition to determining the credit quality and creditworthiness of the customer, ING Bank uses various credit risk mitigation techniques and instruments to mitigate the credit risk associated with an exposure and to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. The most common terminology used in ING Bank for credit risk protection is “a cover”.
The cover values are presented for the total portfolio of ING Bank. In the last year’s disclosure, only the AIRB portfolio was presented with covers in detail while in this year’s disclosure, the covers of both AIRB and SA portfolios are presented in detail reflecting the complete ING Bank’s portfolio. Next to that, detailed information is provided on the cover coverage for the performing and nonperforming portfolio. The non-performing loan definition is explained in detail in the section “Credit Restructuring”. To increase the understanding of the reader on the nature of the collateralised loans, insight is given in the industry and geography breakdown of the ING Bank portfolio as well. Another improvement is that in addition to the lending risk category, the cover valuation tables now also give insight in the risk categories of Investment, Money Market and Pre-settlement. For comparability reasons with previous tables, outstandings are used to show the ING Bank’s portfolio.
Cover values including guarantees received – Total ING Bank – 2014 (1)(2)
Commercial Banking 49,143 Corporate Line Bank 1,807 Retail Banking Benelux 134 Retail Banking International 519
A significant part (49.3%) of the ING Bank’s Residential Mortgage portfolio relates to mortgage loans provided in the Netherlands, followed by other main markets such as Germany (22.5%), and Belgium (10.6%). Given the size of the Dutch mortgages portfolio, below the valuation methodology employed to determine the cover values for the Dutch Residential Mortgages is provided.
Dutch mortgages valuation When a mortgage loan is granted, the policy maximum loan to market value (LTMV) for an existing property and for construction property financing is 104%. The cover values are captured in the local systems which then are fed into a central data system (Vortex). All valuations are performed by certified valuators that are registered at one of the ING Bank-accepted organisations. In addition, the valuator must be a member of the NVM (Nederlandse Vereniging van Makelaars – Dutch Association of Real Estate Agents), VBO (Vereniging Bemiddeling Onroerend Goed – Association of Real Estate Brokers), VastgoedPRO (Association of Real Estate Professionals) or NVR (Nederlandse Vereniging van Rentmeesters).
Other retail portfolio also showed an improvement, mainly in Belgium and Luxembourg.
The outcome of the re-valuation or indexed value is updated accordingly in the cover REF database.
The coverage of the non-performing part remained relatively stable even though an overall decrease was observed in the nonperforming outstandings.
Cover values including guarantees received – Business Lending Portfolio – 2014 (1)(2)
Cover values including guarantees received – Business Lending Portfolio – 2013 (1)(2)
ING Bank recognises the importance of sound market risk management and follows the approach to identify, assess, control and manage market risks. The approach consists of a cycle of five recurrent activities: risk identification, risk assessment, risk control, risk monitoring and risk reporting.
› Risk identification is a joint effort of the 1st and 2nd line of defence (the ‘three lines of defence governance’ model is explained in the risk governance paragraph of the general risk management section). Its goal is to detect potential new risks and changes in known risks.
› Identified risks are assessed to determine the importance of the risk for ING Bank and subsequently to identify the control measures needed. › Control measures used by ING include policies, procedures, limit frameworks, buffers and stress tests. › An important element of risk management is to continuously check if the implemented risk controls are executed and complied with and monitor that the controls are effective. › Results and findings are reported to the governing departments and approval bodies.
The increase in market risk Regulatory Capital for Trading is due to a combination of position changes and market movements which led to an increase in the VaR and Stressed VaR components of the regulatory capital calculation. The increase in market risk Regulatory Capital for Foreign Exchange relates to the equity stake in ING Vysya Bank.
Market risk in banking books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books originate from the market risks inherent in commercial products that are sold to clients and from the investment of own funds (core capital). Both the commercial products, and the products used to hedge market risk exposures in these products are intended to be held until maturity, or at least for the long-term. ING Bank distinguishes the following types of market risk in banking books: › Interest Rate Risk, including customer behaviour risk; › Credit Spread Risk; › Foreign Exchange (FX) Risk; › Equity Price Risk; and › Real Estate Price Risk.
The ING Bank approach to interest rate risk management, as set forth in this framework, is centralisation of risks from commercial books (that capture the products sold to clients) to central interest rate risk books. This enables a clear demarcation between commercial business results and results on unhedged interest rate positions.
ING Bank distinguishes three types of activities that generate interest rate risk in the banking books: › Investment of own funds (by Capital Management); › Commercial business (e.g. retail business); and › The strategic interest rate position (Bank Treasury).
Earnings Sensitivity (ES) ES measures the impact of changing interest rates on (before tax) net interest income. The ES figures in the tables below reflect an instantaneous shock of 1% and a time horizon of one year. For a downward shock it is assumed that interest rates will not be negative after the shock is applied. Management interventions are not incorporated in these calculations.
The NPV-at-Risk is dominated by the interest rate sensitive long-term investments of own funds, as the equity itself is not modelled and hence is not presented as an offset for the investments of own funds. The value of these investments is impacted significantly if interest rates move up by 1%. Convexity risk in retail portfolios also contributes to the overall NPV-at-Risk. The asymmetry between the NPV-atRisk for a -100 bps and a +100 bps shock is primarily caused by the flooring the interest rates to zero for the -100 bps scenario.
BPV banking books per currency amounts in thousands of euros 2014 2013
BPV banking books per business amounts in thousands of euros 2014 2013
In order to measure the remaining sensitivity of the target common equity tier 1 ratio against FX rate fluctuations, the common equity tier 1 ratio at Risk (cTaR) measure is used. It measures the drop in the common equity tier 1 ratio from the target when stressing a certain FX rate. The stress scenario for a currency corresponds with that scenario that causes a drop in the common equity tier 1 ratio, so a negative sign means that a depreciation of that corresponding currency will result in a drop of the common equity tier 1 ratio.
Year-on-year variance analysis The Foreign Investments in Chinese Yuan increased due to an increase in share price of Bank of Beijing. The decrease of the Foreign Investments in Indian Rupee is due to the deconsolidation of ING Vysya Bank, partly offset by the release of the minority interest. The change in Turkish Lira and Brazilian Real hedge position is a result of the decision to terminate the hedge of the common equity tier 1 ratio for foreign exchange rates of a selection of emerging market currencies, resulting in an increase in cTaR. For currencies in the table above, the decision to terminate the hedge was applicable to Turkish Lira, Chinese Yuan, Indian Rupee and Brazilian Real.
ING Bank’s real estate exposure in the banking books (i.e. including leverage and committed purchases) is EUR 1.8 billion. For market risk management purposes, the total real estate exposure amounts to EUR 1.7 billion since property from foreclosures (EUR 0.08 billion) and third party interest (EUR 0.02 billion) are excluded.
A split on the real estate exposure per continent and sector based on the risk management view is shown below.
Year-on-year variance analysis In total, real estate market risk exposure in the banking books decreased by EUR 0.8 billion mainly as a result of divestments (EUR 0.7 billion). The remainder is due to impairments and negative fair value changes.
Governance The Financial Markets Risk Committee (FMRC) is the market risk committee that, within the risk appetite set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. MRM advises both the FMRC and ALCO Bank on the market risk appetite of trading activities.
With respect to the trading portfolios, MRM focuses on the management of market risks of Commercial Banking (mainly Financial Markets) as this is the only business line where trading activities take place. Trading activities include facilitation of client business and market making. MRM is responsible for the development and implementation of trading risk policies and risk measurement methodologies, the reporting and monitoring of risk exposures against approved trading limits and the validation of pricing models. MRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. The management of trading market risk is performed at various organisational levels, from MRM overall down to specific business areas and trading offices.
As of 2014 year end the valuation of all fair valued positions is aligned with the latest draft regulatory standards for fair valued instruments issued by the European Banking Authority (EBA/RTS/2014/06). These ‘Regulatory Technical Standards on Prudent valuation’ encompass a range of prescriptive valuation adjustment categories, aiming to reduce inherent valuation uncertainty for fair valued instruments and create more consistency across the banking industry. Where fair valued positions do not meet these higher standards, institutions must subtract the valuation difference from their Core Tier 1 capital.
To address the risk associated with the illiquid nature of the derivative portfolio, ING applies an additional ‘liquidity valuation adjustment’. The adjustment is based on the market price of funding liquidity and is applied to the uncollateralised derivatives. This additional discounting is taken into account in both the credit and debt valuation adjustments.
Average VaR was in the same level of the previous year. The increase in average IRC was largely driven by updated LGD model parameters for the Central and Local Government portfolio.
Interest Rate (BPV (1)) Interest Rate (BPV (1)) Euro 231 Euro –302 Taiwan Dollar 75 Taiwan Dollar 48 Chinese Yuan –47 Russian Ruble –48 Polish Zloty 43 Romanian Leu –27 Japanese Yen 34 South Korean Won –25
Credit spread sensitivities per risk class and sector at year-end amounts in thousands of euros
Corporate Financial Institutions Corporate Financial InstitutionsCredit Spread (CSO1(1)) Risk classes 17–22 (CCC and Problem Grade) -44 -6 –42 –3
› Funding: The Bank Treasury function will set and update the funding strategy and funding planning, taking into account diversification in sources and tenor of funding.
› Contingency Funding Plan: ALCO ensures the design, regular test and maintenance of formal Contingency Funding planning, setting out the strategies for addressing liquidity shortfalls in emergency situations, outlining procedures to manage these situations, establishing clear lines of responsibility, and articulating clear implementation and escalation procedures.
Based on the above, ING Bank has defined the following funding and liquidity risk management risk appetite statements: › The structural mismatch in expected liquidity tenors of ING Bank’s assets and liabilities per significant currency is manageable. Also refer to Note 45 in which ‘Assets by contractual maturity’ are shown.
› Home/host regulatory liquidity limits must be pro-actively complied with. › The time-to-survive in a funding stress situation must extend over defined period, also depending on the level of stress applied. › Funding of all longer-term assets and investments must be done by stable and longer-term liabilities. › Geographical dependencies with respect to intra-group funding are to be limited. › Diversification must be in place of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies.
Intraday liquidity management The objective of managing intraday liquidity and its risks at ING is twofold: it is focused on preventing damage to the institution’s own liquidity position, and, in light of its role in global financial markets, ING also takes into account the potential damage to other parties which can arise through chain effects in payment and securities transactions. Intraday liquidity management is managed through the risk appetite statement, by setting amongst others monitoring metrics and triggers on daily net negative liquidity positions and levels of payments outflows.
Collateral position management The objective of the Collateral Management is to ascertain that ING Bank can at all times meet collateral requirements for ING’s collateral needs.
The liquidity buffer is held as an insurance against a range of stress scenarios, covering the additional need for liquidity that may arise over a defined short period of time under stress conditions. ING’s minimum standards for liquidity buffers are described below: › When local regulatory rules require so, local liquidity buffers can be established. Although locally established, these buffers must be centrally functionally managed by the BT function.
In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, ING Bank produces several stress test reports with respect to the funding and liquidity position on a regular basis. Some of these stress tests are regulatory driven, and others are based on internal stress scenarios: › On a weekly basis ING reports an internal liquidity stress scenario. This report shows the development of the liquidity buffer during a 3-month-stress period, on a consolidated (bank) level and for the main entities, and split in Euro and US Dollar.
› On a monthly basis ING Bank reports a number of stress scenarios, either based on regulatory requirements: › 1-month DNB liquidity buffer, according to DNB regulation; › Liquidity Coverage Ratio (LCR), based on CRR/CRD IV or on own defined stress scenarios related to time-to-survive periods.
Non-financial risk Introduction The Non-Financial Risk (NFR) department encompasses the operational and compliance risk management functions. It ensures appropriate risk controls in these functional areas by implementing clear policies and minimum standards which are embedded in ING Bank business processes in all divisions. The necessary infrastructure is in place to enable management to track events and non-financial risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing non-financial risk.
The Chief Compliance Officer (CCO) is the general manager of the compliance risk management department and the Head of the Compliance function within the Bank. The CCO reports functionally to the Chief Risk Officer and hierarchically to the Head of NonFinancial Risk. This is an independent function responsible for developing and establishing the Bank-wide compliance risk management charter & framework which establishes the policies and minimum standards for managing compliance risks. The CCO assists and supports the Management Board Banking in managing ING Bank’s compliance risks and control framework.
Framework ING Bank has a comprehensive framework for operational and compliance risks. This supports and governs the process of identifying, measuring, mitigating, monitoring and reporting non-financial risks thus reflecting the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
The yearly objective setting process for both business management and NFR professionals aims to keep improving the management of NFR risk throughout ING Bank to ensure that ING Bank stays in control of its current and future NFR risks.
The risk of clients and ING staff being targeted by fraudsters using social engineering techniques to execute payments has increased. Efforts are undertaken to mitigate the risk such as creating awareness for customer relationship departments about this type of fraud and communication to the customers and staff targeted by these fraudsters. ING Bank continues to strengthen its control environment for manually initiated payments by clients as fraudsters are increasingly shifting their interest to the end-user. ING Bank continues to stringently monitor both this type of fraud and new emerging fraud methodologies.
The compliance risk management function supports management in mitigating the compliance risks and by establishing a compliance control framework derived from laws, regulations and standards. The compliance risk management function actively educates and supports the business in managing compliance risks related, but not limited to, money laundering, terrorist financing, sanction and export control compliance, conflicts of interest, mis-selling, corruption and protection of customer interests.
Compliance Conduct Risk Monitoring Compliance developed a new methodology in order to assess the working of soft controls in relation to compliance risks. This methodology will be rolled out through the compliance function in 2015 as part of the existing compliance framework. This new approach supports the ambition of ING to secure an integrity-led culture.
› Personal Responsibility In this module several Compliance, Operational Risk and Legal topics are covered. Practical examples are supported by an engaging video whereby staff are challenged to think about the need to identify risks and to take personal responsibility when they see something that is not right.
2) Customer behaviour risk relates to clients behaving differently than expected and the effect that this behaviour can have on customer deposits and mortgage pre-payments. The customer behaviour risk is calculated by stressing the underlying assumptions in the models for behavioural assets and liabilities.
ING Group executed several transactions to bring down its stake in Voya Financial, Inc (Voya). ING Group sold shares of Voya in March 2014, September 2014 and November 2014 for a total consideration of EUR 2.8 billion. At the end of 2014, ING’s stake in Voya was approximately 18.86%. On 4 March 2015, ING completed the divestment of all remaining Voya shares for total proceeds of approximately EUR 1.8 billion.
During 2014, all net capital flows related to the sale of insurance related activities as disclosed in Note 57 ‘Other events’ enabled ING Group to reduce Group debt from EUR 4.9 billion at the end of 2013 to EUR 1.5 billion at the end of 2014.
Regulatory requirements Capital adequacy and the use of regulatory required capital are based on the guidelines developed by the Basel Committee on Banking Supervision (The Basel Committee) and the European Union Directives, as implemented by the Dutch Central Bank (DNB until 3 November 2014, the ECB thereafter) for supervisory purposes. In 2010 the Basel Committee on Banking Supervision issued new solvency and liquidity requirements, which superseded Basel II. The minimum common equity Tier 1 ratio is 4.5%, the minimum Tier 1 requirement is 6% and the total capital ratio (known as the BIS ratio) is 8% of all risk-weighted assets. Basel III requires Banks to hold a capital of at least 80% of the old Basel I requirements, which was 8% of the RWAs as calculated with the Basel I methodology. This Basel I floor has been extended until the end of 2017.
ING Groep N.V. – long-term A- negative A3 negative A negative – short-term A-1 P-2 F1 ING Bank N.V.
Other reserves 20,346 19,558 Unappropriated result 1,251 3,545 Total equity 50,424 47,276
References relate to the notes starting on page 329. These form an integral part of the parent company annual accounts.
Balance as at 1 January 2013 (before change in accounting policy) 919 16,034 2,250 12,749 –963 23,038 54,027 Effect of change in accounting policy –474 –474 Balance as at 1 January 2013 (after change in accounting policy 919 16,034 2,250 12,749 –963 22,564 53,553
Transfer to share of associates and joint ventures reserve 119 –119 Employee stock option and share plans 2 4 111 –195 –78 Repayment of non-voting equity securities –750 –750 Repurchase premium –375 –375 Impact of Voya –2,526 –2,526 Purchases/sales of treasury shares 378 378 Changes in the composition of the group and other changes 119 119
In 2014, ING changed the presentation of the components within the Other reserves in equity. The items previously presented in Other within the Other reserves, with the exception of the net defined benefit asset/liability measurement reserve for the defined benefit plans, are now being presented in the component Retained earnings. Furthermore, an additional component has been added to Other reserves: The net defined benefit asset/liability measurement reserve for the defined benefit plans. This remeasurement component was previously included within the Other reserves. The new presentation improves transparency, aligns with the consolidated presentation of equity as well as with the calculations applied for regulatory reporting purposes. The 2013 comparatives were restated accordingly.
ING Group 328 Parent company annual accounts Accounting policies for the parent company annual accounts
Changes in ING Groep N.V. shares held by group companies –13 Closing balance 51,735 52,495
The total amount of non-distributable reserves, in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code, is EUR 13,719 million (2013: EUR 12,340 million). The comparative has been restated as the negative component of the net defined benefit asset/liability remeasurement reserve that was included in the Other reserves was not included.
Share-based payments –100 –43,185 –6,698,947 Other 8 –292 –20,396,576 4 Subordinated loans
Within 1 year 25 More than 1 year but less than 5 years 56 266 6 Other Guarantees As at 31 December 2014, ING Groep N.V. guarantees various US dollar debentures (that mature between 2023 and 2036) which were issued by a subsidiary of Voya Financial Inc. In the Shareholder’s agreement between ING Groep N.V. and Voya Financial Inc. it is agreed that the aggregate outstanding principal amount of the debentures will be reduced from EUR 417 million as at 31 December 2014 to no more than EUR 329 million as at 31 December 2015 and no more than EUR 247 million as at 31 December 2016.
Remuneration of Senior Management, Executive Board and Supervisory Board The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the Consolidated annual accounts (page 234 up to and including page 236).
ING Group 334 Parent company annual accounts Notes to the parent company annual accounts continued
Report on the audit of the annual accounts Our opinion We have audited the accompanying annual accounts 2014 of ING Groep N.V., Amsterdam (‘ING Group’) as set out on pages 99 to 334.
In our opinion: › The consolidated annual accounts give a true and fair view of the financial position of ING Group as at 31 December 2014 and of its result and its cash flows for 2014 in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code.
Employee Benefits (see page 187) ING Group operated various defined benefit retirement plans with the largest scheme, at the start of the financial year, operating in the Netherlands. In February 2014 the Company reached final agreement to transfer all future funding and indexation obligations of the defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement makes the Dutch ING Pension Fund financially independent from ING Group and released the company from all financial obligations arising out of the Dutch defined benefit plan. As such the Dutch defined benefit plan was derecognised from ING Group’s balance sheet. A significant charge was recognised for the settlement with the Dutch ING Pension Fund. Whilst this transaction reduces future accounting complexity its impact on the annual accounts in the year is significant.
We assessed the reliability and continuity of electronic data processing only to the extent necessary within the scope of the audit of the annual accounts. Our work consisted of assessing the developments in the IT infrastructure and analysing the impact on the IT-organisation. Additionally, we tested the design and operating effectiveness of relevant internal controls related to IT- systems and processes.
We involved internal actuarial specialists to assist us in performing the audit procedures in this area, which included among others: › Consideration of the appropriateness of assumptions used in the valuation of the Netherlands’ individual life and group pension contracts by reference to company and industry data and expectations of investment returns, future longevity and expense developments.
We involved our specialists to assist us in performing our audit procedures in this area, which included: › An assessment of NN Group’s governance, processes and internal controls with respect to unit linked exposures within its operating companies, in particular for the NN Life division in the Netherlands.
The sale of the total of 45.6 million shares from the combined transactions reduces ING Group’s stake in Voya from 18.9% to zero. These transactions settled on 9 March 2015. After this transaction, ING Group will continue to hold warrants for approximately 26 million shares in Voya at an exercise price of USD 48.75. The transactions are expected to result in a net profit to ING at closing of EUR 308 million. This broadly reflects the difference between the market value of our 18.9% stake in Voya at the date ING lost significant influence, and the current market value of this stake of approximately EUR 1.8 billion. The result of this transaction will be included in the profit and loss account of ING in 2015.
ov er na nc e Re po rt o f t he E
Any of the risks described below could have a material adverse effect on the business activities, financial condition, results of operations and prospects of ING. In the following risk factors, where we discuss risks related to our insurance business, we refer to NN Group’s insurance and investment management activities. As further described under Note 57 ‘Other events’ to the consolidated financial statements of ING Group, we still hold a significant stake in NN Group and have, among others, the right to nominate three members to its Supervisory Board. While our investment in NN Group is currently classified as ‘held for sale’ on our balance sheet and NN Group’s activities are reflected as ‘discontinued operations’ in our profit and loss account, developments in the business and results of NN Group will continue to impact ING’s results of operations and changes in the value of our stake in NN Group will affect our shareholders’ equity. Accordingly, references to our insurance business in the risks described below should be read in light of the foregoing.
In case one or more of the factors mentioned above adversely affects the profitability of our business, this might also result, among other things, in the following: › changes in the treatment of deferred acquisition costs (‘DAC’); › reserve inadequacies, which could ultimately be realised through profit and loss and shareholders’ equity; › the write-down of tax assets impacting net results and/or equity; › impairment expenses related to goodwill and other intangible assets, impacting net results; › movements in risk weighted assets for the determination of required capital; › changes in credit valuation adjustments and debt valuation adjustments; and/or › additional costs related to maintenance of higher liquidity buffers and/or collateral placements.
In light of current conditions in the global financial markets and the global economy, regulators around the world have increased their focus on the regulation of the financial services industry. Most of the principal markets where we conduct our business have adopted, or are currently in the implementation phase of, major legislative and/or regulatory initiatives in response to the financial crisis. Governmental and regulatory authorities in the Netherlands, Germany, Belgium, the United Kingdom, the EU, the U.S. and elsewhere have implemented, or are in the process of implementing measures to increase regulatory control in their respective financial markets and financial services sectors, including, among others, in the areas of prudential rules, liquidity and capital requirements, executive compensation, crisis and contingency management, bank levies and financial reporting. Additionally, governmental and regulatory authorities in the Netherlands, in the EU as well as in a multitude of jurisdictions where we conduct our business continue to consider new mechanisms to limit the occurrence and/or severity of future economic crises (including proposals to restrict the size of financial institutions operating in their jurisdictions and/or the scope of operations of such institutions).
With the approval of the Omnibus II Directive, the definitive text of the framework directive is available. On 10 October 2014, the EC adopted a Delegated Act containing implementing rules for Solvency II. This Delegated Act entered into force on 17 January 2015. However, it is not certain what the final form of the implementing technical standards will contain. Given previous changes to the effective date of Solvency II and the possibility of further changes to the regime. Accordingly, the future effect of Solvency II on NN’s business, solvency margins and capital requirements is uncertain.
directs existing and newly created government agencies and bodies to perform studies and promulgate a multitude of regulations implementing the law, many of which are in place. Due to the extended period over which regulations are being implemented, we cannot predict with certainty how Dodd-Frank and such regulations will affect the financial markets generally and impact the Group’s business, credit or financial strength ratings, results of operations, cash flows or financial condition or liquidity. Key aspects of DoddFrank that we have identified to date as possibly having an impact on the Group include: Title VII of Dodd-Frank creates a new framework for regulation of the over-the-counter derivatives markets and certain market participants which could affect various activities of the Group and its subsidiaries. ING Capital Markets LLC, a wholly-owned indirect subsidiary of ING Bank N.V., has registered with the .S. Commodity Futures Trading Commission (‘CFTC’) as a swap dealer. New margin and capital requirements for market participants that will be contained in final regulations to be adopted by the SEC and the CFTC, and the Prudential Regulators, could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of risks that we do not hedge. Other regulatory requirements, including business conduct rules imposed on swap dealers, will also increase the costs of operating derivatives businesses, which could increase the costs of hedging and other activities and could cause certain dealers to limit or cease their business activities. In addition, new position limits requirements for market participants that may be contained in final regulations to be adopted by the CFTC could limit the scope of hedging activity that is permitted for commercial end users, as well as the trading activity of speculators, limiting their ability to utilize certain of our products, and could also limit the scope of our ability to provide derivatives products for our non-end user customers. The imposition of position limits, and other regulatory restrictions and requirements, could also result in reduced market liquidity, which could in turn increase market volatility and the risks and costs of hedging and other trading activities.
Pursuant to requirements of the Dodd-Frank Act, the SEC and CFTC are currently considering whether stable value contracts should be regulated as ‘swap’ derivative contracts. In the event that stable value contracts become subject to such regulation, certain aspects of our business could be adversely impacted, including issuance of stable value contracts and management of assets pursuant to stable value mandates.
Dodd-Frank also established the Consumer Financial Protection Bureau (‘CFPB’) as an independent agency within the Federal Reserve to regulate consumer financial products and services offered primarily for personal, family or household purposes. The CFPB has significant authority to implement and enforce federal consumer financial laws, including the new protections established under DoddFrank, as well as the authority to identify and prohibit unfair, deceptive and abusive acts and practices. In addition, the CFPB has broad supervisory, examination and enforcement authority over certain consumer products, such as mortgage lending. Insurance products and services are not within the CFPB’s general jurisdiction, and broker-dealers and investment advisers are not subject to the CFPB’s jurisdiction when acting in their registered capacity.
Some countries, including the Netherlands, have entered into, and other countries are expected to enter into, agreements (‘intergovernmental agreements’ or ‘IGAs’) with the United States to facilitate the type of information reporting required under FATCA. While the existence of IGAs will not eliminate the risk of the withholding described above, these agreements are expected to reduce that risk for financial institutions and investors in countries that have entered into IGAs. IGAs will often require financial institutions in those countries to report some information on their U.S. accountholders to the taxing authorities of those countries, who will then pass the information to the IRS.
The Group intends to take all necessary steps to comply with FATCA (including entering into such agreements with the U.S. tax authorities as may be required), in accordance with the time frame set by the U.S. tax authorities. However, if the Group cannot enter into such agreements or satisfy the requirements thereunder (including as a result of local laws in non-IGA countries prohibiting information-sharing with the IRS, as a result of contracts or local laws prohibiting withholding on certain payments to accountholders, policyholders, annuitants or other investors, or as a result of the failure of accountholders, policyholders, annuitants or other investors to provide requested information), certain payments to the Group may be subject to withholding under FATCA. The possibility of such withholding and the need for accountholders, policyholders, annuitants and investors to provide certain information may adversely affect the sales of certain of the Group’s products. In addition, entering into agreements with the IRS and compliance with the terms of such agreements and with FATCA any regulations or other guidance promulgated thereunder or any legislation promulgated under an IGA may substantially increase the Group’s compliance costs. Because legislation and regulations implementing FATCA and the IGAs remain under development, the future impact of this law on the Group is uncertain.
Financial Stability Board In addition to the adoption of the foregoing measures, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and exploring steps to avoid similar problems in the future. In many respects, this work is being led by the FSB, consisting of representatives of national financial authorities of the G20 nations. The G20 and the FSB have issued a series of papers
In May 2012, the International Association of Insurance Supervisors (‘IAIS’), of which the DNB is a member, published a proposed assessment methodology for designating global systemically important insurers (‘G-SIIs’), as part of the global initiative to identify G-SIFIs. Insurers identified as G-SIIs would be subject to additional policy measures. The FSB published an initial list of G-SIIs in July 2013 and an updated list in November 2014, neither of which included NN Group. However, the group of G-SIIs is expected to be updated annually and published by the FSB each November based on new data, and there can be no assurance that we will be excluded from it in the future. By November 2015, the IAIS is expected to further develop the G-Sll assessment methodology as needed to ensure, among other things, that it appropriately addresses all types of insurance and reinsurance, and other financial activities of global insurers. The revised G-Sll assessment methodology will be applied from 2016. The proposed policy measures, which are still under development and discussion and which would need to be implemented by legislation or regulation in relevant jurisdictions, include higher capital requirements (both for non-traditional and non-insurance activities and for G-SIIs overall), enhanced supervision (including more detailed and frequent reporting, removal of barriers to orderly resolution of the G-SII and reduction of the G-SII’s systemic risk over time), as well as additional measures to improve the degree of self-sufficiency of a G-SII’s different business segments (including separate legal structures for traditional insurance and non-traditional or non-insurance activities, and restrictions on intercompany subsidies). If NN Group were identified as a G-SII in the future, compliance costs will increase and its competitive position relative to other insurers that were not designated as G-SIIs may be adversely affected.
While certain of such conditions have improved during the period between 2011 and 2014, these conditions have generally resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, prices for many types of asset-backed securities and other structured products have significantly deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment grade and especially the sovereign debt of some EEA countries and the U.S., the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes, such as public and private equity, and real estate sectors. As a result of these and other factors, sovereign governments across the globe, including in regions where the Group operates, have also experienced budgetary and other financial difficulties, which have resulted in austerity measures, downgrades in credit rating by credit agencies, planned or implemented bail-out measures and, on occasion, civil unrest (for further details regarding sovereign debt concerns, see ‘ —U.S. Sovereign Credit Rating’ and ‘ —European Sovereign Debt Crisis’ below). As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. In addition, the confluence of these and other factors has resulted in volatile foreign exchange markets. Securities that are less liquid are more difficult to value and may be hard to dispose of. International equity markets have also continued to experience heightened volatility and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage, private equity and credit markets particularly affected. These events and market upheavals, including high levels of volatility, have had and may continue to have an adverse effect on our revenues and results of operations, in part because we have a large investment portfolio and extensive real estate activities around the world.
As a result of the ongoing and unprecedented volatility in the global financial markets since 2007, we incurred in past years substantial negative revaluations and impairments on our investment portfolio, which have impacted our shareholders’ equity and earnings. During the period between 2011 and 2014, the revaluation reserve position improved substantially, positively impacting shareholders’ equity. Although we believe that, as of 31 December 2014, reserves for insurance liabilities were generally adequate at the Group, inadequacies in certain product areas have developed. The aforementioned developments in the global financial markets and, in particular, decreasing interest rates resulted in a decrease in our overall reserves adequacy and may further continue to produce reserves inadequacies in the future, potentially leading to reserve strengthening.
› an increase in policy loans, and withdrawals from and/or surrenders of life insurance policies and fixed annuity contracts as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed maturity investments at a time when market prices for those assets are depressed because of increases in interest rates. This may result in realised investment losses. Regardless of whether we realise an investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature withdrawals may also cause us to accelerate amortisation of deferred policy acquisition costs, which would also reduce our net income; › (depending on the position) a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity and our profitability; and/or
5) lower the value of our equity investments impacting our capital position.
On the other hand, deflation experienced in our principal markets may also adversely affect our financial performance. In recent years, the risk of low inflation (inflation continued be positive for the major part of 2014 but well below the 2% growth rate of harmonised indices of consumer prices. In December 2014, however, prices were 0.2% lower than the same month a year earlier) and even deflation (i.e., a continued period with negative rates of inflation) in the Eurozone has materialized. Deflation may erode collateral values and diminish the quality of loans and cause a decrease in borrowing levels, which would negatively affect our business and results of operations.
Operational risks, such as systems disruptions or failures, breaches of security, cyber attacks, human error, changes in operational practices or inadequate controls may adversely impact our business, results of operation and reputation. Operational risks are inherent in our business. Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Although we endeavour to safeguard our systems and processes, losses can result from inadequately trained or skilled personnel, IT failures (including failure to anticipate or prevent cyber attacks, which are deliberate attempts to gain unauthorised access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or impairing operational performance, or security breaks by third parties), inadequate or failed internal control processes and systems, regulatory breaches, human errors, employee misconduct, including fraud, or from external events that interrupt normal business operations. We depend on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The equipment and software used in our computer systems and networks may not always be capable of processing, storing or transmitting information as expected. Despite our business continuity plans and procedures, certain of our computer systems and networks may have insufficient recovery capabilities in the event of a malfunction or loss of data. In addition, whilst we have policies and processes to protect our systems and networks, they may be vulnerable to unauthorised access, computer viruses or other malicious code, cyber attacks and other external attacks or internal breaches that could have a security impact and jeopardise our confidential information or that of our clients or our counterparties. These events can potentially result in financial loss and harm to our reputation, and hinder our operational effectiveness.
‘Risks Related to the Restructuring Plan — The implementation of the Restructuring Plan and the divestments in connection with that plan will alter and have already significantly altered the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’; › initiatives that we are contemplating may require consultation with various regulators as well as employees and labour representatives, and such consultations may influence the timing, costs and extent of expected savings; › the loss of skilled employees in connection with the initiatives; and › projected savings may fall short of targets.
While holders of our bearer depositary receipts are entitled to attend and speak at our General Meeting of Shareholders (‘General Meeting’), voting rights are not attached to the bearer depositary receipts. Stichting ING Aandelen (‘Trust’) holds more than 99.9% of our Ordinary Shares, and exercises the voting rights attached to the Ordinary Shares (for which bearer depositary receipts have been issued). Holders of bearer depositary receipts who attend — in person or by proxy — the General Meeting must obtain and are entitled to voting rights by proxy from the Trust. Holders of bearer depositary receipts and holders of the American Depositary Shares (‘ADSs’) representing the bearer depositary receipts who do not attend the General Meeting may give binding voting instructions to the Trust.
Introduction This section relates to Pillar III, market discipline, and as such provides information on several topics. Since 1 January, these disclosure requirements are based on CRR and CRD IV and required by the supervisor authority. The purpose of this report is to meet the regulatory disclosure requirements in accordance with Part Eight of the CRR. Some of the required information has already been provided elsewhere in the Annual Report, e.g. in the Risk Management section and/or in the Capital Management paragraph. For the other CRR/CRD IV disclosure requirements such as remuneration disclosures please refer to the corporate website ing.com. This section provides additional information, as well as references to the relevant sections.
General 1 Index to aid navigation through risk related information 246 – 247 2 Risk terminology, risk measures and key parameters 399 – 410 3 Describe and discuss top and emerging risks 262 – 263 4 Discuss regulatory developments, Once the applicable rules are finalised, outline plans to meet each new key regulatory ratio
Risk governance, risk management and business model 5 Summarise the risk management organisation, processes and key functions 248 – 251 6 Risk culture, related procedures and strategies 252 – 254 7 Key risks arising from business model, risk appetite and how risks are managed 251 – 252; 254 – 256 8 Use of stress testing within the risk governance and capital frameworks 256 – 260
Liquidity & Funding 18 Manages of liquidity risk and quantitative analysis of the liquidity buffer 310 – 314; 397 19 Summarise encumbered assets in a tabular format 397 - 398 20 Tabulate assets, liabilities and off-balance sheet commitments by maturity. 213 - 215 21 Discuss funding strategy, including key sources and any funding concentrations 310 – 314
Other risk 31 Describe how ‘other risk’ types are identified, governed, measured and managed 313 – 317 32 Discuss publicly known risk events related to other risks 313 – 317
Market risk Standardised approach 113 1,412 Internal models approach - trading book 745 9,311 Total Market risk 858 10,723
Basel III requires Banks to hold a capital of at least 80% of the old Basel I requirements, which was 8% of the RWAs as calculated using the Basel I methodology. This Basel I floor has been extended until the end of 2017. For 2014, the additional capital requirements resulting from this Basel I floor are EUR 3,538 million for 2014. The increase in Basel III required regulatory capital can be explained by the introduction of the CVA RWA following the implementation of the CRR/CRD IV and the increase of the market value of the equity portfolio. ONCOA represents assets of non-credit obligation character that are not included in the SA or AIRB calculations. At 31 December 2014, the capital requirement for ONCOA was EUR 1,356 million.
Capital adequacy assessment As at 1 January 2014, the CRR/CRD IV capital rules entered into force. According to Basel III capital adequacy rules, the minimum Common Equity Tier 1 ratio has to be 4.5%, the minimum Tier 1 requirement 6% and the total capital ratio (known as the BIS ratio) 8% of all risk-weighted assets.
The capital position table reflects own funds according to the Basel III rules as specified in the CRR/CRD IV. As CRD IV will be phased in gradually until 2019, the table shows the CRD IV positions according to the 2019 end-state rules and the 2014 rules. This makes clear which items phase in directly, which phase in gradually, some of which as of 2014 and others as of 2015.
ING Group continues to maintain strong and high quality capital levels. With a Common Equity Tier 1 ratio of 13.36% at end of 2014, ING Group is already meeting the Basel III solvency requirements. This percentage is calculated on the basis of immediate and full implementation and disregarding the possible impact of future management actions.
Regulatory adjustments: Minority interests, counting as Common equity Tier 1 265 265 265 Goodwill and and intangibles deducted from Tier 1 (1) –336 –673 –1,682 Provision shortfall (2) –263 –525 –1,313 Revaluation reserve debt securities –1,597 –958 – Revaluation reserve equity securities –2,095 –1,257 – Revaluation reserve real estate –291 –175 – Revaluation reserve cash flow hedge –832 –832 –832 Position in own shares – – – Prudent valuation adjustment –83 –83 –83 Investments >10% FI, exceeding 10% threshold –2,829 –5,629 –14,103 Excess AT1 deductions over AT1 –1,802 – –
Risk weighted assets migration analysis The table below explains the changes in RWA during the reporting period and provides additional information by linking the impact on RWA of changes in portfolio composition, model changes and shifts in the risk environment. The table reconciles movements in RWA for the period for each RWA risk type of ING Bank for the SA and AIRB portfolio including securitisations.
› Book size: The increasing book size, excluding divestments and de-consolidations, led to EUR 5.9 billion higher RWA, mainly driven by the Commercial Banking and Retail Banking International portfolios. Growth was seen in the Corporates and Structured Finance book, as well as in the mortgage portfolios in Belgium and DiBa Germany. Several smaller movements, both increases and decreases occurred in various portfolios throughout the year.
› Foreign exchange movements: Over year, FX movements increased RWA by EUR 5.1 billion which was mainly due to the appreciation of the US Dollar (13.87%) against the Euro which contributed to the increase by EUR 5.0 billion.
Advanced IRB and standardised approach ING uses two methods to calculate Regulatory Capital for Credit Risk within its portfolio: the Advanced Internal Rating Based (AIRB) approach and the Standardised Approach (SA). The AIRB approach is permitted by the Regulator if there are regulatory approved rating models (PD, EAD and LGD) in place, if the Legal Entity is AIRB compliant and if the (local) management understands and uses these rating models (Basel Use Test) in their credit decision making processes. ING Bank does not use the Basel Foundation IRB Approach (FIRB) for any of its portfolios. This section is to be read in conjunction with the Risk Management paragraph.
Exposure classes The Basel Accord has developed the concept of ‘Exposure Classes’. These are essentially groupings of credit risks associated with a common obligor type or product type. For the AIRB and Standardised Approach, most of the exposure classes have subcategories. ING Bank has applied the following definitions to determine Exposure Classes: › Central Governments & Central Banks (hereafter Sovereigns) include Sovereign Government entities, Central Banks, CRR/CRD IV recognized Local / Regional Authorities and Public Sector entities as well as Supranational Organisations; › Institutions include all Commercial Banks, non-Bank Financial Institutions, such as Leasing Companies, Funds and Fund Managers, and Insurance Companies, as well as local and regional government entities not classified as governments; › Corporates include all legal entities, that are not considered to be Governments, Institutions or Retail as well as Specialised lending; › Retail includes the following classes: › Residential Mortgages include all mortgage loans for residential properties that are not part of a securitisation; and › Retail Other includes all other credit obligations related to Retail SMEs, such as partnerships, one-man businesses and private individuals, such as consumer loans, car loans and credit cards. Under these exposure class definitions, it is possible for a private individual to be included under both Residential Mortgages and Retail Other.
Small Mid-sized Enterprises 19,584 20,372 –3.9% Private Banking 3,651 3,536 –3.3%
The increase in the Retail exposure class was driven mainly by Residential Mortgages in Belgium, Germany and Turkey in Rest of Europe. The increase in Asia was driven by FX movements, due to the appreciation of the Australian dollar against the Euro.
The non-performing loans increased by EUR 1.4 billion, which is primarily the result of the implementation of the new forbearance policy together with its 1-year probation period. For more information see Risk Management Paragraph Forbearance section.
While in the Netherlands the house price index improved, for Italy the opposite occurred. The decrease in the house price index during the first quarter resulted in an increase of the LTV from 55% to 58%, after which it remained fairly stable.
The ING policy is to index property values on a quarterly basis. In some markets only annual figures are available while for others it is more practical to index on an annual basis. Quarterly or annual indexing is done for the Netherlands, Belgium, Australia, Italy, Romania and Spain covering 75% of the portfolio.
› Sovereigns: The Government Central PD model is developed statistically based upon risk driver information fed from external sources. The Government Local PD model is developed expert based and is a combination of financial and qualitative information. There is one main EAD model applied to all portfolios in this exposure class. There is one main LGD model for Sovereigns and other governments. The model for multilateral banks is based upon the Financial Institutions LGD model with a separate parameter for the unsecured recovery.
› Institutions: The main PD model applied is Bank Commercial based upon financial, qualitative and country information. Other PD models for different types of financial institutions are built using a similar framework, but are more specialised for the specific characteristics of the type of financial institution. Banks and Financial Institutions use the same EAD model, which is also used for sovereigns and corporates. The main differences between the financial institutions and other governments LGD models are difference in the recoveries on unsecured exposure.
› Residential mortgages and other retail: The PD mortgages models are all developed statistically and include borrower specific information, payment behaviour and product related information. The EAD and LGD models all follow the same structure The differences in parameters, risk drivers or segmentation are due to differences in portfolio characteristics and underwriting criteria.
Sovereigns Government Central 51,954 44,154 Government Implied 25,149 24,884 Government Local 19,466 16,430
Institutions Bank Commercial 44,341 46,189 Bank Implied 20,028 17,173 Government Local 12,963 11,472
AIRB credit exposures by internal rating grade The table below shows the AIRB portfolio per internal rating grade. Under CRR/CRD IV rules, the nominal exposures are weighted to determine the RWA (and regulatory capital) of a portfolio, under a ‘risk-based approach’. This approach dictates that less capital is required for credit exposures which are well-rated, while progressively more capital is required as an obligor’s risk (rating) deteriorates. This effect can cause RWA to increase or decrease together with risk rating migration without a significant change in the size of the underlying financial assets, in terms of financial accounting. As such, rating migrations are closely monitored within ING Bank.
ING Bank’s Probability of Default (PD) rating models are based on a 1-22 scale, which corresponds to the same rating grades that are assigned by external rating agencies. Risk Ratings (PD) for performing loans (1-19) are calculated in ING Bank with regulatory approved models. Risk Ratings for non-performing loans (20-22) are set on the basis of an approved discretionary methodology by the Global or Regional Restructuring unit. For securitisation portfolios, the external ratings of the tranche in which ING Bank has invested are leading. Overall the risk weights of the ING portfolio are a mixture of low risk weights for Sovereigns and Residential Mortgages combined with higher risk weights for Corporates and Securitisations. Many central governments exposure receive a zero risk weight due to the high quality rating (permanent partial use of the SA rules). Mortgages generally benefit from large levels of (over) collateralisation.
ING has been working on a project to map the 1-19 rating grades to internal data instead of external rating agency scales. In March 2014, the Dutch National Bank approved the implementation of the new Masterscale (ING Bank internal rating methodology). As of June 2014, PD values of the ING Bank Masterscale are adjusted using internal observed default data history from 2005 until 2012 where previously Standard & Poor’s data was used. These adjustments are performed to reflect internal default experience, which is better compared to the predominantly US based Standard & Poor´s data. This has made the Masterscale better fit to the risk profile of ING Bank and has led to a net decrease in RWA. The planning is, within a year, to gradually move to only internal data in place of the external S&P data to arrive at the Masterscale.
Changes in AIRB risk parameters 2014 compared to 2013 in %
The average LGD decrease was driven by Sovereigns and was the result of a redevelopment of the Sovereign LGD model. The impact of the introduction of CRR/CRD IV was mainly seen in the RWA increase for exposure class Institutions.
Disclosure of estimated and actual loss parameters ING has dedicated AIRB credit risk models per business unit, segment and country. An independent Model Validation department periodically reviews all AIRB models for compliance including back testing when possible. If a model is considered not to be robust or the back-testing indicates insufficient performance, than the model is either re-calibrated or re-developed. All model recommendations from Model Validation department are tracked via iRisk, the same internal database that management uses to track issues detected by the Internal Audit department, incidents and non-financial risk issues. All significant model changes are submitted to the Home Regulator (DNB) and implemented after regulatory approval. On average, 91% of the AIRB credit risk models in the validation cycle have had ‘No to Remote’ (51%) and ‘Minor’ (40%) model deficiencies.
The table below provides a back-testing of the PD models per exposure class. In order to better quantify the back-testing, ING has analysed the 31 December 2014 portfolio. The average PD of 31 December 2013 per portfolio is split per exposure class. The 31 December 2013 portfolio is followed through 2014 to determine the observed default rate. The models are based on long series of historical data. In the back-test the model based PD values are compared against the defaults observed in 2014. This back-test is only representative of the year end 2013 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test gives a comparison of the predicted PD versus the observed default rate. In the table, the default rate is based on the weighted average READ of the defaulted portfolio whereas the models are developed on an obligor basis.
The table below gives insight in the Expected Loss rate and the Observed Loss rate per exposure class. The expected loss as of 31 December 2013 for the performing portfolio is split per exposure class. The 31 December 2013 portfolio is followed through 2014 to determine the defaulted exposures. The models are based on long series of historical data. In the comparison, the expected loss rate is calculated by dividing the expected loss of the performing portfolio as of 31 December 2013 by the READ of the performing portfolio of the same period. The Observed Loss rate is a result of multiplying the observed defaulted exposures by its LGD. This back-test is only representative of the year end 2013 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test gives a comparison of the Expected Loss rate PD versus the observed Loss rate.
Expected loss rate under the Advanced IRB approach versus the observed loss rate per exposure class
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * Expected loss rate 2013 includes performing loans only.
In order to calculate the regulatory capital requirements under the SA approach, ING Bank uses eligible external ratings from Standard & Poor’s, Moody’s, Fitch Ratings and in some cases from DBRS. Ratings are applied to all relevant exposure classes in the Standardised Approach.
Exposures and RWA before and after credit risk mitigation (CRM) and credit conversion factors (CCF) Exposures before CCF and
ING Bank, as an AIRB Bank, implicitly strives to facilitate the possibility for clients and portfolios to be transferred from the SA portfolio to the AIRB portfolio. In line with this strategy/goal, a shift of the Dutch Private Banking portfolio occurred in the first quarter of 2014 from the SA portfolio to the AIRB portfolio. This reduced the exposure of the SA portfolio with EUR 300 million mainly seen in the regulatory retail portfolios.
(1) Equals the amount as of 31 December 2013. (2) Unadjusted for exchange rate fluctuations. (3) Based on start and end date of the outstanding positions, unadjusted for inflow and outflow. (4) At the end of 2014, the stock of provisions included provisions for amounts due from banks: EUR 6 million (2013: 19 million)
Large parts of the Investment portfolio are not accounted at amortised costs (Loans & Receivables or Held-to-Maturity) and therefore out of scope for Loan Loss Provisions. Instead, these assets are evaluated for impairment. The ING Bank Impairment Meeting is a quarterly process held with the ING Provisioning Committee (IPC) that reviews all assets that are subject to an IFRS impairment test.
dd iti on al in fo rm at io n derived from the NAICS classifications presented here. Residential mortgages are generally only extended to private individuals. The tables below show the non-performing exposure and provisions per NAICS industry and should be read in conjunction with the information and statements made in the Risk Management section.
ING Bank has made conservative choices in Retail Banking for what concerns curing from default. The majority of units only allow curing from default once there are no more days overdue. If ING Bank would allow curing from default once the client is < 90 days overdue and this, only if there is no forbearance, then the total non-performing loans READ would reduce to EUR 15.6 billion.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account. (1) Sectors with cumulative provisions of less than EUR 50 million are grouped under ‘Other’. (2) At the end of 2014, the stock of provisions included provisions for amounts due from banks: EUR 6 million (2013: 19 million)
Past due loans by economic sector ING Bank considers past due loans to be those loans where any payment of interest of principal is more than one day past due. The methodology is principally applied to loans to private individuals, such as residential mortgage loans, car loans and other consumer loans. For business loans (Sovereigns, Institutions, Corporates), ING Bank has adopted a policy to classify the obligor as a nonperforming loan as quickly as possible upon the occurrence of a payment default. Therefore, the concept of past due loans does not exist for these types of obligors and hence the reason why the business exposure classes are not included.
Credit quality by geographic area The tables below are based on the country of residence of the obligor. The Non-performing exposure table should be read in conjunction with the information and statements made in the Risk Management Paragraph.
ING Bank has made conservative choices in Retail Banking with respect to curing from default. The majority of units only allow curing from default once there are no more days overdue. If ING Bank would allow curing from default once the client is < 90 days overdue and this, only if there is no forbearance, then the total non-performing loans READ would reduce to EUR 15.6 billion.
The relatively high level of provisions compared to the non-performing exposure in Germany is due to the level of collateral and the enforcement regime which has an impact on the recovery rate which drives LGD higher. The decline in the stock of provisions in Asia is due to the deconsolidation of ING Vysya Bank.
Credit risk mitigation For the determination of the Credit Risk applicable amount for Pre-Settlement deals, ING Bank first matches the trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements (such as ISDAs and GMRAs). Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
CDS positions which were held in Amsterdam no longer exist. Hence the decline in the credit protection bought.
ING Bank uses the Internal Assessment Approach (IAA) for the support facilities it provides to Asset Backed Commercial Paper (ABCP) conduit Mont Blanc Capital Corp., based on externally published rating agency methodologies. Under the IAA approach, the unrated position is assigned by the institution to an internal rating grade, which is estimated using an ING developed model. The position is then attributed a derived rating by mapping the internal rating grade to an externally published credit assessments corresponding to that rating grade.
Excludes equities and ONCOA. (1) These are structured financing transactions by ING for clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to an SPV. (2) Securitisation benefits are excluded. Own originated securitisations are explained in a separate section.
The following table provides the breakdown of current exposures by risk weight bands. The amount of securitisation positions is based on the regulatory exposure values calculated according to the CRR/CRD IV after consideration of credit conversion factors (CCFs) where applicable as used for the purpose of Pillar I, but prior to the application of credit risk mitigants on securitisation positions.
Capital requirements for investment positions in securitisations Exposure values (by RW bands)
Of which non-retail underlying 25 20 0 0 1 45 1 46 14 14 28 1 1 2
The normal non-structured standby liquidity facilities and the structured facilities are reported under irrevocable facilities. All facilities, which vary in risk profile, are granted to the SPE subject to normal ING Bank credit and liquidity risk analysis procedures. The fees received for services provided and for facilities are charged subject to market conditions. Mont Blanc is consolidated by ING Bank. These transactions are therefore on-balance sheet arrangements.
ING Bank has created a number of these securitisations with a 31 December 2014 position of approximately EUR 82 billion of AAA rated notes and unrated subordinated notes. The underlying exposures are residential mortgages in the Netherlands, Germany, Belgium, Spain, Italy and Australia and SME Loans in the Netherlands and Belgium.
Market Risk Weighted Assets movement by key driver amounts in millions of euros VaR Stressed VaR IRC Standardised
Liquidity risk Funding and liquidity risk is the risk that ING Group or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner.
As part of the liquidity buffer management, ING Group also monitors the existing asset encumbrance. Encumbered assets represent the on-balance sheet assets that are pledged or used as collateral for ING Group’s liabilities. The presented templates of ING Group’s encumbered and unencumbered assets are based on the CRR (Part Eight) and the related guidance from the European Banking Authority (EBA). The data is as per 31 December 2014 and as this is the first data set based on these requirements, comparison with previous periods is not available. However, based on internal metrics it can be stated that the level of encumbrance has only slightly increased in 2014. Within the Pillar III section of the ING Bank N.V. Annual Report, the ING Bank encumbered and unencumbered assets are disclosed based on the same CRR requirements and EBA guidance.
Collateral received ING Group Fair value of encumbered collateral received or own debt securities issued
Fair value of collateral received or own debt securities issued available for encumbrance in EUR millions 010 040 130 Collateral received by the reporting institution 61,805 40,506 150 Equity instruments 3,721 15,787 160 Debt securities 57,876 24,432 230 Other collateral received 114 240 Own debt securities issued other than own covered bonds or ABSs – –
Encumbered assets on ING Group’s balance sheet comprise to a large extent mortgages and other loans which are used as cover pool for covered bond programs issued by subsidiaries in the Netherlands, Belgium and Germany, as well as external securitisations and other types of collateralised deposits. Of the total encumbered assets of the Group, EUR 69 billion are loans and advances, mostly mortgages, that serve as collateral for these type of liabilities. The issued securitisations and especially the covered bonds have overcollateralisation, meaning that the assets in the cover pool are higher than the issuance.
Actuarial and underwriting risks These risks (mortality, longevity, morbidity, adverse motor or home claims, etc.) result from the pricing and acceptance of insurance contracts. Actuarial risk is the risk that premium levels and provisions in respect of insurance risk turn out to be incorrect or no longer correct. An underwriting risk is the risk that an issuer will receive a claim under an insurance policy it issues/ underwrites. Maximum underwriting exposures are limited through exclusions, cover limits and reinsurance.
Annuity A financial product that is designed to accept and grow funds from an individual and then, upon annuitisation, pay out a stream of payments to the individual at a later point in time.
Available-for-sale financial assets Those non-derivative financial assets that are designated as available-for-sale or are not classified as: › loans and receivables › held-to-maturity investments › financial assets at fair value through profit and loss.
Basel II Regulatory requirements issued by the Basel Committee on Banking Supervision for the solvency calculation, which apply to ING from 2008 onwards. Basel II is an international standard for calculating the required capital based on internal models that take into account the financial and operational risks.
Directive IV (CRD IV). The CRR is binding for all EU Member States and became effective as at 1 January 2014, with the full requirements to take effect from 1 January 2018. The CRD IV directs all EU Member States to implement certain components of Basel III in their own law, in the Netherlands in the Wet Financieel Toezicht (Act on Financial Supervision). Although not all definitions and parameters of the CRR/CRD IV have been finalised, the key principles of Basel III have been included in both the solvency and liquidity risk appetite framework that are continuously monitored by senior management.
Claims ratio Claims, including claims handling expenses, expressed as a percentage of net earned premiums.
Contingent liabilities Possible obligations that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events, but is not recognised because: › It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
Control Situations in which ING owns, directly or indirectly, more than half of the voting power or over which ING 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.
Cost ratio Underwriting costs expressed as a percentage of premiums written.
Deferred Acquisition Costs (DAC) The costs an insurer spends to acquire a customer when it issues a policy, costs such as commissions paid to sales agents. These costs are put on the balance sheet as an asset (‘capitalised’) and then paid off (‘amortised’) over the life of the policy as the premium is earned. The amount that is set to be paid off each year is predetermined by the company based on estimated future returns.
(b) It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factor.
Economic Capital (EC) EC is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general, EC is measured as the unexpected loss above the expected loss at a given confidence level. This economic capital definition is in line with the net market value (or surplus) definition.
Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
ESR Framework The ESR Framework is a set of policies and structured governance to identify, assess and manage ING’s engagement with companies that operate in sectors that are more vulnerable to environmental and social risks and impacts.
Exposure at Default (EaD) The exposure at default intends to estimate with the use of models the outstanding amount or obligation at the moment of default in the future. Since the fact that a counterparty will go into default is not known, and the level of outstanding that may occur on that date is also not known, ING Bank uses a combination of statistical, expert and hybrid models to estimate the Exposure at Default.
b. Those that ING Group designates as available-for-sale. c. Those that meet the definition of loans and receivables.
ING Trust Office The purpose of the ING Trust Office is to: (i) Acquire and administer, for the purposes of management, registered shares in the capital of ING Groep N.V. and to issue depository receipts for these shares.
(ii) To promote the exchange of information between ING Group on one hand and the holders of depository receipts and shareholders in ING Group on the other.
Interest-rate rebate Profit-sharing for group life insurance business. A rebate granted to policyholders based on the discounted value of the difference between the interest rate used for calculating the premiums and the expected yield on investment. The profit-sharing is granted by means of a premium discount related to the yield on government bonds.
Interim dividend The interim dividend is an advance on the total dividend and distributed before the year-end closing.
Investment portfolio Comprises assets that are intended for use on a continuing basis, and have been identified as such. These investments are held in order to cover the insurance provisions and to manage interest rate, capital and liquidity risks.
Liquidity premium In order to correct the value of the liabilities for their illiquidity, a premium is added to the risk-free liability valuation curve. This premium reflects the price of illiquid long-term funding, which increases in stressed markets.
Loss Given Default (LGD) Anticipated percentage loss in the event of a default of a customer or counterpart.
Monte Carlo simulation A model to calculate Value at Risk, assuming that changes in risk factors are normally distributed together, taking into account nonlinear behaviour of financial products.
Net asset value Used in the equity method of accounting. The initial net asset value of the investment is determined by the fair value of the assets and liabilities of the investee. After the initial valuation of assets and liabilities of the investee at fair value, the assets and liabilities of the investee are valued in accordance with the accounting policies of the investor.
Net premiums written Gross premiums written for a given period less premiums ceded to retrocessionaires during the given period.
Preference share A preference share is similar to an ordinary share but carries certain preferential rights. These rights usually concern the guarantee of a fixed (cumulative) return to the shareholder or a guaranteed return on the investment.
Pre-settlement risk Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The presettlement risk (potential or expected risk) is the cost of ING Group replacing a trade in the market.
Risk-Weighted Assets (‘RWA’ under Basel I) Assets that are weighted for credit risk according to a formula used by the Dutch central bank (De Nederlandsche Bank), which conforms to the capital adequacy guidelines of the BIS (Bank of International Settlements). On and off-balance-sheet items are weighted for risk, with off-balance-sheet items converted to balance-sheet equivalents (using credit conversion factors) before being allocated a risk weight.
Tier 1 capital The Tier 1 capital of an institution consists of the sum of the Common Equity Tier 1 capital and Additional Tier 1 capital.
Trading portfolio Comprises financial instruments held to obtain short-term transaction results, to facilitate transactions on behalf of customers or to hedge other positions in the trading portfolio.
Variance-covariance A model to calculate Value at Risk, assuming that changes in risk factors are normally distributed jointly and that the change in portfolio value is linearly dependent on all risk factor changes.
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