Market risk Introduction Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, credit spreads and real estate prices negatively impact the bank’s earnings, capital, market value or liquidity position. Market risk either arises through positions in banking books or trading books. The banking book positions are intended to be held in the long-term (or until maturity) or for the purpose of hedging other banking book positions. The trading book positions are typically held with a short-term trading intent or in order to hedge other positions in the trading book. This means that financial instruments in the trading books should be free of restrictions on their tradability. Policies and processes are in place to monitor inclusion of positions into either a trading or a banking book and transfer of risk from trading to banking book and vice versa.
Governance A governance framework has been established defining specific roles and responsibilities of business management, market risk management and internal approval bodies per activity.
Model disclosure Economic Capital for market risk is calculated for exposures both in trading portfolios and banking portfolios and includes interest rate risk, equity price risk, foreign exchange rate risk, real estate risk and model risks. Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year.
Real estate price risk includes the market risks in both the real estate investment and the development portfolio of ING Wholesale Banking. The economic capital for real estate price risk is calculated by stressing the underlying market variables.
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) • The strategic interest rate position (Bank Treasury)
- Interests rate risk for mortgages arises through prepayment behaviour. Interest rate dependent prepayment behaviour is taken into account in the models. Next to dependence on interest rates, modelled prepayment may include other effects such as loan to value, seasonality and age of the loan. In addition, the interest sensitivity of embedded offered rate options is considered.
For Earnings Sensitivity (ES) and Net Present Value (NPV)-at-Risk the downward interest rate scenario contains a floor of 0% on the interest rates, in line with regulatory guidelines. This means that interest rates will not drop below 0% when applying the decreasing rate scenario. In case interest rates were already below zero, they remain at that negative level under this scenario.
Earnings Sensitivity (ES) Earnings sensitivity is modelled as described above and measures the impact of changing interest rates on (before tax) net interest income of the banking books, this excludes credit spread sensitivity. The Earnings Sensitivity figures in the tables below reflect an instantaneous interest rate shock of 1% and a time horizon of one year. The Earnings Sensitivity asymmetry between the downward floored scenario and a +100 bps shock is primarily caused by the applying the regulatory 0% floor in this scenario.
The Earnings sensitivity is mainly influenced by the sensitivity of savings to interest rate movements due to pass through rate differences between savings rates and investment yields and is partially offset by the sensitivity of mortgages. The investment of own funds only impacts the Earnings sensitivity marginally, as only a relatively small part has to be (re)invested within the 1-year horizon.
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%. The asymmetry between the NPV-at-Risk for a downward floored scenario and a +100 bps shock is primarily caused by the flooring of interest rates for this scenario. Due to applying this flooring, negative convexity impacts do not materialize significantly in the risk figures of the downward scenario.
Year-on-year variance analysis NPV-at-Risk for the downward floored scenario changed by EUR 714 million during 2016. The sensitivity for the downward floored scenario has mainly changed as a result of lower rates and is additionally impacted by the regulatory requirement that interest rates on savings have to be floored at zero. NPV-at-Risk for the total +100 bps shock changed during 2016 showing an increase of EUR 149 million. The NPV-at-risk for the +100 bps shock of the Corporate Line decreased due to a lower duration of the long-term investments of own funds. The change in the NPV-at-Risk for the Retail Challengers & Growth Markets is due to changes made to the model as a result of changing customer behaviour.
Governance – FX translation result ING Bank’s strategy is to keep the target CET1 ratio within a certain range when FX rates fluctuate, whilst limiting the volatility in the profit and loss account. Therefore, hedges are only done to the extent that they can be hedge accounted for against equity. Taking this into account, the CET1 ratio hedge can be achieved by deliberately taking foreign currency positions equal to certain target positions, such that the target CET1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates. A selection of emerging market currencies that meet specific requirements do not have a target position, but are allowed to remain open under the policy.
Year-on-year variance analysis The INR Foreign Investments have decrease by EUR 458 million to EUR 714 million (vs 2015) as a result of sale of Kotak shares. The increase in US Dollar cTaR is mainly due to appreciation of the US Dollar and an increase in US Dollar RWA.
Risk Profile Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank equity exposure mainly consists of the investments in associates and joint ventures of EUR 1,003 million (2015: EUR 842 million) and equity securities held in the available-for-sale (AFS) portfolio of EUR 4,024 million (2015: EUR 4,434 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised in the revaluation reserve, except in the case of impairment. Investments in associates and joint ventures are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
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. Credit & Trading Risk advises both the FMRC and ALCO Bank on the market risk appetite of trading activities.
Valuation techniques range from discounting of cash flows to valuation models. Such models are based on relevant risk factors such as the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour. Some of these price factors require assumptions which imply that valuation models are subjective by nature. Depending on what valuation technique is used and what assumptions are made, the obtained fair value can be different, hence the implied downward and/or upward uncertainty of the accounting value may vary. For a classification of fair valued exposure to products in accordance with their degree of valuation uncertainty, refer to the section ‘Financial instruments at fair value’ of Note 37 ‘Fair value of assets and liabilities’.
ING applies a Funding Valuation Adjustment (‘FVA’) to address the funding costs associated with the collateral funding asymmetry on uncollateralized or partially collateralized OTC derivatives in the portfolio. This adjustment is based on the expected exposure profiles of the uncollateralized or partially collateralized OTC derivatives and market-based funding spreads.
Risk measurement ING Bank uses a comprehensive set of methodologies and techniques to measure market risk in trading books.
Basel Committee/CRD IV ING Bank follows the regulatory framework set out in the Capital Requirements Regulation (CRR/CRD IV) for its regulatory capital calculations. The Basel Committee is performing a Fundamental Review of the Trading Book, which may have a significant impact on the Pillar I calculations. The final guidelines were published in January 2016 and full implementation is not expected before 2019.
Backtesting Backtesting is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future trading results, estimates are based on historical market data. In a backtest, the actual daily trading result (excluding fees and commissions) is compared with the 1-day VaR. In addition to using actual results for backtesting, ING Bank also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based on ING Bank’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2016 there were three occurrences where a hypothetical daily trading loss exceeded the daily consolidated VaR of ING Bank. The three outliers were caused by market movements for modelled risk factors. ING Bank reports the backtesting results on a quarterly basis to ECB.
Event Risk Event Risk is a valuable risk management tool. Event Risk evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially healthy going concern institution after a severe event occurs. In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, Credit & Trading Risk performs separate stressed scenario tests to monitor market risks under extreme market conditions. Since VaR in general does not produce an estimate of the potential losses that can occur as a result of extreme market movements, ING Bank uses structured stressed scenario tests to calculate Event Risk for monitoring the market risk under these extreme conditions. Event Risk is based on historical as well as hypothetical extreme scenarios. The result is an estimate of the profit and loss caused by a potential event and its world-wide impact for ING Bank. The Event Risk number for the ING Bank trading activity is generated on a weekly basis. Like VaR, Event Risk is limited by ALCO Bank.
Risk profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily trading profits and losses. The overnight VaR is presented for the ING Bank trading portfolio from 2012 to 2016.
ING Group Annual Report 2016 303 amounts in millions of euros 2016 2015 VaR (10 day 99%) 1 Maximum value 64 64 2 Average value 33 44 3 Minimum value 9 29 4 Period end 36 43 Stressed VaR (10 day 99%) 5 Maximum value 131 110 6 Average value 72 71 7 Minimum value 40 41 8 Period end 84 78 Incremental Risk Charge (99.9%) 9 Maximum value 292 482 10 Average value 207 380 11 Minimum value 120 249 12 Period end 120 267 Comprehensive Risk capital charge (99.9%) 13 Maximum value n/a n/a 14 Average value n/a n/a 15 Minimum value n/a n/a 16 Period end n/a n/a
Regulatory capital According to the Capital Requirements Regulation (CRR/CRD IV), regulatory capital for trading portfolios can be calculated using the standardised approach or an internal model approach. ING Bank received regulatory approval to use an internal model to determine the regulatory capital for the market risk in all trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the CRR, using internal VaR, Stressed VaR and Incremental Risk Charge models, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using Standardised Approach with fixed risk weights. In 2016, capital calculations for all trading books are made under the Internal Model Approach. Mismatches in FX risk from the banking books are incorporated under the Standardised Approach. ING Bank does not have a Correlation Trading Portfolio or any other securitisations in the trading book.
The decrease in market risk Regulatory Capital for Trading as of 2015 is mainly due to decrease in exposures to sovereign issuers and as a result a decrease in IRC, and a change in risk positions during 2016 that resulted in decreases in VaR and Stressed VaR. The main changes in risk positions throughout the year were in equity derivatives portfolio and CVA hedge portfolio. The CVA hedges are capitalized under market risk framework, while CVA is capitalized under credit risk framework according to Basel rules.
ING Group Annual Report 2016 305 amounts in EUR thousands 2016 2015 Interest Rate (BPV1) Interest Rate (BPV1) Euro -119 Euro –414 South Korean Won -44 South Korean Won –52 Polish Zloty -32 British Pound 45 Indian Rupee -23 US Dollar 43 Romanian New Leu 22 Japanese Yen 18
According to the Capital Requirements Regulation (CRR/CRD IV) ING Bank monitors and controls its large exposures, including exposures in the trading books. In the course of 2016 there were no exposures in the trading book exceeding the regulatory large exposure limits.
The 2nd line Balance Sheet Risk function is responsible for defining the governance with regard to funding and liquidity management and facilitates the decision making processes for ALCO Bank regarding this. Next to this, Balance Sheet Risk sets the standards for the funding and liquidity risk approach (identify, assess, control, monitor and report). Furthermore, it determines adequate policies and procedures for managing and monitoring liquidity risk and checks compliance with guidelines and limits.
Based on the above, ING Bank has defined the following funding and liquidity risk management risk appetite statements: • Home/host regulatory liquidity limits must be pro-actively complied with; • The time-to-survive in a funding stress situation must extend over defined period, depending on the level of stress applied; • Funding of longer-term assets and investments must be done by stable and longer-term liabilities; • Geographical dependencies with respect to intra-group funding are to be limited; and • Diversification must be in place of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies.
Funding In detailing the activities of the bank regarding utilisation of professional market funding sources, the following key principles apply: • Maintaining adequate market access in both normal and stressed but operable market conditions; • Managing risk by adhering to internally and externally imposed risk limits and balance sheet ratios; and • Optimising the cost of funding under the principles above.
With respect to funding sources, ING Bank manages its balance sheet prudently, whereby short-term funding is primarily utilised for funding short-term assets. The bank aims to fund longer term assets and investments by stable and longer term liabilities. Next to this, ING Bank monitors exposures in major currencies such as the USD. Monitoring and control of the USD funding is effectuated through a dedicated USD funding and liquidity risk framework.
The size and composition of the Liquidity buffer depends on ING’s risk appetite and regulatory liquidity standards. In the buffer, only assets that are included that are ‘unencumbered’ and freely available for liquidity purposes. Bank Treasury ensures functional management of all liquidity buffers within ING Bank, both buffers at Bank level and buffers at local business unit level.
The funding mix remained well diversified. Retail deposits remained ING Bank’s primary sources of funds and slightly increased to 51% of the total funding mix per year end 2016. The Loan-to-Deposit ratio (excluding securities at amortised costs) increased from 1.04 per 2015 year-end to 1.06 per year end 2016.
In November 2016, the EC has submitted a legislative proposal on NSFR to the European Parliament and Council. It is expected that the NSFR will come into force two years after its approval by the European Parliament and Council, with an indicative date of 2019. The NSFR ratio is currently reported on a quarterly basis based on BCBS and EBA guidance.
Scenario analysis Scenario analysis is a process used to consider the impact of rare, significant, yet plausible future events, taking into consideration alternative possible outcomes for those events, their severity and frequency. Input for scenario analysis includes the results of various internal and external assessments such as the BEA. Scenario analysis is an important component in the calculation of operational risk capital.
The Bank Compliance Risk Management function established a compliance control framework in which controls are defined based on laws, regulations and standards that are part of the internal control framework of ING Bank applicable to non-financial risks. To support management in mitigating compliance risks, the Bank Compliance Risk Management function educates and supports the business in managing compliance risks related to e.g. money laundering, terrorist financing, sanction and export control compliance, conflicts of interests, mis-selling, corruption and protection of customers’ interests.
Risk categories ING Bank categorises compliance risk into four conduct-related integrity risk areas: • Client conduct refers to the compliance risks arising from the relationship with or generated by the conduct of our clients and/or business partners, like money laundering or terrorist financing. Those risks are generally defined within ING Bank as Financial Economic Crimes (FEC); • Personal conduct refers to the compliance risks arising from the conduct of ING employees; • Financial Services conduct refers to the compliance risks arising from or generated by the conduct of ING Bank when developing, marketing and/or selling products and services to its clients; • Organisational conduct refers to the compliance risks arising from the way the Bank is organising itself to develop its activities. This category covers for instance the licences required to perform its regulated banking activities or the operating effectiveness of its information barriers.
Management of ING Bank entities maintain local procedures aiming to enable them to comply with local laws, regulations and the ING Bank FEC Policy and Minimum Standards. Where local laws and regulations are more stringent, the local laws and regulations are applied. Likewise the FEC Policy and Minimum Standards prevail when the standards therein are stricter than stipulated in local laws and regulations and if not specifically forbidden (data privacy or bank secrecy).
As a result of frequent evaluation of all businesses from economic, strategic and risk perspective ING Bank continues to believe that for business reasons doing business involving certain specified countries should be discontinued. In that respect, ING has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries. At present these countries are North Korea, Sudan, Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, US and/or other sanctions regimes. Iran, Sudan, and Syria are identified by the US as state sponsors of terrorism and are subject to U.S. economic sanctions and export controls.
Governance and risk management The governance and management of Business Risk differs from the risk types that have been described in the sections before. ING Bank has not developed explicit risk appetite statements regarding business risk nor has it set up a department that is responsible for managing this risk. The main reason is that the underlying risk types (expense risk, volume-margin risk, and customer behaviour risk) are mitigated and managed in a different way. Expense risk is monitored and managed via the financial performance of the bank and the local units, whereby the reported expense numbers are compared on a quarterly basis with the 2020 Ambition of having a cost/income ratio between 50% and 53%. Deviations from this ambition are monitored as part of the financial projections that are discussed continuously within different parts of the organisation. For customer behaviour risk, the management and monitoring of this risk is part of the day-to-day business of the Balance Sheet Risk department. As of January 2017, customer behaviour risk will be reported under market risk economic capital. For a more extensive explanation of the risk management practices for customer behaviour risk, please refer to the ‘Market Risk in Banking Books’ section.
Developments 2016 was an important year for ING Group, as it further strengthened its capitalisation. The further regulatory capital strengthening reflects strong profitability as well as the sale of the remaining stake in NN Group. Although the regulatory environment remains uncertain, our capital position ensures we can continue to support our customers to realise their financial future.
− Interim profit not included in CET1 capital1 –1,629 –1,586 –1,629 –1,586
May 2017. 2 Including EUR 3,052 million (2015: EUR 2,061 million) is CRR/CRD IV compliant and EUR 4,654 million (2015: EUR 5,187 million) to be replaced as capital recognition is subject to CRR/CRD IV grandfathering rules. For 2015 this amount is presented net of positions on lent to insurance. 3 Including EUR 7,347 million (2015: EUR 6,229 million) is CRR/CRD IV-compliant and EUR 2,141 million (2015: EUR 2,341 million) to be replaced as capital recognition is subject to CRR/CRD IV grandfathering rules. 4 The 2015 fully-loaded RWA deviated from the phased-in RWA as a result of a slightly higher threshold to which the significant Financial Institutions were risk weighted.
Total 37,724 36,068 Accrued interest expenses on own fund instruments at year-end 235 216
Interim profit not included in CET1 capital1 –617 0 –617 0
ING Group Annual Report 2016 323 in EUR million 2016 2015
Accounting policies for the parent company annual accounts for the years ended 31 December
Changes in ING Groep N.V. shares held by group companies –10 –28
In 2015, Additions represented the fair value of the investment retained in NN Group at deconsolidation. Further divestments of ING Group’s shareholding in NN Group, subsequent to deconsolidation, was included in Disposals. As at 31 December 2015, Investments in associates and joint ventures represented the remaining interest in NN Group of 25.75%. The investment was measured at the lower of the carrying value and the fair value less cost to sell. Reference is made to the Consolidated annual accounts, Note 51 ‘Other events’.
Realised gains/losses transferred to the statement of profit or loss 128 128
Realised gains/losses transferred to the statement of profit or loss –77 –77
Realised gains/losses transferred to the statement of profit or loss –274 –274
Changes in composition of the group and other changes 321 –2 319
Realised gains/losses transferred to the statement of profit or loss –17 –17
Changes in composition of the group and other changes 226 226
Changes in the composition of the group and other changes –206 –206
The Revaluation reserve, Share of associates and joint ventures reserve and Currency translation reserve cannot be freely distributed. Retained earnings can be freely distributed, except for an amount equal to the negative balance in each of the components of the Revaluation reserve, Share of associates and joint ventures reserve and the Currency translation reserve. Unrealised gains and losses on derivatives, other than those used in cash flow hedges, are presented in the statement of profit or loss and are therefore part of Retained earnings and are not included in Share of associates and joint ventures reserve.
Interest rate Year of issue Due date Notional amount in original currency 2016 2015 1 Reference is made to the ING Group Consolidated annual accounts, Note 18 ‘Subordinated loans - Subordinated notes – Anchor investors’.
In November 2016, ING Groep N.V. issued USD 1,000 million securities that qualify as Additional Tier 1 capital under CRR/CRD IV. The issuance was in the form of 5 Year Callable USD denominated Perpetual Additional Tier 1 Contingent Convertible Securities, with coupon 6.875%. The securities are subject to full conversion into ordinary shares of ING Groep N.V. in the event that ING’s phased-in CET1 ratio would fall below 7%.
The interest rate on the Amounts owed to group companies as at 31 December 2016 is 0.0% (2015: 0.0%).
External advisory fees 1 5 9 Interest and other financial income
Included in Interest and other financial income is EUR 478 million (2015: EUR 552 million) related to group companies.
12 Result from group companies, associates and joint ventures after taxation
At the disposal of the General Meeting of Shareholders pursuant to Article 37 (5) of the Articles of Association 2,560
as at 31 December 2016, and of its result and its cash flows for 2016 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Netherlands Civil Code; • the accompanying parent company annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2016, and of its result for 2016 in accordance with Part 9 of Book 2 of the Netherlands Civil Code.
We are independent of ING Group in accordance with the Verordening inzake de onafhankelijkheid van accountants bij assuranceopdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics).
Scope of the group audit ING Group is the head of a group of entities and subsidiaries. The financial information of ING Group is included in the consolidated annual accounts. ING Group is structured in segments: Retail Netherlands, Retail Belgium, Retail Germany, Retail Other, Wholesale Banking and Corporate Line Banking, covering different countries.
Because we are ultimately responsible for the opinion, we are responsible for directing, supervising and performing the group audit. In this respect, we have determined the nature and extent of the audit procedures to be carried out for group entities. Our group audit focused on significant group entities (‘components’). These components are either individually financially significant due to their relative size compared to ING Group or because we assigned a significant risk of material misstatement to one or more account balances of these entities. In addition, we included certain group entities in the scope of our group audit in order to arrive at a sufficient coverage over all relevant significant account balances.
The group audit team has set component materiality levels, which ranged from EUR 25 million to EUR 80 million, based on the mix of size and financial statement risk profile of the components within the group to reduce the aggregation risk to an acceptable level.
The consolidation of the group, the disclosures in the annual accounts and certain accounting topics that are performed at group level are audited by the group audit team. The accounting matters on which audit procedures are performed by the group audit team include, but are not limited to, goodwill impairment testing, equity, group financing, certain elements of the loan loss provisioning process, corporate income tax for the Dutch fiscal unity and claims and litigations.
By performing the procedures mentioned above at group entities, together with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion about the annual accounts.
Description ING Group’s portfolio of loans and advances to customers amounts to EUR 564 billion as at 31 December 2016. These loans and advances are measured at amortised cost, less a provision for loan losses (EUR 5.2 billion). Certain aspects of the accounting for loan losses require significant judgement of management, such as the identification of loans that are deteriorating, the assessment of objective evidence for impairment, the value of collateral and the estimation of the recoverable amount.
Our procedures over internal controls focused on controls around the accuracy of loan and collateral data, the determination of risk ratings and the process for identifying arrears and the management thereof. In our audit, we also considered the process around the internal validation and implementation of the models used to determine the loan loss provisions, as well as the periodic evaluation of the parameters applied in these models. As a result of internal control deficiencies identified during the year, the internal control risk was assessed as higher and the level of substantive audit procedures increased.
We also assessed the assumptions made and key judgements applied by management based on detailed analysis using historical experience data from previous restructuring programmes.
We read the other information. Based on our knowledge and understanding obtained through our audit of the annual accounts or otherwise, we have considered whether the other information contains material misstatements.
Appropriation of results The result is appropriated pursuant to Article 37 of the Articles of Association of ING Groep N.V., the relevant stipulations of which state that the Executive Board, subject to the approval of the Supervisory Board, determines what part of the result is to be appropriated to reserves and that the remaining part of the result shall be at the disposal of the General Meeting of Shareholders.
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. Additional risks of which the Company is not presently aware could also affect the business operations of ING and have a material adverse effect on ING’s business activities, financial condition, results of operations and prospects. In addition, the business of a multinational, broad-based financial services firm such as ING is inherently exposed to risks that only become apparent with the benefit of hindsight. The market price of ING shares or other securities could decline due to any of those risks including the risks described below, and investors could lose all or part of their investments. The sequence in which the risk factors are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.
General Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. In 2008 and through early 2009, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Concerns over the slow economic recovery, the European sovereign debt crisis, the outcome of the negotiations between the UK and the EU following the UK referendum on EU membership (Brexit), the potential exit of other countries from the Eurozone, increasing political instability in Europe, unemployment, the availability and cost of credit, credit spreads, quantitative easing within the Eurozone through bond repurchases, the ECB’s targeted longer-term refinancing operation (‘TLTRO’), potential changes in U.S. laws, regulations and policies governing financial regulation, foreign trade and foreign investment following the inauguration of a new U.S. administration in January 2017, the level of U.S. national debt and the U.S. housing market, inflation/deflation levels, energy costs and heightened geopolitical issues all have contributed to increased volatility and diminished expectations for the economy and the markets in recent years.
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. 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 changes in economic policy including the implementation of 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 and the United Kingdom’s withdrawal from the European Union 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.
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases, governments nationalised companies or parts thereof. The measures adopted in the Netherlands included emergency funding and capital reinforcement, and a Dutch Credit Guarantee Scheme, both of which have expired. Our completed Restructuring Plan and the divestments in connection with that plan altered the size and structure of the Group and involved significant costs, which required changes in our operations, funding and liquidity. Any potential future transactions with the Dutch State or any other government or any actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
We are subject to the jurisdiction of a variety of banking regulatory bodies, some of which have proposed regulatory changes in recent years that, if implemented, would hinder our ability to manage our liquidity in a centralised manner. As a holding company, ING Groep N.V. is dependent for liquidity on payments from its subsidiaries, which are subject to restrictions, as described in ‘—As a holding company, ING Groep N.V. is dependent for liquidity on payments from its subsidiaries, many of which are subject to regulatory and other restrictions..’ Furthermore, regulatory liquidity requirements in certain jurisdictions in which we operate are generally becoming more stringent, including those forming part of the ‘Basel III’ requirements discussed further below under ‘—We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability’, undermining our efforts to maintain this centralised management of our liquidity. These developments may cause trapped pools of liquidity and capital, resulting in inefficiencies in the cost of managing our liquidity and solvency, and hinder our efforts to integrate our balance sheet.
Declining interest rates or a prolonged period of low interest rates, as is currently the case, may result in: • lower earnings over time on investments, as reinvestments will earn lower rates; • increased prepayment or redemption of mortgages and fixed maturity securities in our investment portfolios, as well as increased prepayments of corporate loans. This as borrowers seek to borrow at lower interest rates potentially combined with lower credit spreads. Consequently, we may be required to reinvest the proceeds into assets at lower interest rates; • lower profitability as the result of a decrease in the spread between client rates earned on assets and client rates paid on savings, current account and other liabilities; • higher costs for certain derivative instruments that may be used to hedge certain of our product risks; • lower profitability since we may not be able to fully track the decline in interest rates in our savings rates; • lower profitability since we may not always be entitled to impose surcharges to customers to compensate for the decline in interest rates; • lower profitability since we may have to pay a higher premium for the defined contribution scheme in the Netherlands for which the premium paid is dependent on interest rate developments and DNB's methodology for determining the ultimate forward rate; • lower interest rates may cause asset margins to decrease thereby lowering our results of operations. This may for example be the consequence of increased competition for investments as result of the low rates, thereby driving margins down; and/or • (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.
• (depending on the position) a significant collateral posting requirement associated with our interest rate hedge Program; Inflation and deflation may negatively affect our business. A sustained increase in the inflation rate in our principal markets would have multiple impacts on us and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates, which may: • decrease the estimated fair value of certain fixed income securities that we hold in our investment portfolios, resulting in: • reduced levels of unrealised capital gains available to us, which could negatively impact our solvency position and net income, and/or
Basel III, CRD IV and CRD V In December 2010, the Basel Committee on Banking Supervision (‘BCBS’) announced higher global minimum capital standards for banks and introduced a new global liquidity standard and a new leverage ratio. The BCBS’s package of reforms, collectively referred to as the ‘Basel III’ rules, will, among other requirements, increase the amount of common equity required to be held by subject banking institutions, prescribe the amount of liquid assets and the long-term funding a subject banking institution must hold at any given moment and limit leverage. Banks will be required to hold a ‘capital conservation buffer’ to withstand future periods of stress such that the total common equity Tier 1 ratio, when fully phased in on 1 January 2019, will rise to 7%. Basel III also introduced a ‘countercyclical buffer’ as an extension of the capital conservation buffer, which would allow national regulators to require banks to hold more capital during periods of high credit growth (to strengthen capital reserves and moderate the debt markets). Further, Basel III has strengthened the definition of capital that will have the effect of disqualifying many hybrid securities, including those issued by the Group, from inclusion in regulatory capital, as well as the higher capital requirements for trading, derivative and securitisation activities as part of a number of reforms to the Basel II framework. In addition, the BCBS and the Financial Stability Board (‘FSB’) published measures in October 2011 that would have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for, and instituting more intensive and effective supervision of, ‘systemically important financial institutions’ (‘SIFIs’) and so-called ‘Global’ SIFIs (‘G-SIFIs’), in addition to the Basel III requirements otherwise applicable to most financial institutions. In particular in November 2015 the FSB published the final Total Loss-Absorbing Capacity (TLAC) standard for GSIFIs, which aims for G-SIFIs to have sufficient loss-absorbing and recapitalisation capacity available in resolution. The implementation of these measures began in 2012, and full implementation is targeted for 2019, with the TLAC requirements to apply from 2019. ING Bank has been designated by the BCBS and the FSB as one of the global systemically important banks (‘G-SIBs’), forming part of the GSIFIs, since 2011, and by the Dutch Central Bank (De Nederlandsche Bank N.V., ‘DNB’) and the Dutch Ministry of Finance as a domestic SIFI since November 2011. The Basel III proposals and their potential impact are monitored via semi-annual monitoring exercises in which ING Bank participates. As a result of such monitoring exercises and ongoing discussions within the regulatory environment, revisions have been made to the original Basel III proposals as was the case with the revised Liquidity Coverage Ratio in January 2013 and the revised Net Stable Funding Ratio and Leverage Ratio in January 2014. In January 2017, the BCBS announced that it expected to complete finalisation of all revisions to the Basel III framework, including the calibration of an aggregate capital floors framework and a leverage ratio minimum requirement, in ‘the near future’. There is a high degree of uncertainty as to whether any further amendments to the 2010 framework and standards will be made by the BCBS in the coming years, and how any such amendments would be implemented subsequently in the EU and in The Netherlands.
For European banks, the Basel III requirements were implemented through the Capital Requirements Regulation and Capital Requirements Directive IV (‘CRD IV Regulation’ and ‘CRD IV Directive’, respectively and together the ‘CRR’), which were adopted by the EC in June 2013 following approval by the European Parliament in April 2013. The CRD IV Regulation entered into force on 28 June 2013 and the CRD IV Directive on 17 July 2013, and all banks and investment firms in the EU (as opposed to the scope of the Basel III requirements, which apply to ‘internationally active banks’) were required to apply the new rules from 1 January 2014 in phases, with full implementation by 1 January 2019. The full impact of these rules, and any additional requirements for SIFIs or G-SIFIs, if and as applicable to the Group, will depend on how the CRD IV Directive is transposed into national laws in each Member State, including the extent to which national regulators and supervisors set more stringent limits and additional capital requirements or surcharges. In the Netherlands, the CRD IV Directive has been implemented through amendments to the Financial Supervision Act.In the next phase for regulatory requirements for banks’ risk and capital management, the regulators are focusing on the required capital calculations across banks. Since the start of the financial crisis there has been much debate on the risk-weighted capitalisation of banks, and specifically on whether internal models are appropriate for such purposes. These developments have suggested that stricter rules may be applied by a later framework. The BCBS released several consultative papers, containing proposals to change the methodologies for the calculation of capital requirements and is expected to issue further standards in this respect. Within these proposals BCBS suggests methods to calculate RWA using more standardised or simpler methods in order to achieve greater comparability, transparency and consistency. In November 2016, the EC proposed substantial amendments (commonly referred to as CRD V) to the CRR (including the CRD IV Directive), the BRRD and the Singe Resolution Mechanism Regulation to, among other things, implement these revisions in the EU legislation. Legislation is expected to be finalised in 2018. These proposals will likely impact the capital requirements for currently reported exposures (e.g. credit risk via revised standardised RWA floor) but may also lead to new capital requirements. The proposals cover multiple areas, including the Pillar 2 framework, the leverage ratio, mandatory restrictions on distributions, permission for reducing own funds and eligible liabilities, macroprudential tools, a new category of ‘non-preferred’ senior debt, the minimum requirement for own funds and eligible liabilities (MREL) and the integration of the TLAC standard into EU legislation. The proposals are to be considered by the European Parliament and the Council of the European Union and therefore remain subject to change. The final package of new legislation may not include all elements of the proposals and new or amended elements may be introduced through the course of the legislative process. Until the proposals are in final form, it is uncertain how the proposals will affect the Group or holders of its securities. The current proposals, as well as on the economic and financial environment at the time of implementation and beyond, can have a material impact on ING’s operations and financial condition and they may require the Group to seek additional capital.
In 2016 the ECB has also started the Targeted Review of Internal Models (TRIM), an exercise which will take several years and is aimed at bringing assurance that capital held reflects the underlying risks. There is also heightened supervisory attention for the credit quality of loans to corporates and/or households. These exercises could impact the RWA we recognise for certain assets.
Finally, as part of the move towards a full banking union, on 19 August 2014, the Single Resolution Mechanism (‘SRM’) came into effect, with the aim to have a Single Resolution Board (‘SRB’) to be responsible for key decisions on how a bank subject to SSM supervision is to be resolved if a bank has irreversible financial difficulties and cannot be wound up under normal insolvency proceedings without destabilizing the financial system. The SRB is a key element of the SRM and is the European resolution authority for the Banking Union and is fully operational, with a complete set of resolution powers, as of 1 January 2016. The SRB works in close cooperation with the national resolution authorities such as the Dutch national resolution authority. The SRB is also in charge of the Single Resolution Fund, a pool of money financed by the banking sector which will be set up to ensure that medium-term funding support is available while a credit institution is being restructured. Historically, ING Bank has contributed to the Dutch National Resolution Fund (the ‘NRF’). Beginning in 2016, contributions to the NRF will be phased out and will decrease steadily until they decrease to nil in 2023; during the same period, contributions to the SRF will commence and steadily increase, replacing ING Bank’s contributions to the NRF. As the contributions for the NRF and the SRF are calculated on a different basis and by different authorities (DNB and SRB, respectively) the contributions to the SRF may deviate from the contributions to the NRF.
ING has a recovery plan in place to enhance the bank’s readiness and decisiveness to tackle financial crises on its own. Effective since 2012, the plan is updated annually to make sure it stays fit for purpose. The completeness, quality and credibility of the recovery plan is assessed annually by ING’s regulators. Since 2012, ING has worked together with the different resolution authorities to determine a resolution strategy and to identify potential impediments to resolution. This resulted in a resolvability assessment that is shared every year with the FSB and the preparation of a transitional resolution plan by the SRB. In November 2016, ING concluded that ING Groep N.V. should be the designated resolution entity. At the end of January 2017, the SRB has informed ING that it supports the designation of ING Groep N.V. as the point of entry.
In February 2013, the EC adopted a proposal setting out the details of a financial transaction tax (‘FTT’) under the enhanced cooperation procedure, to be levied on transactions in financial instruments by financial institutions if at least one of the parties to the transaction is established in the financial transaction tax zone (‘FTT-zone’) or if the instrument which is the subject of the transaction is issued within the territory of a Member State in the FFT-Zone. 10 Member States have indicated they wish to participate in the FTT (Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain) following Estonia’s withdrawal in 2015. The initial proposal contemplated that the FTT would enter into effect on 1 January 2014, which would have then required us to pay a tax on transactions in financial instruments with parties (including Group affiliates) located in such FTT-zone. However, the FTT remains subject to negotiation between the participating Member States and currently it is uncertain whether and in what form and by which Member States the FTT will be adopted. The implementation date of any FTT will thus depend on the future approval by participating Member States in the Council, consultation of other EU institutions, and the subsequent transposition into local law. Depending on its final form, the introduction of an FTT in the Netherlands or outside the Netherlands could have a substantial adverse effect on ING’s business and results.
Additional Tier 1 Securities In April 2015, ING issued USD 2.25 billion of Additional Tier 1 securities (‘AT1 Securities’) and in November 2016, ING issued USD 1 billion AT1 Securities. ING may issue additional AT1 Securities, or other instruments with similar terms (also known as contingent convertible bonds or ‘CoCos’), in the future. The Dutch parliament adopted Article 29a of the Dutch Corporate Income Tax Act of 1969 (Wet op de vennootschapsbelasting 1969) in 2015 to provide debt treatment of securities similar to the AT1 Securities for the purpose of Dutch corporate income tax (25% rate) and (indirectly) dividend withholding tax purposes (15% non-grossed up rate). The interest payment obligation for the year 2015 in respect of the AT1 Securities is EUR 90 million and for the year 2016 it is EUR 135 million. For 2015 and 2016, that amount was treated by ING as a deductible interest expense for Dutch corporate income tax purposes and as exempt for Dutch dividend withholding tax purposes. However, there is a risk that the EC will take the view, and that court would uphold such view if contested, that the tax deductibility of interest payments on the AT1 Securities is in contravention of the EC’s temporary state aid rules for assessing public support to financial institutions during the crisis (the ‘Revised State Aid Guidelines’). The Revised State Aid Guidelines provide for strengthened burden-sharing requirements, which require banks with capital needs to obtain shareholders’ and subordinated debt holders’ contributions before resorting to certain state aid measures. If a determination were made that deduction of interest payments on AT1 Securities and other similar securities, including those ING may issue in the future, is inconsistent with the Revised State Aid Guidelines, amounts ING would have to pay to the Dutch State with respect to interest payments that have previously been treated as an expense for Dutch corporate income tax purposes and that have been paid free of withholding taxes could be substantial, in particular if ING is unable to redeem the securities (e.g. for the year 2015, the total amount of payment in this respect could be EUR 38 million excluding interest and for the year 2016 it would be EUR 58 million excluding interest). The terms of the AT1 Securities provide that ING can redeem the AT1 Securities only upon the occurrence of specific events (not including a determination that the tax treatment of the AT1 Securities is inconsistent with European rules against state aid) or after 5 years or 10 years (depending on the series) after their date of issuance.
There is a trend towards increased regulation and supervision of our subsidiaries by the governments and regulators in the countries in which those subsidiaries are located or do business. Concerns about protecting clients and creditors of financial institutions that are controlled by persons or entities located outside of the country in which such entities are located or do business have caused or may cause a number of governments and regulators to take additional steps to “ring fence” or maintain internal total loss-absorbing capacity at such entities in order to protect clients and creditors of such entities in the event of financial difficulties involving such entities. The result has been and may continue to be additional limitations on our ability to efficiently move capital and liquidity among our affiliated entities, thereby increasing the overall level of capital and liquidity required by the firm on a consolidated basis.
The negative publicity associated with any sales practices, any compensation payable in respect of any such issues and regulatory changes resulting from such issues, has had and could have a material adverse effect on our business, reputation, revenues, results of operations, financial condition and prospects. For additional information with respect to specific proceedings, see Note 45 ‘Legal proceedings’ to the consolidated financial statements.
There can be no assurance that we will pay dividends on our Ordinary Shares in the future. It is ING’s policy to pay dividends in relation to the long-term underlying development of cash earnings. Dividends can only be declared by shareholders when the Executive Board considers such dividends appropriate, taking into consideration the financial conditions then prevailing and the longer-term outlook. The Executive Board proposes to pay a total dividend of EUR 2,560 million, or EUR 0.66 per ordinary share, over the financial year 2016. This is subject to the approval of shareholders at the Annual General Meeting in May 2017. Taking into account the interim dividend of EUR 0.24 per ordinary share paid in August 2016, the final dividend will amount to EUR 0.42 per ordinary share and be paid in cash. However, there can be no assurance that we will pay dividends in the future.
It also may not be able to enforce judgments of U.S. courts under the U.S. federal securities laws in courts outside the United States, including the Netherlands. The United States and the Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, we may not be able to enforce in the Netherlands a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, even if the judgment is not based only on the U.S. federal securities laws, unless a competent court in the Netherlands gives binding effect to the judgment.
Additional Pillar III information amounts in millions of euros, unless stated otherwise
For both Capital Requirement and Asset Encumbrance, this Pillar III report provides information on ING Group level. The information on credit risk, counterparty credit risk, securitisations, market risk and non-financial risk focuses on ING Bank.
(iii) the integration of other BCBS disclosure requirements into the Pillar III framework, which covers the disclosure requirements previously issued or announced by BCBS (i.e. G-SIB indicators, Countercyclical Capital Buffer, Leverage Ratio, LCR and NSFR)
Within the draft Guidelines, EBA adjusted the Revised Pillar III templates and included EU specificities, for instance in terms of exposure classes or concepts used, to fit the CRR requirements. The draft EBA guidelines should therefore be seen as specifications of the existing CRR disclosure requirements, rather than a completely new set of requirements.
The scope of the EBA guidelines corresponds almost fully with the first phase of the RPF, focusing on general disclosure requirements for risk management, credit risk, counterparty credit risk and market risk. The remaining requirements in Part Eight CRR are out of scope because either covered in the second phase of the BCBS Pillar III review or are covered via other regulations (Delegated Act, Implementation Technical Standards, etc.) that are already applicable.
EU CCR8 Exposures to CCPs 411 EU CCR3 Standardised approach – CCR exposures by regulatory portfolio and risk 407 EU CCR4 IRB approach – CCR exposures by portfolio and PD scale 408 EU CCR5-A Impact of netting and collateral held on exposure values 410 EU CCR5-B Composition of collateral for exposures to CCR 410
Market risk EU MR1 Market risk under the standardised approach 303 EU MR2-A Market risk under the IMA 304 EU MR2-B RWA flow statements of market risk exposures under an IMA 421 EU MR3 IMA values for trading portfolios 303
Minimum capital requirements amounts in EUR million 2016 2015 2016 Credit risk (excluding counterparty credit risk) (CCR) 241,331 237,064 19,306 Of which standardised approach (SA) 24,731 22,368 1,978 Of which internal rating-based (IRB) approach 212,982 209,885 17,039 Of which Equity IRB under the simple risk-weight or the internal models approach 3,618 4,811 289 Counterparty credit risk (CCR) 14,714 17,927 1,177 Of which Marked to market - Of which Original exposure - of which standardised approach for counterparty credit risk 10,863 12,290 869 of which internal model method (IMM) - Of which risk exposure amount for contributions to the default fund of a CCP 279 633 22 Of which CVA 3,572 5,004 286 Settlement risk - - - Securitisation exposures in banking book (after cap) 842 1,904 67 Of which IRB approach (RBA) 842 1,904 67 Of which IRB Supervisory Formula Approach (SFA) - - - Of which Internal assessment approach (IAA) - - - Of which Standardised approach (SA) - - - Market risk 6,660 9,635 533 Of which standardised approach (SA) 1,081 1,328 87 Of which internal model approaches (IMA) 5,579 8,307 446 Large exposures - - - Operational risk 40,527 43,137 3,242 Of which Basic Indicator Approach - - - Of which Standardised Approach - - - Of which Advanced Measurement Approach 40,527 43,137 3,242 Amounts below the thresholds for deduction (subject to 250% risk weight) 10,251 11,469 820 Floor adjustment 0 0 0 Total 314,325 321,135 25,146
The capital position table reflects own funds according to the CRR/CRD IV rules. As CRD IV is phased in gradually until 2019, the table shows the CRD IV positions both according to the 2019 end-state rules and the 2016 rules. This makes clear which items phase in directly, which phase in gradually.
ING Group’s phased-in (transitional) common equity Tier 1 ratio at year-end 2016 of 14.15% is well in excess of the 9.00% common equity Tier 1 requirement for ING Group in 2017. This requirement is the sum of (i) 4.5% Pillar 1 requirement (ii) 1.75% Pillar 2 requirement, being the European Central Bank’s (ECB) decision on the 2016 Supervisory Review and Evaluation Process (SREP) (iii) the 1.25% capital conservation buffer and (iv) 1.5% for the Systemic Risk Buffer (SRB) which has been set separately for Dutch systemic banks by DNB as macro-prudential supervisor. The impact from countercyclical buffer requirements was insignificant in 2016. The fully loaded SRB requirement is currently set at 3% for ING Group and phases in over four years, with a final implementation date of 1 January 2019. With a 14.18% fully-loaded Group CET1 ratio as at 31 December 2016, ING is already in compliance with the current fully-loaded requirement that is expected to grow to 11.75% in 2019 .
ING Group Annual Report 2016 372 2016 2015 2016 rules 2017 rules 2019 rules 2015 rules 2016 rules 2019 rules
Regulatory adjustments: Minority interests, counting as Common equity Tier 1 326 326 326 305 305 305 Goodwill and intangibles deducted from Tier 11 -922 -1,229 -1,536 -638 -956 -1,594 Provision shortfall2 -584 -779 -974 -454 -681 -1,135 Revaluation reserve debt securities -470 -235 -758 -505 Revaluation reserve equity securities -1,063 -531 -1,580 -1,053 Revaluation reserve real estate -81 -41 -196 -130 Revaluation reserve cash flow hedge -777 -777 -777 -666 -666 -666 Prudent valuation adjustment -49 -49 -49 -91 -91 -91 Investments >10% FI, exceeding 10% threshold -558 -835 -1,389 excess AT1 deductions over AT1
Common Equity Tier 1 ratio 14.15% 14.17% 14.18% 12.94% 12.87% 12.70% Tier 1 ratio 16.34% 16.50% 16.63% 14.45% 14.56% 14.75% Total capital ratio 19.33% 19.52% 19.68% 16.92% 17.10% 17.45% 1 Intangibles: mainly capitalised software. 2 In CRR/CRD IV the provision shortfall is deducted fully from Common Equity Tier 1. During the phase-in period (until 2017), the part of the shortfall that is not deducted from CET1 Capital is substracted 50%/50% from additional Tier 1 and Tier 2 Capital. 3 Assuming that non CRR/CRD IV eligible Tier 1 and Tier 2 capital will be replaced by CRR/CRD IV eligible equivalents before they stop to meet the CRR/CRD IV
General credit exposures Trading book exposures Securitisation exposures Own fund requirements
Sum of long and short positions of trading book exposures for SA
of which: General credit exposures of which: Trading book exposur es of which: Securiti sation exposur es
Total Own funds requirement s weights Countercy clical capital buffer rate
4 Adjustments for derivative financial instruments1 376 376 -140 -140 5 Adjustments for securities financing transactions ‘SFTs’ 3,661 3,661 15,786 15,786 6 Adjustment for off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures) 71,623 71,623 69,093 69,093
EU-23 Choice on transitional arrangements for the definition of the capital measure Transitional Fully phased in Transitional Fully phased in
in EUR billion 2016 2015 Opening amount 231.6 226.7 Book size1 9.2 7.6 Divestments/De-consolidations -0.5 -1.5 Book quality2 -9.8 -8.4
CVA RWA movement -1.4 -1.4 Total Credit RWA movement 8.7 4.9
• Book quality: The book quality improved reducing RWA by EUR 9.8 billion, largely due to the Dutch mortgages portfolio. The improved economic conditions especially with respect to house prices and employment in the Netherlands, accompanied with a more efficient arrears management has led to RWA reduction of EUR 2.9 billion in the mortgage portfolio. The Real Estate book showed signs of improvement in overall risk profile, helped by return to performing status of key clients and higher collateralisation which reduced RWA by EUR 1.4 billion. Similar Improvement in risk profile was also witnessed in other Corporate portfolios which further reduced RWA by EUR 2.1 billion. However, deteriorating conditions in Poland and Turkey led to a downgrade in ING rating of these countries and subsequently to an increase of more than EUR 0.5 billion in RWA.
• EU Equivalence: The EU equivalence rule used to be applicable to certain countries outside the EU that had supervisory and regulatory arrangements in place that are at least equivalent to those applied in the EU. As of March 31 2016, the 0% risk weight
• Model updates: Introduction of the Single Supervisory Mechanism of the ECB has led to a change in the implementation timelines. Model updates driven by regulatory guidance increased RWA by EUR 13.0 billion. An RWA add-on for the SME portfolios in the Netherlands and Belgium was implemented through LGD model updates which increased RWA by EUR 6.1 billion. Further RWA add-ons were implemented on Belgian mortgages and SBF portfolios through model updates, which increased RWA by EUR 1.9 billion. The RWA impact of all these add-ons were taken as an ONCOA item in 2015. For the LGD models for Project Finance and ING Direct Spain mortgages risk-weight multipliers were added to make the models more conservative increasing RWA by EUR 4.0 billion and EUR 0.7 billion, respectively. Next to these model updates, the model approach for the Dutch Healthcare portfolio changed from AIRB to SA which increased RWA by EUR 1.0 billion.
• Methodology and policy: Some larger and smaller changes resulted in an RWA increase of EUR 0.4 billion. The EUR 1.2 billion decrease was mainly due to the change in calculation for derivatives, counterparty credit risk methodology changes and reduction of the regulatory maturity. An RWA increase of EUR 1.4 billion was due to methodology updates on SME and EU equivalence identification implemented for regulatory compliance. The biggest impact was caused by the change in calculation for derivatives, several methodology changes for counterparty credit risk, and regulatory maturity reduced the RWA by EUR 1.2 billion. Another big impact was caused by the move of the Dutch Healthcare portfolio from IRB to SA approach which increased RWA by EUR 1.0 billion. Further increase in RWA of EUR 1.4 billion was due to methodology updates on SME and EU equivalence identification implemented for regulatory compliance. All in all, these changes and multiple other smaller changes resulted in an RWA increase of EUR 0.4 billion.
Overall, RWA management has a high priority throughout ING Bank in all aspects of our business. From product design, to pricing, to divestment decisions, RWA allocation and consumption is extensively monitored, reported, and managed at all levels of the organisation.
The AIRB and SA approaches are explained in more detail in the Credit Risk Measurement section of the Risk Management paragraph. An analysis on the AIRB and SA portfolios and accompanying tables is provided in the SA and AIRB Approach sections of Pillar III.
• 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 Commercial Banks and non-Bank Financial Institutions; • Corporates include all legal entities, that are not considered to be Governments, Institutions or Retail; and • Retail includes the following classes: • Retail – Secured by immovable property non-SME (hereafter Secured by Residential Mortgages) includes all retail loans which are covered by residential properties
In the tables below an overall picture is given of the ING Bank portfolio per exposure class, after which a breakdown per exposure class is given segmented by geography, industry and maturity. The segmentation on Securitisations is provided in the Securitisation chapter. Compared to the Pillar III section of 2015, new templates have been added in accordance with EBA Pillar III disclosure requirements. A separate section for counterparty risk has been added. In some tables where a separation of actual AIRB and SA exposure classes is not provided, mapping of SA exposure classes presented in above tables has been used. This approach has been followed to preserve continuity with past annual disclosures.
Sovereigns PD Bands 104,368 117,789 -11% 7,879 8,297 -5% <0.05% 84,277 91,755 -8% 1,036 283 266% 0.05% to 0.5% 19,195 25,532 -25% 6,141 7,385 -17% 0.5% to 5% 451 276 63% 49 195 -75% 5% to 10% 438 63 594% 643 10 6346% 10% to 20% 8 43 -82% 9 30 -69% 20% to 50% 0 103 -100% 0 325 -100% more than 50% 0 18 -100% 0 68 -100%
Given that a major purpose of sovereign credit exposure is to support high quality liquid assets, it is consistent that most exposures are in the best quality risk bands. Due to the sovereign rating upgrade for Ukraine the exposure moved from the 20% to 50% bucket to the 5% to 10% PD Band bucket. Exposures in Ukraine increased during the year increasing the 5% to 10% PD Band bucket further.
The declined RWA in the 0.05% to 0.5% PD Band bucket is mainly attributable to the Government of the Republic of Italy (EUR 1.2 billion RWA) and Bank of Japan (EUR 0.2 billion RWA), which was driven by a decrease in READ (EUR 2.6 billion and EUR 3.4 respectively).
The increase in READ is mainly attributed to growth observed in the Structured Finance, Corporate & FI Lending, and Real Estate Finance portfolios. During the year, risk weights improved for these portfolios, partially due to increased provisions, restructuring and increased collateral.
Retail Customer Segment 337,217 333,876 1% 68,964 70,647 -2% Private Persons 315,311 308,145 2% 60,270 59,982 0% Small Mid-sized Enterprises 17,638 19,377 -9% 7,606 8,769 -13% Private Banking 3,112 3,683 -16% 702 910 -23% Other 1,156 2,671 -57% 387 986 -61%
Due to the methodology update on SME clients a shift of EUR 3.7 billion in READ and EUR 1.6 billion in RWA from Retail exposure class to Corporate exposure class is observed. The decreases were offset by model updates for Belgium mortgages, increasing RWA by EUR 1.9 billion. This was mainly caused by the implemented macro-prudential add-on for Belgium mortgages Additionally, growth in the residential mortgages portfolio, mainly observed in Germany, Australia, and Poland, increased RWA by an additional EUR 0.9 billion RWA. The increase of RWA in the Rest of Europe bucket is mainly a result of the ING Direct Spain mortgage LGD model update, increasing RWA by EUR 0.7 billion.
LGD 1 Loss Given Default for Large corporates are predicted by a dedicated hybrid LGD model using both no loss rates as well as secured/unsecured recovery rates.
Institutions 54,573 5,132 10,748 2,210 36,483 11,908 1,234 27,738 5,501 100,954 Corporates 272,448 68,230 59,972 12,991 131,255 64,620 4,309 63,924 4,209 409,510 Retail 292,647 140,662 46,784 83,435 21,766 178 58 127 32,728 325,737 Total AIRB approach 821,909 258,170 162,544 169,573 231,622 86,900 6,187 100,537 46,494 1,062,027
Exposure by industry or counterparty type The following table provides a breakdown of the net carrying values by industry or counterparty type per exposure class, both AIRB and SA, ordered by the size of the combined AIRB and SA exposure. These industry sector or counterparty types are based upon the European NACE codes (Nomenclature statistique des Activités économiques dans la Communauté Européenne) and reflect the main activity of the counterparty. The industry or counterparty type allocation is based exclusively on the nature of the immediate counterparty. The classification of the exposures incurred jointly by more than one obligor should be done on the basis of characteristics of the obligor that was the more relevant, or determinant, for the institution to grant the exposure.
Exposures in default 263 74 2 3 50 90 481 Total SA approach 12,687 7,045 5,797 2,353 8,422 13,824 50,127
The AIRB portfolio is mostly concentrated in the Financial and Insurance Activities, Public Administration and Defence and Activities of Households as Employers industries. This last industry or counterparty type refers to both households as employers and to the production and services to households for own use. In this case is the mortgage book underlying that is classified in this category. The SA portfolio is predominantly spread in Manufacturing, Wholesale and Retail Trade, Financial and Insurance Activities, Human Health Services and Social Work Activities, and Activities of Households as Employers.
The Retail portfolio holds most exposures within the Activities of Households as Employer, which is related to Residential Mortgages and Loans (Traditional Residential Mortgages and Interest-Only Mortgage). The Central Governments or Central Banks exposure class holds most exposures within the industry types Financial and Insurance Activities and Public Administration and Defence.
For the SA portfolio, most exposures within both the Retail and Corporates exposure classes can be found in the first two maturity buckets. With Mortgages as the main underlying exposure the Secured by Mortgages and Immovable Property is predominantly seen in the longer maturity.
AIRB credit exposures by exposure class and PD range The table below provides an overview of the main parameters used for the calculation of capital requirements for AIRB models. The on-and off balance sheet exposures are shown by the four main exposure classes and according to PD grades to enable an assessment of the credit quality of the portfolio. The exposures are bucketed in PD Scales prescribed by EBA. This bucketing of PD scales is not used within ING. The 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. 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. 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.
As of July 2014, PD values of the ING Bank Master Scale are adjusted using both internal and external default data covering the period from 2005 until 2013. External data from Standard & Poor’s is used. Internal default experience is reflected for a better fit of ING Bank’s portfolios compared to the predominantly US-based Standard & Poor´s data.
Central Governments and Central Banks 0.15 to < 0.25 570 630 34% 785 0.2% 30 36% 1.98 216 28% 1
Central Governments and Central Banks 0.50 to <0.75 0% 0.0% 0 0% - 0%
All figures are in millions of EUR, except for the number of obligors. The maturity is not available for the retail exposure class, for all other cells that are left blank, the values are minimal.
The figures in this table can be compared to the figures reported in the first tables in this section on exposure class, geography, counterparty type and maturity. Adding the on and off-balance sheet exposures with the Expected Losses will provide the net carrying amounts, except for the corporate exposure class where the write-offs should be included as well.
The PD, LGD, EAD and Maturity are drivers from the RWA and the RWA Density, which is measured as the RWA over the EAD, and is expected to increase with each PD Scale. In several instances the RWA Density is lower than expected, for instance in the Central Governments and Central Banks and Institutions exposure classes where loans are guaranteed by an Export Credit Agency [ECA]. These ECAs offer loans and insurance to help remove the risk of uncertainty of exporting to other countries and underwrite the political risk and commercial risks of overseas investments, and as such lower the LGD for these loans. With very low LGDs as a result the RWA is lower than would be assumed in a higher PD classes.
Backtesting of model parameters ING has dedicated AIRB credit risk models per business line and geography. The performance and predictive power of the models is monitored by the model development team. More over an independent Model Validation department periodically reviews all AIRB models. All models are backtested when possible by both the Model development and the independent Model Validation departments. If a model is considered not to be robust or backtesting indicates insufficient performance, than the model is either re-calibrated or redeveloped. All model recommendations from Model Validation department are tracked via an 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 ECB and implemented after regulatory approval. On average, 86% of the AIRB credit risk models in the validation cycle have had ‘No to Remote’ (49%) and ‘Minor’ (37%) model deficiencies.
The analysis is based on the 31 December 2016 portfolio. The average PD as of 31 December 2016 per portfolio is split per exposure class and rating grade. Both the number and the amount-weighted predicted PD figures are shown for the performing portfolios. The number weighted predicted PD is also referred to as the arithmetic weighted PD, and the amount weighted PD is referred to as the EAD-weighted PD.
ING does not have positions with Central Governments in the lower two performing rating classes
EL backtesting The table below gives insight in the Expected Loss rate and the Observed Loss rate. The expected loss as of 31 December 2015 for the performing portfolio is split per exposure class. The 31 December 2015 portfolio is followed through 2016 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 2015 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 backtest is only representative of the year end 2015 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, backtesting gives a comparison of the Expected Loss rate PD versus the observed Loss rate.
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * Expected loss rate 2015 includes performing loans only.
The SA portfolio increased by 8% to EUR 36.5 billion in terms of READ, excluding the counterparty credit risk. The RWA increased by 10% to EUR 24.7billion. This increase in the SA portfolio is mainly related to transfer of the Dutch Healthcare portfolio from AIRB approach to SA. Increase in portfolio was witnessed in Poland and in Turkey. In Poland the Residential Mortgage portfolio grew by EUR 0.8 billion READ while in Turkey the portfolio growth is mainly attributable to the Corporates portfolio which increased by EUR 1.3 billion. FX impact over 2016 was limited as the portfolio is denominated in both Turkish Lira’s and U.S. dollar for which the FX impacts offset each other. The exposures with a 35% risk weight are mostly seen in the Polish mortgage portfolio, and the retail exposures with a 75% risk weight originate mostly in the Turkish portfolios, with smaller attributions from Poland and Romania. The 100% risk weight exposures in the corporate exposure class originate in the Turkish corporate portfolio (EUR 7.2 billion) and in the Dutch Healthcare portfolio (EUR 2.0 billion).
Credit quality This section focusses on non-performing loans, which are loans where there is a reasonable probability that ING Bank may end up with a loss, unless ING Bank intervenes with specific and significant actions. In other words, in this category an account or portfolio requires a more intensified approach, which may include renegotiations of terms and conditions and/or business/financial restructuring. This section should be read in conjunction with the Risk Management paragraph sections of the Annual Report on: Risk Appetite Framework and Credit Quality.
Central governments or central banks 0 3,802 -1 3,801 Regional governments or local authorities 0 274 0 274 Institutions 0 2,282 -1 2,281 Corporates 0 12,489 -22 12,468 of which: SMEs 0 2,870 -5 2,865 Retail 0 14,937 -106 14,831 of which: SMEs 0 4,509 -17 4,492 secured by mortgages on immovable property 0 16,012 -21 15,991 of which: SMEs 0 2,967 -7 2,960 Exposures in default 915 0 -434 481 Total SA approach 915 49,797 -585 50,127
EU CR1-A: Credit quality of exposures by exposure classes and instruments
Bank Impaired loan book - movements Impaired loans at 1 January 20161 6,191 7,172 1,962 15,325 Classified as impaired during the year2 1,719 1,668 842 4,229 Outflow from impaired excluding write-offs -1,628 -2,443 -367 -4,438 Amounts written off -624 -677 -188 -1,489 Changes in composition of the bank 0 0 0 0 Exchange rate and other movements3 22 0 -52 -30 At 31 December 2016 5,680 5,721 2,196 13,597
Impairment allowances - movements Impairment allowances at 1 January 20161 2,371 2,199 1,216 5,786 Changes in the composition of the Bank 0 0 0 0 Amounts written off -625 -681 -188 -1,494 Recoveries of amounts written off in previous years 49 38 7 94 Addition to loan loss provisions (from income statement) 367 347 260 974 Exchange rate and other movements -15 -19 -18 -52 At 31 December 2016 2,147 1,884 1,277 5,308 1 Equals the amount as of 31 December 2015. 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 2016, the stock of provisions included provisions for amounts due from banks: EUR 11 million (2015: EUR 14 million).
Aging of past due exposures The table below gives an insight in the aging of the Business and Consumer exposures and includes both the performing and nonperforming portfolio, while the previous table only includes the past due performing exposures for Consumer. The table is broken down into type of instruments (Loans and Debt Securities). The values displayed are the on balance sheet gross carrying values before impairment, provisions and before write offs, as write offs take place after the provisioning process.
Under SA approach 1 1 1,353 166 3,935 5,456 4,518 Under AIRB Approach 1,285 4,270 80,286 11,617 9,768 107,226 105,687 – 0% risk weight 14 25 376 6 421 206 – >0% - ≤10% risk weight 1,082 1,655 12,893 8,696 5,068 29,394 28,052 – >10% - ≤20% risk weight 138 676 8,950 1,702 1,706 13,172 15,595 – >20% - ≤35% risk weight 47 840 20,523 830 880 23,120 24,878 – >35% - ≤50% risk weight 653 15,516 205 723 17,095 16,120 – >50% - ≤75% risk weight 137 11,564 102 711 12,515 10,961 – >75% - ≤100% risk weight 178 4,296 37 439 4,949 5,077 – >100% - ≤150% risk weight 2 60 4,307 22 181 4,572 3,309 – >150% - ≤200% risk weight 2 42 1,243 10 36 1,333 928 – >200% - <1250% risk weight 4 619 7 24 655 560 – 1250% risk weight 0 0 0 0 0 0 Total 1,285 4,271 81,640 11,784 13,703 112,683 110,205
The READ together with the other building blocks (PD, LGD and maturity), allow ING Bank to classify a large part of its derivatives exposures under the AIRB approach. READ also takes into account the sum of CVA recognised as an incurred write-down in line with CRR art. 273(6).
The RWA of ING counterparty credit risk portfolio dropped by 6.6% during the year, mainly due to the increased use of central clearing. In line with regulatory requirement ING novated more trades via qualifying central counterparties (CCPs), which compresses the exposure via the use of the large netting pool of a CCP as well as requires a low risk weight (2%). Additionally RWA dropped by approximately EUR 1 billion due to a change in the regulatory exposure calculation methodology for derivatives.
Institutions 9 554 1 564 Corporates 242 8 250 Retail 1 1 Secured by mortgages on Real Immovable property
Exposure in default Other items Total 9 554 1 243 8 815
Excluding exposure class Securitizations The 100% Risk weight exposure contains mainly interest rate swaps and is related to the Dutch healthcare portfolio. This portfolio was recently moved to the Standardised approach and received a hundred percent risk weight.
IRB – CCR exposures by portfolio and PD scale The following table shows all relevant parameters used for the calculation of CCR capital requirements for IRB models.
EU CCR3: Standardised approach - CCR exposures by regulatory portfolio and risk
density Central Governments and Central Banks 0.00 to < 0.15 2,377 0.03% 128 26% 3.6 184 8% Central Governments and Central Banks 0.15 to < 0.25 25 0.21% 3 45% 2.3 12 47% Central Governments and Central Banks 0.25 to < 0.50 33 0.31% 12 45% 3.8 24 73% Central Governments and Central Banks 0.50 to < 0.75 Central Governments and Central Banks 0.75 to < 2.50 Central Governments and Central Banks 2.50 to < 10.00 8.35% 3 31% 4.9 1 181% Central Governments and Central Banks 10.00 to < 100.00 14 16.32% 2 100% 1.5 55 397%
2016 2015 Notional MtM Notional MtM OTC derivatives CCP 2,238,106 - 1,804 2,052,352 -2,190 Non-CCP 1,644,126 -1,658 1,759,442 -1,353
Gross positive fair value Netting benefits Netted current credit exposure Collateral held
The change in the actual amount that ING Bank had to pledge can be observed in the following table.
ING’s key drivers of the changes to the collateralized derivative portfolio are Interest- and Foreign Exchange Risk.
Note: The exposures to non-QCCPs are predominantly with the entity “The Options Clearing Corporation (OCC)”. Although this US based entity is qualified for the US regulator, it was not so for ESMA as of 31 December 2016.
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 ‘cover’. While a cover can be an important mitigant of credit risk and an alternative source of repayment, generally it is ING Bank’s practice to lend on the basis of the customer’s creditworthiness rather than exclusively relying on the value of the cover. Within ING Bank, there are two distinct forms of covers: assets and third party obligations.
Credit Risk Mitigations techniques – overview Covers which are received are intended to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. These are subdivided into four groups called collateral values mortgages, cover values cash, cover value guarantees and other physical covers.
Total loans 142,167 463,478 437,601 82,905 0 Total debt securities 85,497 794 794 107 0 Total exposures 227,664 464,272 438,395 83,012 0 Of which defaulted 3,426 9,809 8,636 2,933 0 Includes the AIRB and SA portfolios and the Default Fund Contribution, excludes securitisations, CVA RWA, equities and ONCOA.
SA Sovereigns 2,466 50 2 Institutions 676 565 91 73 2,316 474 151 Corporates 305 270 270 323 12,705 8,127 145 411 Res Mortgage secured
Total Bank 173,887 59,626 45,484 50,003 770,736 579,484 34,662 93,354 89,633 Excludes equities exposure
Res. Mortgage Other retail Total Total Under AIRB Approach 1,419 3,929 58,091 24,858 4,100 92,397 86,826 Total 1.5% 4.3% 62.9% 26.9% 4.4% 100.0% 100.0% Includes AIRB portfolio only; excludes securitisations, equities and ONCOA.
Valuation and accounting policies ING Bank's activities regarding securitisations are described in Note 48 ’Structured entities’ in the annual accounts. The applicable accounting policies are included in the section ‘Accounting policies for the consolidated annual accounts of ING Bank’ in the annual accounts. The most relevant accounting policies for ING Bank’s own originated securitisation programmes are ‘Derecognition of financial assets’ and ‘Consolidation’. Where ING Bank acts as investor in securitisation positions, the most relevant accounting policy is ‘Classification of financial instruments’.
Investor securitisations ING Bank’s goal is to maintain a portfolio of high quality liquid assets that meets the regulatory requirements of CRR/CRD IV and the Delegated Act of October 2014 regarding liquidity. ING invests in high quality Residential Mortgage Backed Securities (RMBS) and Asset Backed Securities (ABS) keeping close track of the securitisation investment positions via monthly monitoring reports and weekly update calls. Additionally, ING may invest in securitisation positions in order to facilitate client business from its Global Capital Markets Unit.
ING Group Annual Report 2016 419 2016 2015 Traditional Synthetic Total Total Retail 4,617 4,617 6,114 Of which residential mortgage 1,568 1,568 3,340 Of which credit card Of which other retail exposures 3,049 3,049 2,774 Of which re-securitisation Wholesale 859 859 327 Of which loans to corporates 10 10 18 Of which commercial mortgage 32 32 36 Of which lease and receivables 817 817 274 Of which re-securitisation Total 5,476 5,476 6,442
Of which non-retail underlying Exposure values (by RW bands) <= 20% RW 5,303 5,271 32 5,303 5,835 >20% to 50% RW 147 147 0 147 237 >50% to 100% RW 4 4 0 4 288 >100% to <1250% RW 3 3 0 3 10 1250% RW 19 19 0 19 72 Total 5,476 5,444 32 5,476 6,442 Exposure values (by regulatory approach) IRB RBA (incl. IAA) 5,457 5,425 32 5,457 6,370 1250% Risk Weight 19 19 0 19 72 Total 5,476 5,444 32 5,476 6,442 RWA (by regulatory approach) IRB RBA (incl. IAA) 462 456 7 462 772 1250% Risk Weight 232 232 0 232 903 Total 695 688 7 695 1,674 Capital charge after cap IRB RBA (incl. IAA) 37 36 1 37 62 1250% Risk Weight 19 19 0 19 72 Total Capital 56 55 1 56 134 Excludes equities and ONCOA. ING does not have any re-securitisation in its books.
In the table above an overview of Investor Securitization exposures and their respective capital requirements are shown. In line with ING’s policy and Risk Appetite the vast majority of positions are rated AA- and above, and almost the entire portfolio remains within the investment grade. Positions that have deteriorated in credit quality have been adequately provisioned and have been reduced significantly.
In its role as administrative agent, ING Bank facilitates these transactions by acting as administrative agent, swap counterparty and liquidity provider to Mont Blanc. ING Bank also provides support facilities (liquidity) backing the transactions funded by the conduit. The types of asset currently in the Mont Blanc conduit include trade receivables, consumer finance receivables, car leases and residential mortgages.
The credit approval process for individual transactions follows ING’s standard credit approval procedures. At inception, initial data is required to be received outlining the historical performance of the assets. Due diligence is carried out on the underlying asset pool. Following ING policy, each transaction is reviewed (including reassessing the internal assessment approach analysis for that transaction) on at least an annual basis or on a more frequent basis if deemed necessary. The performance of each transaction is closely monitored on an ongoing basis through a.o. detailed transaction reports.
Originator securitisations ING Bank originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes. As of 31 December 2016, there were no synthetic transactions.
Market risk Market RWA under the internal model approach (IMA) The table below explains the changes in Market RWA under the internal model approach (IMA) during 2016 and provides additional information by linking the impact of changes in portfolio composition, model changes and shifts in the risk environment on Market RWA.
Disclosures on Market risk under Internal Model Approach (table EU MR2-A), Internal Model Approach values for CAD2 trading portfolios (table EU MR3) and Market risk under Standardised Approach (table EU MR1) are presented in “Market risk in trading books” section of the Annual Report.
Market risk 7,974 8,581 533 771 * Regulatory capital for equity investments are reported under credit risk regulatory capital.
Capital at Risk Capital at Risk measures the impact of predefined instant shocks of market risk factors such as interest rates, credit spreads, foreign exchange rates, equity prices and real estate prices on the volatility of IFRS-EU and common equity Tier-1.
IFRS–EU CRR/CRD IV* +100bp +40bp –10% –10% +10% Capital elements Reserve Property revaluation reserve   -88 Cash flow hedge reserve  -2,057 Available-for-sale reserve – Debt securities   -521 -1,263 – Equity securities   -391 -368 Currency translations reserve   -972 P&L All items impacting P&L, excluding DVA   -48 -73 -88 -16 -144 DVA own issued debt/structured notes  165 DVA derivatives  -1 45 -3
Assets of ING Group 106,258 763,461 Equity instruments 5,450 5,450 8,583 8,583 Debt securities 15,782 15,745 99,422 99,391 Other assets 706 74,414 2015 median in EUR million
Assets of ING Group 104,305 752,873 Equity instruments 6,551 6,551 12,326 12,326 Debt securities 11,477 11,394 106,771 106,697 Other assets 660 70,536 2016 median in EUR million
Fair value of encumbered collateral received or own debt securities issued
In 2016, losses occurred mainly in the risk categories Execution, delivery and process management and External fraud. Over 50% of losses for Execution, delivery and process management were from multiple events in the home markets of the BeNeLux countries. For External fraud, 60% of losses were caused by two events in Wholesale Banking. In 2015, losses were mainly in the category Clients, products and business practices. This was mostly related to the compensation of Small and Medium-sized Enterprise (SME) customers with Interest Rate Derivative contracts in the Netherlands. These contracts were all sold before 2012.
Reporting principles We aspire to present a balanced and comprehensive overview of our financial and non-financial performance. We disclose data on our financial performance as well as the impact of our organisation on society and the environment. We report performance data on areas of our business and operations where we can have a material impact both inside the organisation and externally. The Executive Board and the Supervisory Board are the highest bodies to review and approve our Annual Report including disclosure on all material topics.
The high-priority material topics identified and disclosed in our materiality assessment are reported on in the relevant sections of the Annual Report including this appendix. For a detailed description of data-gathering scope and process on specific data points, please refer to the Non-financial data reporting protocol (www.ing.com/16ar1). This provides the definitions on performance indicators and describes the internal data-gathering process. Compared to previous year, no significant changes were observed in definitions and measurement methods.
Power for Youth” partnership reached a total 95,227 adolescents since 2015
To improve as an organisation, we need to identify and understand the most important issues for our stakeholders and how these relate to the actions and decisions that we take. Our regular materiality assessment results guide us in our strategic decision-making, stakeholder engagement agenda and reporting framework.
ING contributes to the economies of more than 40 countries where we operate. In addition to this, we aim to align the disclosures with the Global Reporting Initiative (GRI) G4 guidelines.
Business Most of ING Bank’s activities serve the financing and investment needs of households and companies, other financial institutions and governments. We allocate 39.3% of the balance sheet to private individuals in the form of mortgages and other types of loans. This exposure has minimal environmental risk implications. Some 34.6% of our assets is allocated to meet the financing needs of corporates. In response to what stakeholders and society ask of us with regard to transparency, the tables on the next pages provide insight into the different sectors we finance and how we apply our Environmental and Social Risk Framework.
1 Rest of the world. 2 Other financial instruments such as term loans and derivatives.
In response to what stakeholders and society ask of us regarding transparency, the table below provides insight into the different sectors we finance and how we apply our Environmental and Social Risk Framework. It specifically focuses in more detail on the corporate sectors, as these sectors are more vulnerable to environmental and social risks and impacts. The table also provides insight into which sectors we have Sustainable Finance strategies for.
En vi ro nm en ta l m an ag em en t *U N
En er gy *N ew c oa l-f ire d po w er p la nt s *O nl in e ga m bl in g* **
Consumer lending 39,3% ● Financial institutions 15,0% ● Governments 9,8% ● Other 1,3% ● Corporates 34,6% – Real estate 5,7% ● ● ● ● ●
– Transportation & logistics 3,9% ● ● ● ● ● ● ●
– Chemicals, health & pharmaceuticals 1,8% ● ● ● ● ● ●
* Examples of excluded activities per sector are mentioned in the smaller font. The full list of excluded activities is available in the public ESR policy Framework. ** A Sustainable Finance sector strategy identifies sustainability related developments in a specific sector. It outlines how best to pursue the opportunities that arise from them and provides solutions for best-in-class clients and best practices that are outstanding in their environmental performance relative to their sector. *** Gambling and Pornography are excluded activities only and not sector policies.
Applying the Equator Principles (EP) As an Equator Principles (EP) Financial Institution, we implement the EP in our internal environmental and social policies, procedures and standards. We aim not to provide project finance or project-related corporate loans to clients that are unable, or choose not, to comply with the principles. All transactions in scope of EP are reviewed at least annually, at which time covenant compliance is typically affirmed. Project names of project finance transactions that reached financial close in the reporting period are published annually in the Equator Principles website. All project names are disclosed only if ING has received the related client’s consent11. The EP are embedded in ING’s ESR Framework, and require involvement of the following three banking areas: Front Office: departments that originate transactions and have direct contact with the client or project sponsors.
As our risk assessment processes are decentralised, each front-office team must be highly familiar with ING’s Environmental and Social Risk framework and in particular Equator Principles III (EPIII). Hence, ING makes significant investment in internal training programmes to help front office and risk management staff in assessing the environmental and social risk under EPIII.
The table below provides an overview of EP transaction in accordance with EPIII reporting requirements, which refer to funded deals or advisory roles that have been mandated to ING in 2016.
Percentage of employees that have undergone a performance management process (headcount)
2 Adolescence is the period in human growth and development that occurs from ages 10 to 19. 3 A child is a person below the age of 18. 4 The methodology we used to calculate the number of children reached through UNICEF programmes has changed. For historical comparison the number presented in this table is in line with the former calculation method and only includes the number of children reached through UNICEF education programmes supported between 2005-2015. Due to the type of activities carried out by UNICEF from 2013 to 2015, we know the number of children reached is higher than reported here.
We are proud of this progress but will set a new target in 2020 to drive continued action against climate change. Our residual waste increased by 6% against our base year due to archive dumps in two countries and a move to a new building in the UK. Our water footprint increased slightly by 1%. We have faced challenges with our waste and water indictors but remain vigilant in our efforts to work towards our 2020 targets.
In MWh and kilotonne CO2e MWh x 1.000 Kilotonne MWh x 1.000 Kilotonne MWh
Total energy per FTE in MWh and in tonne 6.9 0.6 7.3 1.0 7.9 1.2
3 Scope 1: comprises emissions from our use of natural gas and fuel oil; Scope 2: comprises emissions from our use of electricity, renewable electricity and district heating; Scope 3: comprises emissions from our business travel by air and car. While scope 3, category 15 (emissions through lending and investments) is material to ING’s indirect emissions footprint, due to measurement complexity and lack of quality data, ING is not able to completely measure and disclose this figure. See section ‘Impact Measurement’ in this appendix for information on our efforts and challenges in this area.
4 The total carbon figure for Scope 2 displayed here is calculated using the GHG Protocol Market-based calculation method outlined within the Scope 2 Guidance. This method takes into account the use of renewable electricity with an emissions factor of 0 g CO₂e/MWh. This sharp decrease in 2016 is thanks to decrease in electricity consumption and an increase of renewable electricity purchased, in particular in Poland, meaning a shift from a heavy coal-mix in the grid. Using the Location-based method outlined within the Scope 2 Guidance, our scope 2 CO₂e emissions for our base-year (2014) is 123 kilotonnes and for 2016 is 112 kilotonnes. This means that we have reduced our location-based scope 2 emissions by 9% since 2014. For more information on our calculation methodology and scope, please see our reporting protocol on ING.com.
3 As a result of the UK Modern Slavery Act 2015, ING is obliged to publish a ‘slavery and human trafficking statement’ for each financial year. ING aims to publish its first statement in 2017.
Interest paid on pension account: The Australian Securities & Investments Commission (ASIC) raised the question of whether customers “expected” to be paid the top retail rate on savings inside of superannuation (pension account) relative to retail rates. In a subsequent review, ING DIRECT found that some Living Super customers may have understood that the interest paid on their cash options would be eligible for ING DIRECT’s highest variable savings rate, including any bonus rates. This is not the case as interest rates for Living Super are set independently.
ING-DiBa used the discussion to take its position: German consumers shall get access to cash - anytime, quick and free of charge or at a low fee. To strengthen its position ING-DiBa has published a new position paper ( uns/menschen/positionen/ing-diba-positionenbargeldversorgung -2016.pdf) based on an analysis of the payment behaviour of its current account clients. The results were met with high interest by representatives of politics and media and was widely covered in the news.
In November 2015 we published our new coal policy, which stated ING decided to end our financing of new coal-fired power plants and thermal coal mines worldwide, effective immediately. ING also won’t finance any new clients whose business is over 50 percent reliant on operating coal-fired power plants or thermal coal mines. As part of our responsibility to existing clients, we will honour standing commitments. As part of our responsibility to existing clients, we are honouring standing commitments, as financing a coalfired power plants is a long process. We had already made commitments to some projects before we announced our new policy, including Punta Catalina (Dominican Republic) and Cirebon II (Indonesia). Suek was also already an ING client at the time we published our policy. Uniper is a new client whose business is not over 50 percent reliant on operating coal-fired power plants or thermal coal mines. Though we understand NGO concern regarding coal in general, it is important to stress that these transactions comply with our policy. As well as to reconfirm that our lending book to thermal coal will decrease over time (2015 & 2016 data has been published in this report). More information has been shared on: Society/Sustainability/Our-Stance/Energy.htm
Animal Welfare: On 18 August 2014 the Dutch animal-rights NGO called ‘Wakker Dier’ published a report on animal welfare in the US animal husbandry sector. It expressed its concerns about companies in the US not respecting animal welfare as a consequence of a lack of legislation around animal housing and care.
In consultation with Wakker Dier, we commissioned an independent research institute to look into these alleged differences. The summary of that research titled 'Critical ethical issues in US animal production' was published late 2015, and early 2016 we published our animal husbandry policy based on those results and conversations with various stakeholders. More information has been shared on: Society/Sustainability/Our-Stance/Animal-welfare.htm
ING understands that the ways our food is produced is an important topic and as such we take our responsibility seriously. For that reason we are actively involved in the debate on this topic, advise our clients on social and environmental aspects and require them to live up to our Environmental and Social Risk standards. We extensively spoke to our client and carefully assessed their activities. In addition, the IFC executed an independent audit. MHP scored good on both bio safety and animal welfare and MHP lives up to EU standards. “Our production facilities have been built up from the ground based on European standards and with the best technology,” said MHP employee Anastasija Sobotjoek in the newspaper FD on 27 May 2016. Nonetheless, in 2016 the company agreed to further increase their animal welfare standards.
Update report on Environmental & Social Risk policies of Dutch Banks: In December the FFG published its annual update, comparing banks’ policies with their own expectations. FFG concluded that ING made improvements. In the Volkskrant newspaper, 21 December 2016, Peter Ras, project leader FFG, stated: “Banks continue to become more sustainable. That deserves kudos.”
Dakota access pipeline: Being part of a syndicate of 17 banks, ING financed the pipeline project. Controversy arose due to the pipeline being located in an area considered a Heritage Site by native Americans (Standing Rock Sioux Tribe).
US President Donald Trump signed executive orders on 24 January 2017 to advance the construction of the Dakota Access pipeline. This is in contrast to the US government decision in December 2016 to withdraw the necessary permits and conduct an additional detailed environmental assessment.
We have signed a contract and it is legally impossible to withdraw from it.
Given the developments, we decided however to divest our shares in the parent companies towards the end of 2016 (approximately USD 220 million) and to stop doing any new business with them. Credit facilities that expire won’t be renewed. This effectively means that the relationship will end if there is no improvement.
Net result attributable to ING Group’s shareholders (a) 4,651 4,010 16%
Total income (continuing operations) (e) 17,491 16,845 -/- Net result from divestments/special items 367 -/- Net result insurance other and eliminations ING Bank/NN Group 33 –73
Total operating expenses (continuing operations) (g) 10,614 9,326 -/- Net result from divestments/special items 1,157 77 -/- Net result insurance other and eliminations ING Bank/NN Group 3
Application programme interface A software device that allows for an application or data to be shared.
Associate An entity 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.
Collateralised debt obligation (CDO) A type of asset-backed security that provides investors with exposure to the credit risk of a pool of fixed income assets.
Common equity Tier 1 capital Capital definition specified in article 26 of the capital requirements regulation (CRR). Common equity Tier 1 items of institutions consist of the following: a.capital instruments; b.share premium accounts related to the instruments referred to in point (a); c. retained earnings; d.accumulated other comprehensive income; e.other reserves; and f. funds for general banking risk.
Contingent liabilities Possible obligations that arise 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’s not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
• the amount of the obligation cannot be measured with sufficient reliability.
Debit valuation adjustment (DVA) An adjustment made by ING to the valuation of ‘over-thecounter ’ (OTC) derivative liabilities to reflect within fair value ING’s own credit risk.
Discontinued operations A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and a.represents a separate major line of business or geographical area of operations; b.is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or c. is a subsidiary acquired exclusively with a view to resale.
Elimination A process by which intercompany transactions are matched with each other and deducted, so that the assets, liabilities, income and expenses are not inflated.
Financial liability Any liability that is: a.contractual obligation: - to deliver cash or another financial asset to another company; or - to exchange financial instruments with another company under conditions that are potentially unfavourable; or b.contract that will or may be settled in the company's own equity instruments.
Group debt Investments in ING Group subsidiaries minus the equity of the holding company, including hybrids.
Issued share capital The share capital that is issued by a public or private limited company.
Liquidity premium In order to correct the value of 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.
Money market risk Money market risk arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity. As such, money market deposits tend to be shortterm in nature. In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is measured as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment
Stakeholder A stakeholder is a person or group with an interest in ING. We distinguish the following groups: customers (individuals, families, small businesses, large corporations, financial institutions, governments, public-private entities and supranational agencies), capital providers, employees, supervisors, regulators, civil society organisations, citizens and society at large.
Sustainable transitions financed Sustainable transitions financed describes the business that we do with clients who are environmental outperformers in their sectors as well as projects that provide sustainable solutions. The definition by which projects should be tagged as a sustainable solution or by which a client is tagged as an environmental outperformer is determined by ING sector strategies and consists of: a. ING Groenbank: total assets on the balance sheet b. Loans to Renewable energy: Renewable energy projects include biomass, geothermal, hydro, solar, offshore and onshore wind power generation.
c. Loans to Sustainable Real Estate: Sustainable Real Estate projects include the financing of sustainable buildings (certified with a BREEAM, LEED, HQE or DGNB, or with an EPC label of C or higher)
Warrant A financial instrument that gives the holder the right to purchase ordinary shares.