> Sustainability of our business model solidified > Our funding position improved and our capital and liquidity positions remained strong > ING posted 2013 underlying net profit of EUR 3,255 million, up 22% from 2012 > Risk costs up in a weak economic year in many of the markets in which we operate > Significant progress made with our restructuring programme in 2013. We have reached the final stage of this process
Banking overview 27 – Retail Banking 32 – Commercial Banking 41 Insurance overview 46 – NN Group 50
Risk factors 356 Additional Pillar 3 information 380 Financial glossary 411 General information 419
Also NN Group received several awards, for example in Poland, it was the most customer friendly life insurance company in the Gazeta Bankowa 2013 contest. Investment Management in the Netherlands was awarded for a second year in a row the People’s Choice award for “Best Fund Manager”. All these awards are a recognition of our commitment to support our customers throughout the challenging financial environment.
In spite of the weak economic climate, we have seen an improvement in the operating performance in 2013 of both the bank and the insurance business. We have also significantly strengthened our capital and liquidity positions, ensuring we meet the new and tougher national and international supervisory and regulatory requirements.
These steps have given us greater control over our future as a bank, as well as the standalone future of the insurance business. We have emerged as a stronger company, as well as a less complex one. We have simplified our business significantly, reducing our product offering and streamlining processes to drive down costs and make our services and products quicker and easier to use.
We are busy redefining what kind of bank and what kind of insurance business we want to be, what more we can do to help our customers get ahead, and what we can contribute to society. We are aware that we are not there yet and there is still a lot of work to do, but I am proud of what we have achieved so far.
OUR STRATEGY ING has strategic priorities at the Group, Bank and Insurance (NN Group) levels. All are ultimately in line with our mission. ING Group’s strategic priorities in 2013 were: strengthening our financial position, restructuring, repaying the remaining state aid and building both stronger and sustainable banking and insurance/ investment management businesses.
OUR PROGRESS ON RESTRUCTURING ING has substantially completed the separation of its banking and insurance operations. This is required by the European Commission (EC), but ING also thinks it is in the interests of all stakeholders, especially of our customers. The main reason is that it simplifies the organisation, which makes it easier to manage it. We made significant progress with our restructuring programme in 2013. As a result, we have now reached the final stage of this process.
During 2013, ING reached several milestones, for example: • The unwinding of the illiquid assets back-up facility (“IABF”)
• Completion of the divestment of ING Insurance/IM Asia. • An agreement in November 2013 with the EC on revised timelines for the European and Japanese Insurance divestments, which together formed ING Insurance and were renamed NN Group on 1 March 2014.
NN GROUP NN Group is a leading insurance and investment management company with a predominantly European presence in 18 countries.
NN Group’s activities are divided into several business segments: Netherlands Life, Netherlands Non-life, Insurance Europe, Japan Life, Investment Management, Other (Nationale-Nederlanden Bank, ING Reinsurance and Holding) and Japan Closed Block VA.
(1) As a bank and asset manager, ING allocates assets to a wide range of companies, projects and funds. Increasingly, we include sustainability criteria in our capital allocation choices. For reporting purposes, we combine all the assets from our financing and investment activities under the heading Sustainable assets allocated. Sustainability criteria have been applied to these assets.
Risk Committee R.W.P. (Robert) Reibestein, chairman J.P. (Tineke) Bahlmann J.H. (Jan) Holsboer J.C.L. (Joost) Kuiper H.J.M. (Hermann-Josef) Lamberti L.A.C.P. (Luc) Vandewalle J. (Jeroen) van der Veer
It remains ING’s ambition to repay the remaining support as quickly as possible and ING aspires to accelerate repayments if possible and prudent under the prevailing economic circumstances. Given the weak macro economy in the eurozone and increasing regulatory capital requirements, ING needs to take a cautious approach and to maintain strong capital ratios in the Bank as it builds towards the implementation of Capital Requirements Regulation and Directive IV (CRR/CRD IV). Each subsequent repayment to the Dutch State requires prior approval from DNB, at the time ING decides to propose such repayment.
Price – year-end 10.10 7.06 5.56 Price/earnings ratio* 11.9 6.4 3.6 Price/book value ratio 0.82 0.47 0.42 * Based on the share price at year-end and net profit per ordinary share for the financial year.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profit retention and distribution policy is determined by internal and external capital requirements and profitable business opportunities on the one hand, and shareholders’ dividend expectations on the other. ING Group’s internal needs are determined by statutory solvency requirements and capital ratios, in excess of which ING Group needs to maintain healthy buffers. An important determinant are the credit ratings which are of high importance to ING Group, because they influence the company’s financing costs and hence profitability. For their part, shareholders expect a dividend which reflects ING Group’s financial results and is relatively predictable.
In December 2009, ING repaid half of the core Tier 1 securities of EUR 5 billion plus a total premium of EUR 605 million. Furthermore, at the coupon reset date, 13 May 2011, ING exercised its option for early repayment of EUR 2 billion of the remaining core Tier 1 securities. The total repayment in May 2011 amounted to EUR 3 billion and included a 50% repayment premium. ING has funded this repayment from retained earnings.
INVESTOR RELATIONS To receive press releases and other ING news, you can subscribe to the email service at www.ing.com. You can also download the ING Investors and Media app on www.ing.com, which provides access to the latest financial information and press releases both online and offline.
Score: 76 Position: Included in the DJSI World Index and the DJSI Europe Index
Score: 69 Position: Not included in World Index and Europe Index
In 2013, the eurozone emerged from recession and embarked on a gradual and fragile recovery. Continuing weakness of domestic demand, combined with low inflation, prompted the European Central Bank to lower interest rates and consider further options. The Federal Reserve on the other hand had been considering the phase-out (“tapering”) of its monetary asset purchases, given the progress of the US recovery. Financial markets were resilient in 2013, although the prospect of tapering hurt emerging markets.
During 2013, progress was made on a wide range of regulatory initiatives that had been set in motion after the financial crisis. Important legislative proposals were already underway to strengthen banks’ capital and liquidity positions and to ensure the resolvability of banks. The decision in June 2012 to move towards a European banking union was followed up in 2013 by further work on the initiatives to create a Single Supervisory and Single Resolution Mechanism (“SSM“ and “SRM”) for the eurozone. The SSM was agreed upon in 2013 and is expected to become operational by November 2014. Although progress on regulatory change was substantial in 2013, several agreements and compromises that were reached on some of the key issues may hamper the realisation in the short term of a true level playing field. ING is concerned that, as a consequence, the single European banking market will remain fragmented and that this will continue to limit the ability of crossborder banks to support the recovery of the European economy.
SLOW ECONOMIC RECOVERY, BUOYANT FINANCIAL MARKETS EUROZONE EMERGED FROM RECESSION IN 2013 After six consecutive quarters of negative growth, the eurozone emerged from recession in 2013. From the second quarter onward, the currency bloc embarked on a slow and gradual recovery. This revival was mostly export-led, as domestic demand in many European countries remained depressed by austerity measures and deleveraging. Eurozone inflation fell from 2% at the start of 2013 to around 1% at year-end. This was partly driven by declining contributions of food and energy prices. But inflation of other goods and services also fell, as the slack in the European economy remained substantial and kept labour costs low. Low inflation also prompted talk about deflation, and the European Central Bank (ECB) reacted with a rate cut in November. With the ECB’s main refinance rate at 0.25% and the deposit facility at 0.0%, room for further conventional rate cuts was running out.
The US economy performed better, even despite fiscal headwinds in the form of sizeable tax increases and austerity measures, and a temporary government shutdown in October 2013. Negative effects on household income were offset by low interest rates that pushed debt service payments as a percentage of household income to their lowest levels in over 20 years. The US housing market also gathered steam, fuelled by record-low mortgage rates in early 2013. China recovered from the growth slowdown of late 2012, although growth seemed to be financed for a worryingly large part by credit. Economic and financial reforms are underway though.
Financial markets did react when the Federal Reserve announced it was considering to phase out its monthly asset purchases (“tapering”) in May. While this did not bring forward a rate increase, emerging markets saw an outflow of capital and their equity, bond and currency markets experienced marked losses. This did not cause major problems though, as emerging markets’ shock absorbers are now far stronger than before, with more flexible exchange rate regimes, more abundant official reserves and less debt in foreign currency.
At NN Group, the operating result for the ongoing business rose 6.4%, mainly due to higher results at Netherlands Life. This was driven by a higher investment income, in combination with lower expenses reflecting the impact of the transformation programme.
• The result from discontinued operations decreased EUR 574 million, mainly due to lower results from ING U.S. reflecting the 2013 sale of 43% of ING U.S., a lower investment margin at ING U.S., lower revaluations and higher losses on guaranteed benefit hedges, net of reserve changes. Furthermore, the sale of a number of Asian entities in 2013 also contributed to the decrease.
Banking Union: Single Supervisory Mechanism (“SSM”) In 2013, the SSM was agreed upon, whereby prudential regulatory powers will be transferred from eurozone national authorities to the European Central Bank (ECB). As a result, approximately 130 of the eurozone’s largest banks will be directly supervised by the ECB from November 2014. In the opinion of ING the SSM constitutes an important first step in creating a European banking union. It will help to reduce the current inter-dependency between national governments and national banking systems, and at the same time will help restoring confidence and growth in the eurozone and the wider European single market. Moreover, it will contribute to eliminating uncoordinated national supervisory practices, which are restricting cross-border banks such as ING from transferring funds within the company and from financing the economy in the most efficient way.
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Remuneration On 26 November 2013, the Dutch Ministry of Finance opened up a consultation on draft legislation on remuneration within the financial sector. The anticipated effective date of the legislation is 1 January 2015. The legislation introduces a cap for variable remuneration of 20% of fixed remuneration for staff covered by a Collective Labour Agreement (“CLA”) in the Netherlands. The following exceptions are currently included: • For staff in the Netherlands who are not exclusively covered by the CLA, the 20% cap does not apply on an individual basis, but it applies to the average across ING in the Netherlands.
• For staff that work predominantly outside the EU, there is an individual cap of 200% of variable remuneration for all staff, subject to shareholder approval and notification to the regulator.
Payment accounts In May 2013, the EC published a draft of the Basic Payment Accounts Directive. This Directive aims to increase the comparability of fees and services, and make it easier to switch accounts. The measure would also oblige banks to open a basic payment accounts for any EU resident who applies for one, irrespective of his or her financial condition. The legislative process is expected to be finalised before the European Parliamentary elections in May 2014, after which the Directive needs to be transposed into national law by mid-2015. Depending on the adoption of cross-border switching and account opening measures, the Directive will have limited impact on ING’s payments account processes. ING already offers payment accounts at transparent low fees in several EU member states and facilitates easy switching.
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STRATEGIC CONTEXT At ING we believe that a focus on our customers is a good basis for contributing to the creation of a healthy economy and stable society. It gives clear direction to our employees and we believe that it helps to provide good returns for our shareholders.
• Ongoing uncertainty about regulatory changes. Lack of an international level playing field.
ING’s solid foundations, based on a long legacy as a financial institution, give us an excellent starting position to face existing and future challenges, and to grasp opportunities to become a better company for all our stakeholders. Specifically on the banking side of the business, we strive to make optimal use of our leading position in digital banking.
ING Bank is making clear progress on meeting the other regulatory CRD IV-requirements, and other aspects of Ambition 2015. For example, ING maintained a liquidity coverage ratio of more than 100% in 2013; a level we aimed at for 2015. Also, the targeted balance sheet optimisation at ING Bank is substantially complete.
ING Bank’s underlying result before tax was mainly driven by a strengthening of the interest margin, less volatility in credit and debt valuation adjustments (“CVA/DVA”) in Commercial Banking and the Corporate Line, and the absence of de-risking losses in 2013. The profitability of ING Bank went up: the underlying return on IFRS-EU equity was 9.0% in 2013, which is higher than it was in 2012 (7.0%) and brings our 2015 target within reach (10 to 13%).
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> We are open and clear. > We respect each other.
REVISION OF TIMELINES On 6 November 2013 ING announced that, together with the Dutch State, it had reached an agreement with the EC on revised timelines for the European and Japanese insurance and investment management divestments: • The timeline to divest more than 50% of these businesses remains unchanged at year-end 2015.
• The deadline to divest 100% of these businesses was accelerated from year-end 2018 to year-end 2016. • The entity for the base case IPO of ING’s European insurance and investment management activities, will include ING Life Japan. ING Life Japan is therefore to be divested in line with timelines for the European insurance and investment management businesses.
For a more comprehensive overview of ING’s sustainability strategy and performance, please see the ING Group Sustainability Report 2013.
The customer is also looking for ease of use and corporate responsibility. The Net Promoter Scores (“NPS”) methodology measures if customers recommend a company to their family and friends. ING Bank’s NPS for 2013 shows that customer satisfaction with our services is quite high in the countries in which we are active. In 11 countries in which ING Bank operates with retail banking activities, it is number 1 or 2 in a peer group comparison.
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• ING Bank received “Great Place to Work” awards in Luxembourg, Germany and Spain. ”Great Place to Work” is the world’s largest employee satisfaction study, surveying employees at about 5,500 companies and conducted by “Great Place to Work”. According to this survey, ING was the only financial institution in the top-25 of best multinational workplaces in Europe.
A refined and sharpened Bank strategy for 2014 and onwards will be presented in the first half of 2014.
• “We commit”: We take responsibility for what we do. We act with integrity. We focus on our long-term objectives.
CONCLUSIONS AND AMBITIONS ING focuses on implementing strategic measures that are robust under all circumstances, and on being flexible in order to be able to adapt to change.
All in all, in 2013 ING became simpler, stronger and better positioned to serve its customers in a sustainable way.
CAPITAL MANAGEMENT AT THREE LEVELS ING Group continues to manage capital on a consolidated basis at three levels – ING Group, NN Group and ING Bank – because ING has set strategic objectives at each of those levels. Within ING Bank and NN Group there are different entities that have their own ratings and capital requirements. The overall approach of ING Group’s Capital Management is to meet these requirements, but also to challenge them constantly to ensure optimal use of capital.
At the end of 2013, we also reduced our State support by unwinding the Illiquid Assets Back-up Facility (“IABF”). Since then, the Dutch State has sold the remaining USD 11.5 billion of securities in the portfolio through three auctions for an average price of 77.3%. The unwinding resulted in a cash profit for the Dutch State of EUR 1.4 billion. As a result of the unwinding, the restrictions as part of the IABF agreement will no longer be applicable.
Contributions provided to / earned by the Dutch State, 2008-2013 in EUR million
Finally, ING Group converted EUR 1,000 million of intercompany debt with NN Group into equity, to help prepare the NN Group balance sheet for the planned IPO (initial public offering) in 2014. This increased core debt by the same amount. During the whole of 2013, the net capital flows enabled ING Group to reduce the core debt significantly from EUR 7.1 billion at the end of 2012 to EUR 5.0 billion at the end of 2013.
• NN Group refined the market interest rate assumption that is used in determining certain components of the insurance liabilities for the separate account pension business in the Netherlands in the fourth quarter of 2013.
• Economic capital requirements: although it is currently not a constraining factor, economic capital is used to manage the Bank’s risk profile and to set limits.
The commercial departments form the first line of defence and they have primary responsibility for the day-to-day risk management. They originate loans, deposits, insurance and wealth management products and other products to help our customers manage their financial future. They know our customers well and are well positioned to act in both the customers’ and ING’s best interest. The second line of defence consists of oversight functions with a major role for the risk management organisation headed by the chief risk officer (CRO). The membership of the CRO on the Bank and Insurance boards ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation, which supports the commercial departments in their decision-making. Also importantly, it has sufficient countervailing power to prevent risk concentrations and other forms of excessive risks. The third line of defence is the corporate audit function, which independently assesses and ensures the functioning and effectiveness of the first two lines.
MANAGING CHANGES The essence of risk management is the power to limit the impact of unfavourable events, being either expected or unexpected. Within ING Bank we continuously challenge understanding, measurement, and management of risk using advanced technology and common sense in a manner that supports our strategy and retains trust among all our stakeholders. This is becoming more important as the world in which we operate changes rapidly.
Both within the Bank and the Insurance company, ING has a risk appetite framework in place that projects and restricts the impact of adverse markets on ING’s capital and liquidity position, based on a number of different risk metrics. An important element of such a risk appetite framework is the monitoring and reporting, which not only includes internal reporting but also external disclosures. Therefore, in 2013 the Bank reaffirmed its commitment to the Enhanced Disclosure Task Force (“EDTF”), by extending the implementation of the EDTF recommendations. ING is a member 23ING Group Annual Report 2013 1 W h o w e are 2 R
The Bank improved its funding profile and ensured its liquidity position stayed within regulatory and internal targets. The full-year 2013 long term debt issuance totalled EUR 25.7 billion compared with EUR 33.1 billion issued in 2012. The issuance volume was lower due to a combination of an asset growth slowdown and increasing funds entrusted. As a result, ING Bank’s loan-to-deposit ratio, excluding securities that are recorded at amortised costs in loans and advances and excluding the IABF government receivable, improved in 2013 from 1.13 at 2012 year-end to 1.04%, thereby already complying with ING’s 2015 Ambition of below 1.10.
All these changes make the company stronger, simpler and more sustainable as it focuses on retail banking in Europe, its world-class commercial banking network, and being a preferred supplier of protection products for our Bank and Insurance customers. A comprehensive, more detailed chapter on ING Group’s risk management practices is contained later in this Annual Report.
Information technology plays a crucial role in ensuring ING remains a competitive and an innovative financial services player. It underpins ING’s banking and insurance business propositions.
In 2013, new and existing IT projects supported ING in its strategy to be a strong, simple and sustainable business.
By the end of 2013, the separation of Bank and Insurance IT systems was almost complete. Both the Bank and Insurance worked towards completing the last projects required to complete disentanglement. From early January 2014, the Bank will no longer be involved in meeting the IT infrastructure needs of Insurance (with the exception of Insurance Belgium). In the process hundreds of servers and internal connections were decommissioned. A new Insurance/Investment Management data centre was established, more than 700 applications have been migrated and a new network has been put in place with additional security capabilities and services. In addition, a new workplace environment for Insurance/Investment Management was established which hosts 10,000 users.
ING aims to further strengthen its ability to replicate applications and reuse solutions across different countries and business units. An example of this was the creation of responsive websites (no matter what device customers use, the content of the site will always fit perfectly on the screen) in several countries, which was developed through sharing knowledge, applications and expertise across countries.
Europe’s weak economy and new financial regulations made it a difficult year for the banking industry, but ING Bank still produced a strong result in 2013. The Bank continued to be involved in ING Group’s restructuring programme, worked hard to optimise its balance sheet, and announced more cost reductions in Retail Netherlands, ING Belgium and Commercial Banking at the beginning of 2013. Further progress was made on customer centricity, operational excellence and being a top employer.
Total underlying income rose 6.9% to EUR 15,305 million in 2013, from EUR 14,313 million in 2012. The underlying interest result increased 1.2% to EUR 11,804 million driven by an improvement of the interest margin to 1.42% from 1.32% in 2012, whereas the average balance sheet declined by 5.7%. The interest margin on lending and savings products improved, supported by repricing in the loan book and lowering of client savings rates. This more than offset the impact of lower lending volumes, partly caused by the transfer and sale of WestlandUtrecht Bank (“WUB”) assets to NN Group, and lower interest results in Bank Treasury following a lengthening of the Bank’s funding profile. Commission income rose 3.3% to EUR 2,244 million. Investment and other income strongly improved to EUR 1,257 million, from EUR 477 million in 2012. This improvement was mainly explained by the positive swing in CVA/DVA adjustments (which were EUR 74 million positive in 2013, compared with EUR 640 million of negative CVA/DVA impacts in 2012), while 2012 included EUR 478 million of selective de-risking losses in the European debt securities portfolio, against nil in 2013. Excluding both items, investment and other income was 25.8% lower, mainly due to lower gains on the sale of equity and debt securities.
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RESTRUCTURING ING Bank continued to be involved in preparations for the NN Group IPO as a base case. Relevant parts of WestlandUtrecht Bank (“WUB”) have been transferred to Nationale-Nederlanden Bank as part of amendments to the EC Restructuring Plan announced in November 2012, paving the way to divest these operations as part of the NN Group IPO. In May, ING Bank paid the Group a dividend of EUR 1.5 billion to facilitate the reduction of the Group double leverage. Early July, ING Bank paid a dividend of EUR 330 million to facilitate the capital injection into Nationale-Nederlanden Bank after the transfer of WUB. Continued strong capital generation furthermore facilitated the repayment of EUR 1.125 billion of core Tier 1 securities, including a EUR 375 million in premiums and interest, by ING Group to the Dutch State in November.
Another key regulatory milestone was the agreement on the Capital Requirements Regulation/Capital Requirements Directive (“CRR/CRD IV”), the implementation of Basel III in the EU. An increase in the * ING has an equity position in TMB Bank in Thailand and Bank of Beijing in China.
in March 2014. In November 2013, ING announced that it had reached an agreement with the Dutch State on the unwinding of the Illiquid Assets Back-up Facility (“IABF”). In February 2014 ING and the Dutch State completed the unwinding of IABF.
ING Bank attracted a net inflow of funds entrusted (adjusted for WUB transfers, the divestment of ING Direct UK and currency impacts) of EUR 27.3 billion during the year. Retail Banking generated EUR 18.8 billion of net inflow, driven by continued growth outside of the Netherlands. Total net lending grew by EUR 5.5 billion (also adjusted for the sale of Dutch mortgages and US REF loans), despite muted demand and pricing discipline.
We continue to innovate. In 2013 we launched “responsive” websites for example at ING Austria, ING Czech Republic and ING Italy. These are sites where no matter what device is being used (smartphone, tablet or PC), the site content will always fit in the screen.
introduced an innovative and award-winning branch concept to respond to changing customer demands. In these newly designed branches, customer centricity is brought to the fore, with ample room for customer interaction by means of, for example, selfservice facilities. The bank also introduced an iPad mobile banking app which helps sales teams service customers across retail and commercial banking.
In 2013 we enjoyed a number of key milestones and external recognition. ING-DiBa, for example, surpassed EUR 100 billion funds entrusted and ING Spain surpassed one million payments accounts.
Customers voted ING Direct Australia as the Best Bank in Australia and ING-DiBa was named Germany’s most admired bank for the seventh year in a row. ING was named “Bank of the Year 2013” in Western Europe by The Banker, the global financial magazine which is part of the Financial Times Group; The Banker also named ING “Bank of the Year” in Belgium, and “Bank of the Year” in the Netherlands for the third year in a row. Commercial Banking received several awards in recognition of ING’s capabilities in trade finance and structured finance. High profile deals demonstrated Commercial Banking’s skill in combining its expertise to create tailored solutions for clients across countries and industries sectors.
OPERATIONAL EXCELLENCE Operational excellence is a key priority at ING Bank. We align our systems, structure and processes to deliver the best customer experience in a cost-effective way. The big transformations we have initiated in the Netherlands and Belgium, and in Commercial Banking, are laying the groundwork for a lower cost base.
ING in the Netherlands is improving its customer services by focusing on easy-to-use operational processes. To reach this goal,
However, there are several challenges facing us as an employer. First, the general sentiment towards banks is still not positive. Second, we had to lower the headcount at ING Bank to reduce costs and keep our organisation flexible. These measures (also from previous years with an impact on 2013) resulted in a total reduction of internal staff at ING Bank by 2,022 FTEs in 2013 despite growth in Retail International. Third, we tightened up our remuneration policy in the Netherlands. Despite these challenges, the outcome of our annual employee engagement survey showed an increased confidence in the long-term future of the company which illustrates the resilience of our staff in a difficult environment.
Our main ambition is to finalise our disentanglement from the Dutch state. Our longer-term ambition is to develop a mature banking model in each country where we operate.
Retail Banking provides banking services to individuals and small and medium-sized enterprises in Europe, Asia and Australia. A full range of products and services is provided, albeit offerings may vary according to local demand. Retail Banking has leading positions in the Netherlands, Belgium, Luxembourg, Germany, Australia and Poland. It also has solid positions in its other markets – Spain, France, Austria, Italy, Romania, Turkey and India – where it challenges the established players. It has equity positions in TMB Bank (Thailand) and Bank of Beijing (China). Every country has the same strategic focus: to provide easy and fair banking, at low costs, according to the “direct if possible, advice when needed” principle.
In addition to putting the customer first, operational excellence and being a top employer, the focus in 2013 was on “digital first”, providing customers with a consistent and improved experience across all channels and on maintaining a safe electronic banking environment. Although in many areas the economic and social uncertainty persisted in 2013, Retail Banking’s performance was strong.
Underlying income rose 11.8% to EUR 10,162 million. The interest result was 6.3% higher, driven by improved margins on lending and savings, the latter following reductions in customer savings rates, which more than offset the impact of the transfer and sale of portfolios, mainly related to the partial transfer of WestlandUtrecht Bank (“WUB”) to Nationale-Nederlanden Bank. Adjusted for currency impacts and the aforementioned transfers and sales, net inflow in funds entrusted was EUR 18.8 billion, predominantly in Germany and Rest of World. Net lending growth was EUR 5.8 billion, of which EUR 4.2 billion was in residential mortgages. Commission income rose 3.0% due to higher fees from the securities business. Investment and other income improved to EUR 396 million from a loss of EUR 137 million in 2012, mainly due to the absence of losses from the selective sale of European debt securities, which dampened income by EUR 462 million in 2012, and higher dividend from Bank of Beijing.
We also get in touch with our customers via online media, from online seminars on topics such as housing, business lending, and the Single Euro Payments Area (SEPA) to the use of social media. In November, the CEO of ING Netherlands used Google Hangout, the instant messaging and live video chat platform, to talk with customers about various issues, including mobile banking, online communications with the bank and the future of banking.
We are also constantly improving our successful mobile banking apps for retail and corporate customers by adding functionalities requested by them. We achieved an important milestone in the third quarter of 2013 when mobile log-ons exceeded internet banking log-ons for the first time. Mobile traffic increased from over 25 million at year-end 2012 to over 41 million visits a month at the end of 2013.
The ING Socially Responsible Investment portfolios consider social and environmental criteria when investing the funds of retail and private-banking customers. These criteria have been integrated into the investment-decision process of the ING Investment Office. The process also includes an analysis of both the financial and sustainability performance. Since its introduction in 2008, the ING Socially Responsbile Investing Index has outperformed the MSCI World Index and the Dow Jones Sustainability Index.
Customer centricity has become an integral part of various bank employee courses, such as the general Enter@ING programme for new employees, as well as for specific positions like SME relationship managers. Educating and training staff to give them the skills to help customers and ensure that customers remain at the centre of our attention is a key goal.
In September, ING and other parties piloted a new smartphone payment method. During the three-month trial in the city centre of Leiden, around 1,000 consumers paid for goods and services using their smartphone at 180 retail shops with the amount to be paid debited directly from their bank account. Pilot results showed that for the majority of the participating consumers mobile payments exceeded their expectations. Based on customer and retailer feedback, ING was able to improve this process even further. A first nationwide market introduction is scheduled for the second half of 2014. Also in 2013, ING set up a system with Chambers of Commerce, whereby if a business changes its address or other details with its local chamber, the details of the change are relayed automatically by the chamber to ING. There is no need for the business separately to notify ING of the change.
Top Employer Several Top Employer initiatives were launched in the Netherlands in 2013. They included a new career platform, “Steer Your Career”, which helps employees determine their strengths and passions, what they want in their business life and how to achieve it. Physical wellbeing is supported by the introduction of Energy@ING, which teaches employees to manage their energy level. More than 4,000 have signed up to the programme. The scope of The New Way of Working (Het Nieuwe Werken), was extended and is now available to over 5,000 employees at head office locations, creating flexible working conditions and the opportunity to have a better work/life balance. ING employees have asked to be given more flexibility over how they use their staff benefits. As a result, the Benefits Budget (Keuzebudget) has been introduced as from 2014, giving them better control over some of their benefits. Top Employer initiatives will continue to be developed in 2014.
RETAIL BELGIUM FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Belgium increased 10.3% compared with 2012 to EUR 663 million, due to higher income supported by volume growth. Underlying income rose 5.8% to EUR 2,321 million, from EUR 2,194 million in 2012, mainly reflecting higher interest results driven by further growth in customer balances, while margins on current accounts declined. In 2013, net production in funds entrusted was EUR 3.7 billion. The net mortgage production was EUR 1.0 billion, while other lending grew slightly by EUR 0.1 billion. Operating expenses increased 3.6% compared with 2012 to EUR 1,476 million, mainly due to higher expenses for the deposit guarantee scheme and inflation-driven cost increases, which were partly offset by the benefits from the efficiency programmes. Risk costs were EUR 183 million, or 89 basis points of average riskweighted assets. This is an increase of 8.9% on 2012, reflecting higher additions for business lending and mortgages, though the latter still remained relatively low.
Customer centricity ING BE continued to offer products and services that best meet customers’ needs and to improve access through new mobile banking facilities. ING BE’s mobile banking app, Smart Banking, was launched for tablets in 2013, providing a user experience in line with customer expectations for a tablet device. With this app customers can easily manage their income and expenditure with the “My budget” tool, and make transfers to any beneficiary.
Through its corporate social responsibility (CSR) policy ING BE aims to manage its business not solely on the basis of financial criteria but also by giving the necessary weight to the environment, ethical considerations and the needs of society in general. Against this background, ING BE committed itself to improve the accessibility of its branches for physically challenged people. By the year-end, more than 600 branches had been renovated to meet this objective. The Bank also strives to reduce its carbon footprint every year. Branches and ING BE’s two main buildings have been “carbon neutral” since 2007. They use 100% green electricity and foster a strict waste-recycling policy. Various projects aimed at reducing the use of paper, such as paper cheques and paper payment orders, were started in 2013, in coordination with efforts to improve the ease of use of electronic alternatives, such as Home’Bank. On top of these initiatives, sustainability is also embedded in ING BE’s product offering to private customers. While the growth of real-estate eco loans to private customers stabilised in 2013, eco car loans increased by close to 5% year-on-year.
On 10 April 2013, Luxembourg announced its intention to switch, from 1 January 2015, to the automatic exchange of information under the European Savings Tax Directive, thus following a general international trend. ING Luxembourg continually informs its customers of any changes in regulation, in this case an obligation by both the bank and the customer to comply with local tax regulation. ING Luxembourg further advises its customers to contact a tax adviser if necessary and (re-)affirm that they comply with local tax regulations following the European Savings Tax Directive.
ING-DiBa Austria, which is reported under Retail Germany, had 521,000 customers at the end of 2013, up slightly from 515,000 at the end of 2012. Total retail balances at year-end 2013 amounted to EUR 7.6 billion, an increase of EUR 0.3 billion, of which total funds entrusted were EUR 7.4 billion.
Interhyp, Germany’s biggest mortgage broker, was awarded “Best Mortgage Financer” by renowned Euro magazine, for the eighth year running, for best service, advice and price. Interhyp increased its local branch and tied-agent network to almost 70 in 2013.
Customer centricity ING-DiBa is a socially responsible bank. First of all, it treats customers fairly by offering easy-to-understand products with no strings attached. ING-DiBa Germany, for example, launched an initiative, aiming at making all its letters and e-mail templates easier to understand. This, in turn, should lead to fewer additional inquiries and, consequently, to a better customer experience. Prior to the launch, many workshops were held, an electronic handbook was published and an ongoing newsfeed set up. A survey showed ING-DiBa is well on track reaching targeted aims. Second, it is a caring employer, providing staff with a range of ancillary, non-work related benefits such as sports classes, cooking classes and child care provision. Third, it gives something back to society. ING-DiBa Austria, for example, launched the Club Thousand (Vereinstausender ) initiative in 2013, which involves donating EUR 1,000 to 50 Austrian non-profit clubs. More than 900 clubs and their members participated in this campaign by applying to be one of the 50 clubs to which the donations were granted. This raised ING-DiBa’s brand awareness significantly.
All businesses continued to converge to the same model: easy and fair, with a focus on “digital first”. Progress was made in building the preferred bank and establishing a primary relationship with our customers, in which our payment account serves as the “anchor” product. In 2013, 1.2 million payment accounts were added, resulting in a total of more than 12 million payment accounts. ING Spain reached the milestone of one million payment accounts. In ING Italy, almost half of customers out of one million customers, have a payment account. In 2013, ING Australia passed the 1.5 million customer milestone. Rest of World welcomed close to 900,000 new customers, bringing the total at year-end to 14.3 million, excluding Bank of Beijing and TMB Bank. ING in Spain, Turkey and France were one of the first banks in the world to launch “responsive” websites, which provide customers with a consistent experience regardless of the device used.
There were a number of mobile banking and digitalisation developments in 2013. ING Romania launched an app for making contactless payments by smartphone, called ING Pay; ING Australia’s new mobile app won the 2013 “Mobile Award”; ING Vysya Bank released an app that increases its reach into remote cities and rural areas; and ING Italy’s mobile app is now used by 50% of its customers within a year after launch.
ING Turkey launched a ground-breaking social media campaign for consumer loans called #BirTweetimeBakar, which offers customers tangible benefits: the more they tweet, the lower the loan interest rate. Using best practices from around the ING world, Turkey also introduced an innovative, award-winning branch concept which includes self-service facilities and greater improves customer interaction. By the year-end it had been introduced to 40 branches, and our aim is to convert all branches within the next three years.
In India, as part of our corporate social responsibility, ING offers farmers a range of products, including the Kisan Credit Card, to cover their credit requirements at the pre- and post-harvest stages. We also offer customised products for various agricultural activities.
CONCLUSIONS AND AMBITIONS All business units will continue to focus on the customers’ needs with easy and fair products, with a focus on “digital first”. They will also continue to provide fast and innovative responses, when and where required, with digital innovation remaining a top priority. This is all part of ING’s overall aim to help customers manage their finances, now and for the future. Our aim is also to make a positive contribution to society and the environment. We therefore respond to society’s increasing demand for products and services that meet clear social, environmental and ehtical objectives. We will continue to do so in 2014. In 2014, continued attention will be spent on the local Top Employer programme, as we need committed and motivated employees to help realise our ambition to become the customer’s preferred bank.
FINANCIAL DEVELOPMENTS Commercial Banking’s underlying result before tax rose 11.1% to EUR 1,817 million from EUR 1,635 million in 2012. Credit and debt valuation adjustments (“CVA/DVA”), fully recorded in Financial Markets, were EUR 173 million positive in 2013 versus EUR 457 million of negative adjustments in 2012. Excluding CVA/DVA, underlying result of Commercial Banking was 21.4% lower than in 2012, mainly caused by lower income in Bank Treasury, Real Estate & Other, partly offset by good cost control and lower risk costs.
Commercial Banking’s total underlying income rose 0.6% to EUR 4,994 million compared with EUR 4,963 million in 2012. Excluding CVA/DVA, income declined 11.1% on 2012, due to lower interest results, especially in Bank Treasury and Financial Markets, but also in General Lending. Adjusted for currency impacts and the sale of a US Real Estate Finance portfolio, net lending declined slightly by EUR 0.2 billion in 2013, as lower volumes in Real Estate Finance, General Lending and the Lease run-off portfolio was offset by growth in Structured Finance and Trade Finance Services. Net funds entrusted grew by EUR 8.5 billion. Underlying operating expenses decreased 2.6% to EUR 2,310 million, due to good cost control and lower impairments on real estate development projects. The underlying cost/income ratio improved to 46.3%, from 47.8% in 2012.
Total underlying income 4,994 4,963 Underlying operating expenses 2,310 2,372 Underlying additions to loan loss provisions 867 955 Underlying result before tax 1,817 1,635 Underlying cost/income ratio 46.3% 47.8% Client balances: net production funds entrusted (EUR billion) 8 -5 Client balances: net production lending (EUR billion) 0 -11 Underlying risk costs in bp of average RWA 68 72 Risk-weighted assets (year-end, in EUR billion) 127 124 Underlying return on equity based on 10% core Tier 1** 11.0% 9.0%
Underlying income in EUR million 2013 2012 - General Lending and Transaction Services 1,358 1,459 - Bank Treasury, Real Estate & Other 193 680 Total Commercial Banking 4,994 4,963
Underlying result before tax in EUR million 2013 2012 - General Lending and Transaction Services 518 632 - Bank Treasury, Real Estate & Other -253 135 Total Commercial Banking 1,817 1,635 41ING Group Annual Report 2013 1 W h o w e are 2 R
For corporate clients, our Working Capital Solutions team has established ING as a recognised provider of receivables and payables solutions. It was awarded several prestigious client mandates in 2013, and in 2014 it will concentrate on further strengthening its market position and execution capabilities.
STRUCTURED FINANCE The Structured Finance division aims for a consistent top-10 position globally in the markets in which it competes. We have three structured commercial lending services groups.
Our continued balance sheet optimisation efforts in 2013 provided additional capacity for us to support clients. We progressed with building integrated domestic banks by combining Retail Banking’s deposit gathering capabilities with Commercial Banking’s origination capabilities, resulting in a further strengthening of our business model.
In addition to market structure changes, new capital rules continue to increase the capital required to support trading businesses, and dilute return on capital. As a consequence, FM will continually analyse and re-assess its business profile to ensure that we continue to maintain and outperform ING’s return targets.
The Specialised Financing Group comprises a number of global teams largely engaged in arranging, underwriting and lending against business cash flows in sectors such as telecommunications, media and technology. In 2013 our clients have been able to take advantage of excess supply of credit in the market, which has made it challenging to retain asset levels.
This will improve the overall flexibility of our Commercial Banking business model, while supporting further balance sheet optimisation. The establishment of two new Global Services &
In addition ING is number-one bookrunner for Offshore Services syndicated loans in 2013 according to Dealogic’s Global Bookrunner league tables.
TOP EMPLOYER Banking is all about people: our people’s engagement, sustainable performance and strong development are key drivers for successful client servicing. With continued pressure on our cost base in 2013, we had to make difficult decisions in several areas. At the same time, we had to keep employees engaged and motivated. Commercial Banking therefore made it a priority to continue to build a learning organisation in 2013. We enhanced our offerings both in technical training for all staff as well as in specific leadership programmes.
Our ambition is not only to become a stronger bank, but also a better bank for our clients, who increasingly choose banking relationships based on the quality of solutions offered, combined with effective service delivery. To become that better bank we have reconfirmed our target customer base and the products we offer, and are adapting the way we serve and deliver products to them. We have launched a number of initiatives to optimise our business model across products and countries, streamlining our operational infrastructure and renewing our IT platform.
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** Operating result is underlying result before tax excluding non-operating items.
Operating result ongoing business* 886 833 Non-operating items ongoing business -229 -779 Japan Closed Block VA -669 105 Underlying result before tax NN Group -12 159 * Excluding the results of the discontinued operations of ING U.S. and the results of Insurance Other.
FINANCIAL DEVELOPMENTS The operating result ongoing business of NN Group was EUR 886 million in 2013, a 6.4% increase compared with EUR 833 million in 2012, mainly driven by higher operating results for Netherlands Life, Investment Management and the Other segment. This improvement was partially offset by lower operating results for Insurance Europe, Japan Life and Netherlands Non-life.
The result before tax of Japan Closed Block VA was a loss of EUR 669 million in 2013, compared with a profit of EUR 105 million in 2012. This decrease was primarily due to a EUR 575 million charge in order to bring the reserve adequacy of the business line to the 50% confidence level as of 1 October 2013, due to a change in the segmentation of operations that was introduced in the fourth quarter of 2013.
As such, the timeline to divest more than 50% of Japan Life has effectively been extended by two years to year-end 2015. This is the agreed timeline to divest more than 50% of ING’s European insurance and investment management businesses.
Also as part of the revised EC agreement, ING will accelerate the time to complete the 100% divestment of its insurance and investment management activities in Europe and Japan by two years, to year-end 2016.
The board of NN Group N.V. consists of: • Ralph Hamers, CEO • Lard Friese, vice-chairman • Delfin Rueda, CFO • Doug Caldwell, CRO • Patrick Flynn • Wilfred Nagel • Dorothee van Vredenburch
As part of the preparations to become a standalone company through a base case IPO, changes were made to the reporting segmentation in the fourth quarter of 2013, as follows: • Netherlands Life • Netherlands Non-life • Insurance Europe • Japan Life • Investment Management • Other • Japan Closed Block VA
In September, the remaining stake in ING U.S. was transferred from NN Group to ING Group. Later in the year, ING Group successfully sold a second tranche of shares, reducing its stake further to 57%.
GOVERNANCE NN GROUP On 28 February 2014, before the finalisation of the 2013 consolidated financial statements, ING Insurance Topholding N.V. legally merged with its wholly-owned subsidiary ING Verzekeringen N.V. The legal merger became effective as of 1 March 2014 and on that date the merged entity was renamed NN Group N.V. Through this merger, the legal entity ING Verzekeringen N.V. ceased to exist and NN Group N.V. became the legal successor of ING Verzekeringen N.V.
2013 was a year of major transition for the insurance and investment management operations in the Netherlands. As announced in November 2012, the transformation programme in the Netherlands is expected to result in an estimated headcount reduction of 1,350 FTEs over the period 2013-2014. By the end of 2013, a reduction of 818 FTE was realised.
In November, a major milestone was reached in Brussels. The European Parliament, Council and European Commission reached a political deal on the Omnibus II Directive – amending the 2009 Solvency II Framework Directive. Solvency II’s implementation is planned for 1 January 2016.
NN Group’s overall ambition is for customers to choose its products and services based on their previous positive experience with its businesses. The priorities for the business are to be a strong, sustainable company, delivering excellent customer service and transparent products. The priorities also include providing multiaccess distribution, having efficient and effective operations and generating capital.
In 2013 the technical margin was EUR 237 million, a 68.1% increase from EUR 141 million in 2012, mainly driven by non-recurring movements in technical provisions in both years.
Administrative expenses decreased to EUR 472 million in 2013 compared with EUR 495 million in 2012, mainly due to the transformation programme in the Netherlands partly offset by higher pension expenses.
Revaluations improved to a gain of EUR 27 million compared to a loss of EUR 296 million in 2012. Negative real estate revaluations in 2013 were more than offset by positive revaluations of private equity. The loss in 2012 included a EUR 206 million loss on equity hedges and a EUR 149 million negative revaluation of real estate, partly offset by a EUR 20 million positive revaluation of private equity.
The result before tax was a gain of EUR 325 million in 2013, compared with a loss of EUR 335 million in 2012, driven by an improvement in non-operating items and lower adverse impact from special items as well as the increase in operating result.
In 2012, Netherlands Life stepped up its efforts in compensating customers with individual unit-linked policies based on the compensation scheme with two consumer protection organisations and also based on additional measures (‘’flankerend beleid”) that comply with the “Best in Class” criteria as formulated by the Dutch Minister of Finance. By early 2013, all policyholders of an individual unit-linked policy were informed about their compensation. The agreements with the two consumer protection organisations are not binding on policyholders. For more information, please refer to ‘Legal proceedings’ in the Accounts section of this Annual Report.
PRODUCTS Netherlands Life launched a Defined Contribution (DC) pension product (Essentie Pensioen) in 2012 which bundles insurance from Nationale-Nederlanden, pension administration by AZL and investment management services from Investment Management. It launched another DC product (Bewust Pensioen) in 2013, which is based on a straight-through-processing framework and offers guarantees and investment opportunities. With these two products, Netherlands Life is well positioned to capture more opportunities in the growing DC market.
Netherlands Non-life’s aim is to lower expenses, create innovate products and to further improve customer and intermediary service levels. It continues to sell its products through multiple distribution channels. Intermediaries continue to play an important role, but bancassurance and direct channels are also an integral part of Netherlands Non-life’s distribution strategy.
Expenditure improved to EUR 1,651 million in 2013 compared with EUR 1,741 million in 2012. This improvement was driven by a significant reduction in claims frequency for disability and accident insurance products following the implementation of a recovery programme in 2011 and 2012. The recovery was also strengthened by a significant improvement in the claims experience for shortterm disability products. The restored profitability of the Income business was partly offset by a relatively high volume of significant claims in the fire product line and several large storms in the fourth 51ING Group Annual Report 2013 1 W h o w e are 2 R
The result before tax increased to a gain of EUR 66 million in 2013 from a loss of EUR 51 million in 2012. The decrease in operating result was more than offset by an improvement in non-operating items and special items.
The economic downturn continued to affect the non-life business in 2013, most visibly in disability and accident insurance. Netherlands Non-life is gradually increasing the profitability of this product line having adjusted premiums and having made operational improvements in the claims process.
Furthermore, by innovating products and processes it lowered run rate expenses. In the property and casualty business, it downsized the product portfolio in line with the focus on retail, SMEs and the self-employed.
In spite of the challenging macroeconomic environment in many European countries, Insurance Europe achieved growth in 2013 by increasing multi-channel distribution and improving service levels, which resulted in higher NPS scores. Insurance Europe has a strong focus on profitable growth.
The Japanese life insurance market is the second largest market in the world. Although it is mature, it has attractive growth opportunities in some large segments and channels. In November 2013, ING announced Japan Life would be included within the base case IPO of NN Group.
FINANCIAL DEVELOPMENTS The operating result for Japan Life was EUR 162 million in 2013, a 17.3% decline compared with EUR 196 million in 2012, due to the 27% depreciation of the Japanese yen against the euro in 2013.
Fees and premium-based revenues were EUR 436 million in 2013, a 11.0% decrease compared with EUR 490 million in 2012, due to the depreciation of the Japanese yen against the euro. Excluding this currency effect, fees and premium based revenues increased by 10.0% driven by strong COLI sales and favourable persistency.
DAC amortisation and trail commissions decreased to EUR 177 million in 2013 compared to EUR 197 million in 2012. Excluding currency effects, DAC amortisation and trail commissions increased by 11.7% due to higher in-force volume.
The result before tax decreased to EUR 192 million in 2013 from EUR 209 million in 2012, due to the decrease in operating result. This was partly offset by an improvement in non-operating items. assumption.
CONCLUSIONS AND AMBITIONS The continued shift towards professional distribution channels, such as independent brokers and banks, is creating growth opportunities for Japan Life. Its aim is to grow faster than the market boosted by its strong presence in these channels.
> Global asset manager with EUR 174 billion in assets under management (AuM)
> Investing responsibly and effectively with 71% of funds above benchmark > Focus on growing third party business
Investment Management operates from a strong middle and back office, enabling solid investment performance and room for further growth in assets under management. It is preparing for the base case IPO of NN Group, making its business simpler by streamlining its governance and divesting several activities in Asia.
In 2013, Investment Management again scored highly compared to the industry average in its annual client satisfaction survey. It received various awards that highlighted its customer centricity. On the operational side, it completed the transformation of its infrastructure to a simpler, more advanced environment that enables even better investment performance and that further improves the customer experience.
PRODUCTS AND DISTRIBUTION Investment Management produces and distributes its products globally. It operates from a modern middle and back office with sufficient capacity to increase its operations without infrastructure constraints. It has a global distribution network across various distribution channels. This network will help it grow its third-party business in the future.
INVESTING RESPONSIBLY In managing investments, Investment Management is committed to the UN Principles for Responsible Investment. In 2013, it integrated environmental, social and governance (ESG) factors as a screening criterion into all its investment strategies. These factors can have a significant impact on long-term performance. Sustainable assets under management increased by 8.3% to EUR 3.5 billion. In line with being an active investor, Investment Management visits shareholder meetings of its investee companies. In 2013, it introduced the publication of quarterly active ownership reports on its voting and engagement activities. For more information on these and other sustainability-related subjects, please refer to the ING Group Sustainability Report.
Investment Partners which signifies its ambition to be a partner to its customers rather than a general supplier of products.
> Nationale-Nederlanden Bank offers integrated wealth management solutions and successfully introduced two savings products > Solvency II provides ING Re with opportunities to improve NN Group’s capital allocation
Non-operating items was a gain of EUR 29 million in 2013, compared with a loss of EUR 24 million in 2012, due to improvements in gains/losses and impairments, reflecting the reallocation of the investment portfolio of ING Re in 2013, and lower losses from revaluations. Special items amounted to a loss of EUR 79 million in 2013, compared with a loss of EUR 43 million in 2012. The loss in 2013 was primarily due to expenses related to the restructuring and integration of WestlandUtrecht Bank operations at NationaleNederlanden Bank. The 2012 loss included EUR 94 million in expenses related to the operational separation from ING Group and preparation costs for the base case IPO, EUR 56 million in goodwill impairments, and a EUR 26 million reorganisation provision. These negative items were largely offset by a pension provision release of EUR 133 million.
Japan Closed Block VA primarily consists of single premium variable annuities (SPVA) sold from 2001 to 2009. In 2009, ING in Japan ceased the sale of SPVA products in Japan, placed the portfolio in run-off and classified it as closed-block business.
DAC amortization and trail commissions fell to EUR 38 million in 2013, compared with EUR 50 million in 2012, as DAC related to the annuity portfolio was written-down entirely on 1 October 2013, as part of the charge to restore the reserve adequacy of the business line to the 50% confidence level, due to the change in segmentation.
The result before tax was a loss of EUR 471 million in 2013, compared with a loss of EUR 452 million in 2012, as improvements in the operating result and non-operating items were more than offset by higher special items and a lower result on divestments.
BUSINESS DEVELOPMENTS Nationale-Nederlanden Bank offers a range of banking products, especially mortgages and savings, to retail customers in the Netherlands. In addition, it coordinates the distribution of Nationale-Nederlanden’s individual life and retail non-life insurance products in the Netherlands to enable a comprehensive product offering to retail customers in the Netherlands.
The minimum guarantee obligations of Japan Life under the closed-block portfolio are fully reinsured by ING’s internal reinsurer, ING Re. ING Re manages this risk through a sophisticated hedging programme. Japan Life is responsible for managing the policies, the relationships with customers, the distribution partners and the Japanese regulatory authority.
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Also in January, the Supervisory Board held its annual meeting on ING’s strategy as well as the medium-term plan (MTP) 2013-2016 and related risks. The MTP addresses the plans and the financial and non-financial targets for the banking and the insurance businesses and for the Group as a whole. The Supervisory Board discussed the strategic ambitions for ING Bank, NN Group, ING U.S. and ING Group while taking into account the regulatory changes, the economic developments, the volatility on the financial markets, the situation in the eurozone, the execution of the EC Restructuring Plan and the intended repayments of the outstanding core Tier 1 securities to the Dutch State. The Supervisory Board approved the MTPs and the proposed strategic directions for ING Bank, NN Group as well as for ING Group.
The Audit Committee regularly discussed financial reporting, internal controls over financial reporting, capital management and regulatory matters. The shareholders agreement between ING Group and ING U.S. as well as the Form S-1 registration statement, which was submitted to the US SEC concerning the IPO of ING U.S., was discussed regularly by the Audit Committee. NationaleNederlanden Life actuarial and risk reporting, the developments in the unit-linked products case and the capital plan for NN Group were also topics of frequent discussion during the year.
Corporate Governance Committee meetings The Corporate Governance Committee met twice in 2013. In February the Corporate Governance Committee discussed the agenda for the 2013 annual General Meeting, including the publication on the application of the Dutch Banking Code by ING Bank N.V and the implementation of the Dutch Insurers’ Code by NN Group N.V. The Committee also discussed the legal restructuring of NN Group and the annual review of the charters of the Supervisory Board and the Executive Board. In November the Committee advised on various recommendations regarding the 2014 annual General Meeting.
COMPOSITION OF THE SUPERVISORY BOARD Jeroen van der Veer was reappointed to the Supervisory Board for a consecutive period of four years. Tineke Bahlmann, the statenominated Supervisory Board member, was reappointed to the Supervisory Board for a consecutive period of four years, concluding after the annual General Meeting in 2017.
Isabel Martín Castellá, Carin Gorter and Hermann-Josef Lamberti were appointed to the Supervisory Board on 13 May 2013 by the annual General Meeting. Following the annual General Meeting, Carin Gorter and Isabel Martín Castellá joined the Audit Committee. Carin Gorter also joined the Corporate Governance Committee.
The Nomination Committee and the Supervisory Board will continue to strive for an adequate and balanced composition of the Supervisory Board when selecting and nominating new members for appointment.
RECENT DEVELOPMENTS LEGISLATIVE AND REGULATORY DEVELOPMENTS On 1 January 2013, a law on the revision of the corporate investigative procedure (wet in verband met de aanpassing van het recht van enquête) and a law clarifying the law on Management and Supervision (wet aanpassing regels over bestuur en toezicht in naamloze en besloten vennootschappen) came into force. A law on corporate governance (wijziging van de Wet op het financieel toezicht, de Wet giraal effectenverkeer en het Burgerlijk Wetboek naar aanleiding van het advies van de Monitoring Commissie Corporate Governance Code van 30 mei 2007) came into force on 1 July 2013.
A legislative proposal on revision and claw back of executive bonuses and profit-sharing of directors and persons determining the day-to-day policy (wetsvoorstel aanpassing en terugvordering van bonussen en winstdelingen van bestuurders en dagelijks beleidsbepalers) was adopted by the Upper House of the Dutch Parliament on 10 December 2013 and came into force on 1 January 2014.
These arrangements entailed, among other things, that the Dutch State could recommend two candidates (“State Nominees”) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board required approval of the State Nominees. At the annual General Meeting in 2013, one State Nominee decided to step down and not be eligible for reappointment. The Dutch State
For more information on the State Nominees, please refer to the section on the Supervisory Board; for more information on ING’s remuneration policy, please refer to the Remuneration report, starting on page 81.
SHAREHOLDER PARTICIPATION AND POSITION OF ING TRUST OFFICE (STICHTING ING AANDELEN) During the years 2010–2013, participation of shareholders, excluding the ING Trust Office, and holders of depositary receipts in the decision-making in annual General Meetings consistently increased from 41.3% to 51.4%.
As ING Group was still in the implementation phase of the amended restructuring plan, ING did not regard it as an opportune moment to reconsider its governance and depositary- receipts structure.
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Share issuances are to be decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights to existing shareholders. The powers delegated to the Executive Board are limited: • in time: powers are delegated for a period of 18 months; • by number: insofar as a sufficient number of unissued ordinary shares is available in the authorised capital, ordinary shares may be issued up to a maximum of 10% of the issued share capital, or, in the event of a merger or takeover or to safeguard or conserve the capital position of ING Group, up to a maximum of 20% of the issued capital; and under the Corporate Governance Code, however, differs in its details from the definitions of independence under the NYSE listing standards. In some cases, the Dutch requirements are stricter and in other cases the NYSE listing standards are the stricter of the two. The Audit Committee, Risk Committee, Remuneration Committee, Nomination Committee and Corporate Governance Committee of ING Group are comprised of members of the Supervisory Board. Furthermore, a temporary committee, the Insurance Europe Committee, was established on 1 October 2013. This Committee is also comprised of members of the Supervisory Board and assists the Supervisory Board with the performance of its duties in relation to the preparation and execution of the initial public offering process and/or spin-off of (part of) NN Group.
• The articles of association of ING Group (‘Articles of Association’) provide that there are no quorum requirements to hold a General Meeting, although certain shareholder actions and certain resolutions may require a quorum.
CAPITAL AND SHARES CAPITAL STRUCTURE, SHARES The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to ING Continuity Foundation (Stichting Continuïteit ING). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issuance of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 77). The purpose of this call option is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). The ordinary shares are not used for protective purposes. The ordinary shares, which are all registered shares, are not listed on a stock exchange. The Board of ING Continuity Foundation currently comprises four 64 ING Group Annual Report 2013
cash-settled, such as call or put options, warrants, swaps or any other similar contract, reaches, exceeds or falls below certain thresholds, is required to notify in writing the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) immediately after the acquisition or disposal of the triggering interest in ING Group’s share capital. These thresholds are 3%, 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% or 95% of the issued share capital of ING Group.
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation), are shown on page 10. ING Group is not aware of shareholders, potential shareholders or investors with an interest of 3% or more in ING Group other than the ING Trust Office, the ING Continuity Foundation and Blackrock Inc.
Approximately 25 analysts actively cover and frequently issue reports on ING Group. A list of these analysts can be found under “Analyst Coverage” of the Investor Relations section of ING Group’s website. During 2013, ING Group did not provide any form of compensation to parties that are directly or indirectly involved in the production or publication of analysts’ reports, with the exception of credit-rating agencies.
ING Group presented at 6 industry conferences throughout the course of the year. In total, there were 104 Fixed income and 408 Equity meetings (including conference calls) with institutional investors and/or analysts. Combined, conference presentations and face-to-face meetings with investors and/or analysts took place in 38 different cities across the globe.
VOTING ON THE ORDINARY SHARES BY ING TRUST OFFICE ING Trust Office has discretion to vote in respect of shares for which it has not issued voting proxies to holders of depositary receipts and has not received any voting instructions.
PROXY VOTING FACILITIES In 2013, ING Group was a participant in the Shareholder Communication Channel (Stichting Communicatiekanaal aandeelhouders), through which participating holders of depositary receipts could give voting instructions to ING Trust Office. Following the fact that the law on corporate governance (wijziging van de Wet op het financieel toezicht, de Wet giraal effectenverkeer en het Burgerlijk Wetboek naar aanleiding van het advies van de Monitoring Commissie Corporate Governance Code van 30 mei 2007) came into force, the Shareholder Communication Channel concluded that its function had ended. Therefore, it ceased to exist in 2013. ING Group continues to provide proxy voting facilities to its investors via its website and solicits proxies from its ADS holders in line with common practice in the US.
VOTING ON THE ORDINARY SHARES BY HOLDERS OF DEPOSITARY RECEIPTS AS PROXY OF ING TRUST OFFICE Although the depositary receipts for shares do not formally carry any voting rights, holders of depositary receipts, in practice, rank equally with shareholders with regard to voting. ING Trust Office will, subject to certain restrictions, grant a proxy to a holder of depositary receipts allowing such holder, in the name of ING Trust Office, to exercise the voting rights attached to the number of ordinary shares that corresponds to the number of depositary receipts held by such holder of depositary receipts. On the basis of such a proxy, the holder of depositary receipts may vote such shares according to his or her own discretion.
However, because of the fact that ING Group needs to balance several relevant selection criteria when composing its Executive Board, the composition of the Executive Board did not meet the above-mentioned gender balance in 2013 (0% women). ING Group will continue to strive for an adequate and balanced composition of its Executive Board in future appointments, by taking into account all relevant selection criteria including but not limited to gender balance, executive experience, experience in corporate governance of large stock-listed companies and experience in the political and social environment.
TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Executive Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation from the Corporate Governance Code however, this does not apply if (i) such disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character
• the issuance of shares or rights to subscribe for shares, the restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board; and
The recommendation right of the Dutch State was subject to applicable law and to corporate governance practices, generally accepted under stock exchange listing regimes applicable to ING Group and continued as long as the IABF was in place. As a result of the agreement completed between ING Group and the Dutch State in December 2013 on the unwinding of the IABF, the recommendation right of the Dutch State expired. State Nominee Tineke Bahlmann was recommended for re-appointment by the Dutch State and reappointed by the annual General Meeting on 13 May 2013. State Nominee Lodewijk de Waal decided not to apply for re-appointment at the 2013 annual General Meeting and the Dutch state indicated not to use its right to recommend a second candidate for appointment as a member of the Supervisory Board at the time.
FUNCTION OF THE SUPERVISORY BOARD The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events of ING Group and its business, as well as to provide advice to the Executive Board. In line with Dutch company law, the Corporate Governance Code and the Articles of Association, the Supervisory Board Charter requires all members of the Supervisory Board, including the State Nominee, to act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all stakeholders of ING Group, to perform their duties without mandate and independent of any interest in the business of ING Group, and to refrain from supporting one interest without regard to the other interests involved.
W.F. (WILFRED) NAGEL, CHIEF RISK OFFICER (Born 1956, Dutch nationality, male; appointed in 2012, term expires in 2016) Wilfred Nagel was chief executive officer of ING Bank Turkey until his appointment as a member of the Management Board Banking and the Management Board Insurance as of 5 October 2011. He joined ING in 1991 and has held various positions including Global Head Credit Risk Management from 2002 to 2005 and CEO Wholesale Banking in Asia from 2005 to 2010. He was appointed a member of the Executive Board of ING Group on 14 May 2012. He is responsible for ING’s risk departments including compliance.
CHANGES IN THE COMPOSITION Jan Hommen stepped down from the Executive Board on 1 October 2013. His role as chairman of the Executive Board was succeeded by Ralph Hamers, who was appointed to the Executive Board on 13 May 2013. Patrick Flynn was reappointed by the General Meeting on 13 May 2013.
ING Group needs to balance several relevant selection criteria when composing its Supervisory Board but strives for an adequate and balanced composition thereof, by taking into account all relevant selection criteria including but not limited to experience in retail and wholesale banking, insurance, gender balance, executive experience, experience in corporate governance and experience in the political and social environment. Annually, the Nomination Committee assesses the composition of the Supervisory Board. In the context of such assessment, ING Group aims to have a gender balance by having at least 30% men and at least 30% women amongst its Supervisory Board members. In 2013, the composition of the Supervisory Board met the above-mentioned gender balance (33.3% women).
TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Supervisory Board in which there are a. the issuance or acquisition of its own shares by ING Group, other than related to the Securities issuance (including, for the avoidance of doubt, for the purpose of conversion or financing of a repurchase of Securities), as part of regular hedging operations or in connection with employment schemes; b. the cooperation by ING Group in the issuance of depositary receipts for shares; c. the application for listing on or removal from the price list of any stock exchange of the securities referred to in a. or b.; d. the entry into or termination of a lasting cooperation between ING Group or a dependent company and another legal entity or partnership or a general partner in a limited partnership or general partnership where such cooperation or termination thereof has a material significance for ING Group, i.e. amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; e. the acquisition by ING Group or a dependent company of a participating interest in the capital of another company amounting to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto or a material increase or decrease in the magnitude of such participating interest; f. investments involving an amount equal to one-quarter or more of ING Group’s issued capital and reserves as disclosed in its balance sheet and notes thereto; g. a proposal to wind up ING Group; h. filing of a petition for bankruptcy or moratorium of ING Group; i. a proposal to reduce the issued capital of ING Group (other than related to the Securities issuance); j. a proposal for merger, split-off or dissolution of ING Group; k. a proposal to change ING Group’s remuneration policy; and l. appointment of the chief executive officer of the
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING as a whole as well as the structure and operation of the internal risk management and control systems. On 31 December 2013, the members of the Risk Committee were: Robert Reibestein (chairman), Tineke Bahlmann, Jan Holsboer, Joost Kuiper, Hermann-Josef Lamberti, Luc Vandewalle and Jeroen van der Veer.
INDEPENDENCE Annually, the members of the Supervisory Board are requested to assess whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board, with the exception of Luc Vandewalle, are to be regarded as independent on 31 December 2013. Luc Vandewalle is not to be considered independent because of his former position at ING Belgium. Members of the Supervisory Board to whom the independence criteria of the Corporate Governance Code do not apply, and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
J.H. (JAN) HOLSBOER (Born 1946, Dutch nationality, male; appointed in 2012, term expires in 2016) Former member of the Executive Board of Univar N.V. and former member of the Executive Boards of ING Group and NationaleNederlanden. Other business activities: non-executive (senior independent) director of PartnerRe Ltd. (Bermuda) (listed company). Chairman of the Supervisory Board of TD Bank N.V. Member of the Supervisory Board of YAM Invest N.V. Non-executive director of YAFA S.p.A. (Turin, Italy). Chairman of the Board of Foundation Imtech. Chairman of the Supervisory Board Vithèr Hyperthermia B.V.
H.J.M. (HERMANN-JOSEF) LAMBERTI (Born 1956, German nationality, male; appointed in 2013, term expires in 2017) Former chief operating officer of Deutsche Bank AG. Other business activities: member of the Board of EADS. Member of the Advisory Board Barmenia Versicherungen. Member of the Supervisory Board Open-Xchange AG.
R.W.P. (ROBERT) REIBESTEIN (Born 1956, Dutch nationality, male; appointed in 2012 as an observer, full member as of 2013, term expires in 2017) Former senior partner of McKinsey & Company. Other business activities: member of the Supervisory Board of IMC B.V. Chairman of the Board of Royal Concertgebouw Orchestra Member of the Supervisory Board of Stichting World Wildlife Fund.
Y.C.M.T. (YVONNE) VAN ROOY (Born 1951, Dutch nationality, female; appointed in 2012, term expires in 2016) Former Minister of Foreign Trade, member of the Dutch Parliament and member of the European Parliament. Former president of Utrecht University. Other business activities: chairman of Nederlandse Vereniging van Ziekenhuizen (Dutch association of hospitals). Member of the Board of Royal Concertgebouw Orchestra.
P.A.F.W. (PETER) ELVERDING (VICE-CHAIRMAN) (Born 1948, Dutch nationality, male; appointed in 2007, term expires in 2015) Former chairman of the Managing Board of Directors of Koninklijke DSM N.V. Former vice-chairman of the Supervisory Board of De Nederlandsche Bank N.V. (Dutch Central Bank). Other business activities: chairman of the Supervisory Board of Koninklijke BAM Groep N.V. (listed company). Vice-chairman of the Supervisory Board of SHV Holdings N.V. Chairman of the Supervisory Board of Q-Park N.V. Member of the Supervisory Board of Koninklijke FrieslandCampina N.V. Chairman of the Supervisory Board Camille Oostwegel Holding.
J.P. (TINEKE) BAHLMANN (Born 1950, Dutch nationality, female; appointed in 2009, term expires in 2017) Professor in Business Administration, University of Utrecht. Other business activities: member of the Supervisory Board of Stedin Netbeheer B.V. Member of the Supervisory Board of Maatschappelijk Verantwoord Ondernemen Nederland (CSR). Chairman of the Supervisory Board of Maasstad Ziekenhuis (hospital).
EXTERNAL AUDITOR At the annual General Meeting held on 14 May 2012, Ernst & Young Accountants LLP (EY) was appointed to audit the financial statements of ING Group for the financial years 2012 and 2013, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. In the 2013 annual General Meeting, the appointment of EY as auditor of ING Group was extended by two more years, i.e. for the financial years 2014 and 2015. ING Group started a project with the objective of changing its external audit firm as of the financial year 2016.
SEVERANCE PAYMENTS TO MEMBERS OF THE EXECUTIVE BOARD The contracts entered into with the members of the Executive Board provide for severance payments, which become due upon termination of the applicable Executive Board member’s contract in connection with a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. For purposes of calculating the amounts due, it is not relevant whether or not termination of the employment contract is related to a public bid. Severance payments to the members of the Executive Board are limited to a maximum of one year’s fixed salary, in line with the Corporate Governance Code. Dutch legislation (Law on the limitation of liability of supervisors of financial markets and rules on remuneration of persons who determine the day-to-day policy (“dagelijkse beleidsbepalers”) of financial institutions receiving state aid) (Wet aansprakelijkheidsbeperking DNB en AFM en bonusverbod 73ING Group Annual Report 2013 1 W h o w e are 2 R
ACTIVITIES BOARD MEETINGS During the 2013 reporting year, the board of ING Trust Office (the “Board”) held six meetings. In these meetings, among other things, the following topics were discussed: - The preparation of the meeting of holders of depositary receipts of 27 November 2013.
MEETINGS WITH ING GROUP During the 2013 reporting year, the Board had five meetings with the chairmen of the Executive Board and the Supervisory Board of ING Group. In these meetings, among other things, the following topics were discussed: - The state of affairs of ING Group in 2012 on the basis of the press release of 13 February 2013 and the 2012 figures, the state of affairs of ING Group over the first six months of 2013 on the basis of the press release of 7 August 2013 and the state of affairs of ING Group over the first nine months of 2013 on the basis of the press release of 6 November 2013.
The Board convened a meeting of holders of depositary receipts, which was held on 27 November 2013. 0.11% of the total number of depositary receipts issued was present or represented during this meeting. During the meeting a report was made on the activities of ING Trust Office. In addition, the Board answered various questions of holders of depositary receipts attending the meeting. The minutes of the aforementioned meeting are published on the website of ING Trust Office (www.ingtrustoffice.com).
OUTSTANDING DEPOSITARY RECEIPTS On 31 December 2013, the nominal value of administered ordinary shares amounted to EUR 921,682,613.76 for which 3,840,344,224 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts increased with 10,069,970.
The Board currently consists of Jan Veraart, chairman, Mick den Boogert, Paul Frentrop, Herman Hazewinkel, Harrie Noy and Jolanda Poots-Bijl.
In 2013 the board of ING Continuity Foundation (the “Board”) held two meetings, on 18 April and 29 November.
Due to the listing of ING shares on the New York Stock Exchange, ING Group is required to comply with the SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act, or SOX 404. These regulations require that the CEO (the chairman of the Executive Board) and the CFO of ING Group report and certify on an annual basis on the effectiveness of ING Group’s internal controls over financial reporting. Furthermore, the external auditors are required to provide an opinion on the effectiveness of ING Group’s internal controls over financial reporting. ING Group has long-established Business Principles and a strong internal control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the Company’s internal control over financial reporting is effective as of 31 December 2013. The SOX 404 statement by the Executive Board is included on this page, followed by the report of the external auditor.
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2013. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (1992 framework). Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the Company’s internal control over financial reporting is effective as of 31 December 2013.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (“the COSO criteria”). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2013, based on the COSO criteria.
The other 60% of the total variable remuneration is deferred and also equally divided between cash and stock. This long-term component is intended to serve the objective of retaining the members of the Executive Board for a longer period of time. The value of the stock award is set such that total variable remuneration at the time that the maximum number of shares to be granted is determined stays within the 100% limit. The component is subject to a tiered vesting on the first, second and third anniversary of the grant date (one-third per annum). The entire long-term component is subject to an ex-post performance assessment by the Supervisory Board. The ex-post performance assessment cannot lead to an upward adjustment of the value of the cash deferred portion or the number of deferred shares.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy for the Executive Board was adopted by the annual General Meeting (AGM) on 27 April 2010; amendments to the remuneration policy in line with new regulatory developments were adopted by the AGM on 9 May 2011.
In addition, the Remuneration report provides information on the remuneration paid for 2013. The base salary level of the Executive Board remained at the 2010 level and for the fifth consecutive year no variable compensation was paid to the Executive Board.
REMUNERATION POLICY The primary objective of the remuneration policy is to enable ING to retain and recruit qualified and expert leaders, senior staff and other highly qualified employees.
Financial performance indicators include: Non-financial performance indicators include: 1. Underlying net profit for ING Group 2. Reduce double leverage in ING Group 3. Reduce the loan-to-deposit ratio of ING Bank 4. Reduce leverage in ING U.S. in preparation for IPO base case 5. Reduce leverage in Insurance EurAsia to prepare for standalone future 1. Reinforce “Customer First / Suitability” culture of transparency, honesty, integrity and societal awareness 2. Strengthen key stakeholder relationships 3. Improve employee engagement across the Banking and Insurance operations 4. Improve leadership capabilities and strengthen leadership pipeline 5. On sustainability: improve sustainable business practices 6. Align operational excellence Group-wide 81ING Group Annual Report 2013 1 W h o w e are 2 R
Members of the Executive Board are required to pay a contribution to their pension premium in line with the contributions under ING’s Collective Labour Agreement (“CLA”) in the Netherlands.
Tenure Members of the Executive Board who were appointed prior to 2013, have an employment agreement with ING Group N.V. Members who are appointed as of 2013 have a commission contract. The employment agreement and the commission contract for Executive Board members provide for an appointment for a period of four years and allow re-appointment by the General Meeting. In the case of an involuntary exit, Executive Board members are eligible for an exit-arrangement limited to one-year base salary.
(upcoming Capital Requirements Directive IV and local Dutch legislation on 20% cap on variable remuneration). In order to ensure that ING can adapt to these uncertain factors, the Supervisory Board indicated in the previous years that it may re-evaluate at a later stage whether the remuneration policy adopted in 2010 and amended on 9 May 2011 is in line with the long-term objectives of the Company, the relevant international context, as well as the societal perception of ING as a financial institution. However, since the internal restructuring has not been completed yet and the proposed legislation has not been fully developed, the Supervisory Board may re-evaluate the remuneration policy in 2015.
Should it become clear, after such evaluation, that the remuneration policy has led to an unintended or inequitable outcome, the Supervisory Board has the discretion to correct the previously allocated variable remuneration, in line with the Dutch Banking Code and the Capital Requirements Directive III.
Pension costs of the individual members of the Executive Board amounts in thousands of euros 2013 2012 2011
Jan Hommen (2) Base salary 1,015 1,353 1,353 Variable remuneration in cash 0 0 0 0 0 0
Wilfred Nagel (3) Base salary 750 469 - Variable remuneration in cash 0 0 0 0 - -
Ralph Hamers Jan Hommen Patrick Flynn Wilfred Nagel Leo Performance shares
ING depositary receipts for shares held by Executive Board members Executive Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Executive Board.
REMUNERATION POLICY FOR SENIOR MANAGEMENT As much as possible for a global financial institution of its size, ING aims to take account of all the differences and standards applied within similar financial institutions in the various countries in which it operates. The remuneration policies applicable to members of the Management Boards and senior management are in line with the general principles of the remuneration structure for the Executive Board, taking into account international and local legislation and practices.
It should be noted that as the execution of our strategy progresses with stand-alone futures for our banking and insurance businesses, they will have different financial and non-financial performance drivers. For more information on our strategy, please refer to the Strategy chapter of this Annual Report.
Exceptions (variable remuneration above 100% of base salary) may exist for high value specialists and senior management working in certain divisions and/or geographical areas. The remuneration policy for senior management is in line with the requirements of the Capital Requirements Directive III and the Capital Requirements Directive IV.
(2) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The figures reflect the loans and advances received well before his appointment to the Executive Board.
2013 Remuneration Supervisory Board amounts in thousands of euros 2013 (1) 2012 (2) 2011 (2)
Hermann-Josef Lamberti (5) 46 Isabel Martín Castellá (5) 48 Robert Reibestein(5) 66 14 Yvonne van Rooy 67 14 37
(3) Jeroen van der Veer has been chairman of the Supervisory Board since May 2011. From October 2009 until May 2011 he was vice-chairman of the Supervisory Board.
ING DEPOSITARY RECEIPTS FOR SHARES AND OPTIONS HELD BY SUPERVISORY BOARD MEMBERS Supervisory Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table on the next page shows the holdings by members of the Supervisory Board on 31 December 2013.
(1) The options held by Mr. Vandewalle were granted during his position at ING Bank Belgium S.A. and are currently out of the money. Due to an omission these options were not reported in the Annual Report of earlier years.
N. (Norbert) Lucas, chairman, Germany R. (Rene) De Meij, secretary, Belgium
Consolidated balance sheet 90 Consolidated profit and loss account 91 Consolidated statement of comprehensive income 93 Consolidated statement of cash flows 94 Consolidated statement of changes in equity 96
Notes to the consolidated profit and loss account 23 Interest result banking operations 156 24 Gross premium income 157 25 Investment income 158 26 Result on disposals of group companies 159 27 Commission income 159 28 Valuation results on non-trading derivatives 160 29 Net trading income 161 30 Other income 161 31 Underwriting expenditure 162 32 Intangible amortisation and other impairments 163 33 Staff expenses 164 34 Other interest expenses 167 35 Other operating expenses 167 36 Discontinued operations 168 37 Earnings per ordinary share 169 38 Dividend per ordinary share 170
Parent company balance sheet 345 Parent company profit and loss account 346 Parent company statement of changes in equity 347 Accounting policies for the parent company annual accounts 348 Notes to the parent company annual accounts 349 6 Other information
ASSETS Cash and balances with central banks 2 13,316 17,657 31,194 Amounts due from banks 3 43,012 39,053 45,323 Financial assets at fair value through profit and loss 4
Gross underwriting expenditure 13,585 15,867 13,444 Investment result for risk of policyholders –4,930 –5,517 –206 Reinsurance recoveries –70 –72 –79
Net result from continuing and discontinued operations (before minority interests) 3,439 4,270 5,868
Earnings per share from discontinued operations 37 Basic earnings per ordinary share from discontinued operations 0.06 0.31 0.21 Diluted earnings per ordinary share from discontinued operations 0.06 0.31 0.21
Investments and advances: – associates –68 –26 –140 – available-for-sale investments –132,318 –143,681 –223,544 – real estate investments –200 –60 –32 – property and equipment –388 –423 –499 – assets subject to operating leases –82 –1,188 – investments for risk of policyholders –56,008 –67,986 –57,130 – other investments –343 –369 –340
Net result from continuing and discontinued operations 5,781 5,781 87 5,868
Net result from continuing and discontinued operations 3,232 3,232 207 3,439 Total comprehensive income –3,354 –3,354 –30 –3,384
Repayment of non-voting equity securities –750 –750 Repurchase premium –375 –375 –375 Changes in the composition of the group and other 119 119 –3 116 Dividend –13 –13 Impact of ING U.S. 14 –2,526 –2,526 4,348 1,822 Purchase/sale of treasury shares 378 378 378 Employee stock option and share plans 2 4 –84 –78 19 –59
1 ACCOUNTING POLICIES ING Group applies International Financial Reporting Standards as adopted by the European Union ‘IFRS-EU’. In the annual accounts the term ‘IFRS-EU’ is used to refer to International Financial Reporting Standards as adopted by the EU, including the decisions ING Group made with regard to the options available under IFRS-EU.
CHANGES IN ACCOUNTING POLICIES IN 2013 The following new and/or amended IFRS-EU standards were implemented by ING Group in 2013: • Amendments to IAS 19 ‘Employee Benefits’; • Amendments to IAS 1 ‘Presentation of Financial Statements’; • Amendments to IFRS 7 ‘Financial instruments: Disclosures’; and • IFRS 13 ‘Fair Value Measurement’.
The impact of changes in IAS 19 on previous reporting years is as follows: Impact on Shareholders’ equity
Tax effect 943 –31 240 Shareholders’ equity (after change in accounting policy) 51,777 47,038 40,165
Diluted earnings (before change in accounting policy) 3,252 4,246 3,802.4 3,789.1 0.86 1.12 Impact of change in accounting policy 267 15 0.07 Diluted earnings (after change in accounting policy) 3,519 4,261 3,802.4 3,789.1 0.93 1.12
IFRS 13 ‘Fair Value Measurement’ IFRS 13 ‘Fair Value Measurement’ brings together in one standard all guidance on how to determine fair value. It does not change the scope of assets/liabilities that are measured at fair value. ING Group’s interpretation of fair value measurement was not significantly different from the guidance in IFRS 13. Therefore, the implementation of IFRS 13 ‘Fair Value Measurement’ at 1 January 2013 did not have a significant impact on Total equity, Net result and/or Other comprehensive income. In addition, IFRS 13 introduces an extended scope for the disclosure of the fair value hierarchy by level of fair value for non-financial assets and liabilities. Reference is made to Note 46 ‘Fair value of assets and liabilities’.
ING Japan After carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that a standalone divestment of ING Life Japan, including its Corporate Owned Life Insurance (COLI) and Closed Block VA businesses, is not feasible in a manner that would appropriately meet the demands of regulators and other stakeholders in ING Group and ING Life Japan. Therefore, ING Life Japan will be included with ING’s European insurance and investment management businesses in the base case IPO of NN Group in 2014. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’) are no longer classified as held for sale and discontinued operations. Reference is made to Note 59 ‘Other events’.
Based on the above events, changes were made to the segment reporting as disclosed in Note 42 ‘Segments’.
Changes in assets and liabilities due to the classification of ING U.S. as held for sale and discontinued operations, the classification to continuing operations of ING Japan and as a result of other disposal groups classification as held for sale are included in the notes in the line ‘Changes in the composition of the group and other changes’.
UPCOMING CHANGES IN IFRS-EU AFTER 2013 The following new or revised standards and interpretations will become effective for ING Group from 1 January 2014 (unless otherwise indicated), if and when endorsed by the EU: • IFRS 10 ‘Consolidated Financial Statements’; • IFRS 11 ‘Joint Arrangements’ and amendments to IAS 28 ‘Investments in Associates and Joint Ventures’; • IFRS 12 ‘Disclosure of Interests in Other Entities’; • Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27); • Amendments to IAS 32 ‘Presentation - Offsetting Financial Assets and Financial Liabilities’; • Amendments to IAS 39 ‘Novation of Derivatives and Continuation of Hedge Accounting’; • IFRIC 21 ‘Levies’; and • Amendments to IAS 36 ‘Recoverable amount disclosures for non-financial assets’.
The significant upcoming changes in IFRS-EU after 2013 are explained below.
IFRS 10 ‘Consolidated Financial Statements’ IFRS 10 ‘Consolidated Financial Statements’ introduces amendments to the criteria for consolidation. Similar to the requirements that were applicable until the end of 2013, all entities controlled by ING Group are included in the consolidated annual accounts. However, IFRS 10 redefines control as being exposed to variable returns and having the ability to affect those returns through power over the investee. The requirements in IFRS 10 are generally similar to the policies and interpretations that ING Group applied and, therefore, the impact of implementing IFRS 10 is not significant.
The implementation of IFRS 10 as at 1 January 2014 will not have significant impact on Shareholders’ equity, Net result and/or Other comprehensive income. The impact of IFRS 10 is included in the table below.
Assets held for sale 1,213 –442 771 Assets – other –95 –95 Impact on Total assets 1,213 –537 676
The use of different assumptions about these factors could have a significant effect on insurance provisions and underwriting expenditure. Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
Loan loss provisions Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent of the loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic conditions, loss experience in recent years and credit, industry, geographical and concentration trends. Changes in such judgements and analyses may lead to changes in the loan loss provisions over time.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different valuations. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values. To illustrate the uncertainty of our real estate investments valuation, a sensitivity analysis on the changes in fair value of real estate is provided in the ‘Risk management’ section.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings) and customer behaviour are taken into account. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
Reference is made to Note 46 ‘Fair value of assets and liabilities’ and the ‘Risk management’ section for the basis of the determination of the fair value of financial instruments and related sensitivities.
Segment reporting A segment is a distinguishable component of the Group, engaged in providing products or services, subject to risks and returns that are different from those of other segments. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 29 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned below in Group companies relating to the disposals of group companies, any exchange rate difference deferred in equity is recognised in the profit and loss account in Result on disposals of group companies. Reference is also made to Note 14 ‘Equity’, which discloses the amounts included in the profit and loss account.
Fair values of financial assets and liabilities The fair values of financial instruments are based on quoted market prices at the balance sheet date where available. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
Reference is made to Note 46 ‘Fair value of assets and liabilities’ for the basis of the determination of the fair value of financial instruments.
Investments Investments (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale and are initially recognised at fair value plus transaction costs. Investment debt securities and loans quoted in active markets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as available-for-sale.
Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods in which the hedged item affects net result. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the profit and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred immediately to the profit and loss account.
When a loan is uncollectable, it is written off against the related loan loss provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised in the profit and loss account.
For interests in investment vehicles the existence of significant influence is determined taking into account both the Group’s financial interests for own risk and its role as investment manager.
Real estate investments Real estate investments are recognised at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recognised in the profit and loss account. On disposal the difference between the sale proceeds and carrying value is recognised in the profit and loss account.
ING Group owns a real estate portfolio, diversified by region, by investment segment (Office, Retail and Residential) and by investment type. The valuation of different investments is performed using different discount rates (‘yields’), dependent on specific characteristics of each property, including occupancy, quality of rent payments and specific local market circumstances. For ING’s direct properties in its main locations, the yields applied in the 2013 year-end valuation generally are in the range of 5% to 8%.
The fair values of land and buildings are based on regular appraisals by independent qualified valuers or internally, similar to appraisals of real estate investments. Subsequent expenditure is included in the asset’s carrying amount when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
Property under development for which ING Group has the intention to sell the property under development after its completion and where there is a specifically negotiated contract is valued using the percentage of completion method (pro rata profit recognition). The stage of completion is measured by reference to costs incurred to date as percentage of total estimated costs for each contract.
Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. Borrowing costs are determined at the weighted average cost of capital of the project.
been recognised in other comprehensive income are reclassified to the profit and loss account, where such treatment would be appropriate if that interest were disposed of. Acquisition-related costs are recognised in the profit and loss account as incurred and presented in the profit and loss account as Other operating expenses.
Other liabilities Defined benefit plans The net defined benefit asset or liability recognised in the balance sheet in respect of defined benefit pension plans is the fair value of the plan assets less the present value of the defined benefit obligation at the balance sheet date.
Remeasurements recognised in other comprehensive income are not recycled to profit and loss. Any past service cost relating to a plan amendment is recognised in profit or loss in the period of the plan amendment. Gains and losses on curtailments and settlements are recognised in the profit and loss account when the curtailment or settlement occurs.
The recognition of a net defined benefit asset in the consolidated balance sheet is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the plans.
Earnings per ordinary share Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: • Own shares held by group companies are deducted from the total number of ordinary shares in issue; • The computation is based on daily averages; and • In case of exercised warrants, the exercise date is taken into consideration.
Amounts held at central banks 10,625 13,847 Cash and bank balances 2,471 3,671 Short term deposits insurance operations 220 139
No individual amount due from banks has terms and conditions that significantly affect the amount, timing or certainty of consolidated cash flows of the Group. For details on significant concentrations see ‘Risk management’ section.
Trading equity securities increased significantly in 2013 due to increased client facilitation. Most securities hedge accompanying swap transactions.
Equity securities 36,919 89,994 Debt securities 1,821 6,940 Loans and receivables 849 1,831
Available-for-sale – equity securities 7,265 7,707 – debt securities 130,632 185,877
Equity securities in 2013 include EUR 1,832 million shares in ING managed investment funds and EUR 1,759 million shares in third party managed investment funds.
As at 31 December 2012, ING Group’s balance sheet value of ‘Government bonds’ and ‘Unsecured Financial institutions’ bonds to Greece, Italy, Ireland, Portugal, Spain and Cyprus and the related revaluation reserve (before tax) in equity was as follows: Greece, Italy, Ireland, Portugal, Spain and Cyprus - Government bonds and Unsecured Financial institutions’ bonds (1)
Reference is made to Note 46 ‘Fair value of assets and liabilities’ for disclosure by fair value hierarchy and Note 25 ‘Investment income’ for impairments on available-for-sale debt securities.
The decrease in Held-to-maturity debt securities is mainly due to redemptions.
In 2012, Changes in the composition of the group and other changes related mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale and the disposal of ING Direct Canada. Reference is made to Note 12 ‘Assets and liabilities held for sale’ and Note 55 ‘Companies and businesses acquired and divested’.
To/from loans and advances to customers/amounts due from banks –282 –282
Carrying value as at 31 December 1,694 8,707 443 Fair value as at 31 December 1,667 8,379 512 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –186 –221 –2 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –27 –328 69 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (interest income and sales results) –47 –164 22 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Reclassifications to Loans and advances to customers and Amounts due from banks (continued)
Loans guaranteed by credit institutions 776 114 3,367 6,049 4,143 6,163
As at 31 December 2013, Loans and advances to customers includes receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 810 million (2012: EUR 320 million).
– more than 1 year but less than 5 years 7,239 8,926 – more than 5 years 4,949 5,497
CBRE Retail Property Fund Iberica LP 29 129 1,423 964 –22 75 ING Real Estate Asia Retail Fund Ltd 26 107 475 50 62 1 CBRE Lionbrook Property Partnership LP 20 102 577 77 31 23 CBRE Property Fund Central Europe LP 25 97 907 519 66 30
CBRE Retail Property Fund France Belgium C.V. 15 76 1,388 882 123 78 CBRE Nordic Property Fund FGR 14 55 1,057 674 19 68 Other investments in associates 600
Disposals In 2013, ING reduced its 36.5% stake in SulAmérica S.A. to approximately 21.5% through two separate transactions. Under the International Finance Corporation transaction, ING sold a stake of approximately 7.9% in SulAmérica S.A. for a total consideration of approximately EUR 140 million. Under the terms of the Larragoiti transaction, ING sold a stake in SulAmérica S.A. of approximately 7% to the Larragoiti family, swap its remaining indirect stake for tradable units, and unwind the existing shareholder’s agreement. A net gain/loss of EUR 64 million (EUR 64 million after tax) is recognised in the Result on disposal of Group companies in the profit and loss account on these transactions.
On 7 January 2014, ING completed the sale to Swiss Re Group of 37.7 million units in SulAmérica S.A. The transaction further reduced ING’s stake in the Brazilian insurance holding to approximately 10.3%. ING received a total cash consideration of EUR 176 million. The transaction resulted in a net gain to ING of EUR 56 million which represents the difference between the book value and the fair value for both the 11.3% stake in scope of the transaction with Swiss Re and the 10% stake retained by ING. The net gain will be recognised in the first quarter of 2014 and the remaining stake will be accounted for as an available for sale investment from 2014.
In 2013, Changes in the composition of the group and other changes includes EUR –6 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2013 is EUR 137 million (2012: EUR 162 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2013 is nil (2012: nil).
The total amount of direct operating expenses (including repairs and maintenance) in relation to Real estate investments that generated rental income for the year ended 31 December 2013 is EUR 58 million (2012: EUR 77 million). The total amount of direct operating expenses (including repairs and maintenance) incurred on Real estate investments that did not generate rental income for the year ended 31 December 2013 is EUR 7 million (2012: EUR 15 million).
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 7.4 billion (2012: EUR 8.7 billion) of which EUR 2.6 billion (2012: EUR 3.3 billion) relates to banking operations and EUR 4.8 billion (2012: EUR 5.4 billion) relates to insurance operations. Reference is made to the section ‘Risk management’.
Transfers to and from Other assets –2 –1 Depreciation –24 –25 Revaluations –4 –30 Impairments –30 –24 Reversal of impairments 5 7 Disposals –34 –49 Exchange rate differences –26 5 Changes in the composition of the group and other changes –104 –25 Closing balance 1,243 1,423
Property in own use by year of most recent appraisal by independent qualified valuers in percentages 2013 2012
Gross carrying amount as at 31 December 1,347 1,623 2,498 2,579 3,845 4,202 Accumulated depreciation as at 31 December –1,032 –1,284 –1,678 –1,671 –2,710 –2,955 Accumulated impairments as at 31 December –1 –1 –1 –1 Net carrying value as at 31 December 314 338 820 908 1,134 1,246
2012 – Impairment In 2012, a goodwill impairment of EUR 48 million was recognised relating to the reporting unit Netherlands-Life (formerly Insurance Benelux). In the impairment test of Netherlands-Life, the IFRS book value (including goodwill) was compared to a valuation based on the surplus in the market consistent balance sheet and the market value of new business. These are commonly used metrics in the European insurance industry. During 2012, the book value of Netherlands-Life increased, mainly as a result of declining interest rates being reflected in the fair value of assets but with no corresponding increase in the IFRS book value of insurance liabilities. As the market value surplus (MVS) of Netherlands-Life did not increase similarly, the margin of MVS over IFRS book value, which supported the goodwill, became negative and, as a result, goodwill was fully impaired. This charge was included in the profit and loss account in the line ‘Intangible amortisation and other impairments’. Goodwill is recognised in the Corporate Line and, therefore, this charge is included in the segment reporting in Other.
2012 – Changes in composition of the group and other changes In 2012, ‘Changes in composition of the group and other changes’ represented the reclassification of goodwill to ‘Assets held for sale’. This included all goodwill that related to businesses that were classified as held for sale. For 2012, the amount was EUR 485 million and related to Insurance Korea (EUR 200 million), Investment Management Korea (EUR 180 million), Insurance India (EUR 41 million) and Investment Management Taiwan (EUR 48 million) for the insurance operations and ING Direct UK (EUR 16 million) for the banking operations. As businesses to which these goodwill amounts related to were classified as held for sale, the related goodwill is no longer evaluated at the level of the reporting unit to which it is allocated in the regular goodwill impairment test. Instead, it is reviewed as part of the valuation of the disposal unit that was presented as held for sale. Reference is made to Note 12 ‘Assets and liabilities held for sale’.
Retail Netherlands 1 1 Retail Belgium 50 50 Retail Germany 349 349 Retail Central Europe 611 764 Commercial Banking 24 24 Insurance Europe 101 114
Included in Shareholders’ equity is cumulative other comprehensive income of EUR 35 million (2012: EUR 1,957 million) related to Assets and liabilities held for sale.
Investment contracts (for contracts at fair value) 1,988 3,903 9 5,900
Financial assets Trading assets 18 18 Investments for risk of policyholders 22,452 116 22,568 Non-trading derivatives 1,447 1,447 Financial assets designated as at fair value through profit and loss 2,640 15 2,655 Available-for-sale investments 16,180 8,386 239 24,805
Financial liabilities Non-trading derivatives 287 1,786 2,073 Financial liabilities designated as at fair value through profit and loss 8 8 Investment contracts (for contracts at fair value) 95 95
Real estate investments 6 6 Property in own use 102 102 13 OTHER ASSETS
The allowance for uncollectable reinsurance and insurance receivables amounts to EUR 62 million as at 31 December 2013 (2012: EUR 50 million). The allowance is deducted from this receivable.
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Groep N.V. currently consists of 14,500 million ordinary shares. It increased in 2011 from 4,500 million ordinary shares to 14,500 million ordinary shares as a result from an amendment made to the Articles of Association on 15 June 2011. As at 31 December 2013, 3,841 million of ordinary shares were issued and fully paid.
Available- for- sale reserve and other Cash flow hedge reserve Total
Unrealised revaluations relates to changes in the value of hedging instruments that are designated as net investment hedges.
Result for the year 3,232 3,232 Changes in treasury shares 378 378 Transfer to share of associates reserve –118 118 Employee stock options and share plans –84 –84 Repurchase premium –375 –375 Impact of ING U.S. –2,041 –39 –2,080 Changes in composition of the group and other changes 231 231
Purchased/sold 14 –86 –17 976,907 –14,554,460 –625,803 Share-based payments –100 –67 –19 –6,698,947 –4,638,786 –1,368,381
Legally non-distributable reserves from ING Group’s subsidiaries and associates are as follows: 2013 ING Bank NN Group Other Total
Minority interest In 2013, minority interests increased with EUR 4,358 million due to the IPO and second tranche sale of ING U.S., as explained in Note 59 ‘Other events .́ This amount represents approximately 43% of the net asset value under IFRS-EU of ING U.S. The proportional interests held and key information on ING U.S. is included in the tables below.
The dividend on the cumulative preference shares will be equal to a percentage, calculated on the amount compulsorily paid up or yet to be paid up. This percentage shall be equal to the average of the Euro OverNight Index Average (EONIA) as calculated by the European Central Bank. During the financial year for which the distribution is made, this percentage is weighted on the basis of the number of days for which it applies, increased by 2.5 percentage points.
2011 – Exchange offers On 12 December 2011, ING announced the launch of three separate exchange offers in Europe and tender offers in the United States of America, on a total of seven series of outstanding subordinated securities of ING entities with a total nominal value of approximately EUR 5.8 billion. Of this amount, EUR 4.8 billion relates to securities issued by ING Groep N.V. and EUR 1.0 billion originally issued by ING Verzekeringen N.V. All tender and exchange offers announced on 12 December 2011 were successfully completed on 23 December 2011 with an average participation of approximately 60%. As part of this initiative, EUR 0.9 billion intercompany debt from ING Bank N.V. to
In 2013, the Debt securities in issue also decreased due to the repurchases of certain government guaranteed debt.
As at 31 December 2013, ING Group has unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 8,081 million (2012: EUR 13,129 million).
2012 – Exchanges of certain debt securities On 8 March 2012, ING launched three separate exchange offers and consent solicitations on a total of three series of senior debt securities originally issued by ING Verzekeringen N.V. with a total nominal value of EUR 2.6 billion. Holders had the possibility to exchange the original securities into new securities issued by ING Group and/or consent to a modification of existing terms. On average 64% of the holders have accepted the offer to exchange into new securities issued by ING Group. The total nominal amount of the new securities issued by ING Group in exchange for the existing securities originally issued by ING Verzekeringen N.V. securities is EUR 1,654 million. Approximately 6% of the holders, representing EUR 151 million, accepted a modification of the existing terms of the securities. The transactions were completed on 30 March 2012. A charge of EUR 39 million (EUR 30 million after tax) was recognised in 2012. The settlement date of the exchange offers and consent solicitations was on 4 April 2012.
Provision for non-participating life policy liabilities 17,352 62,797 34 5,065 17,386 67,862 Provision for participating life policy liabilities 46,208 47,801 88 87 46,296 47,888 Provision for (deferred) profit sharing and rebates 3,799 7,236 3 3,799 7,239 Life insurance provisions excluding provisions for risk of policyholders 67,359 117,834 122 5,155 67,481 122,989
Provision for life insurance for risk of policyholders 38,038 90,754 49 49 38,087 90,803
Total provisions for insurance contracts 108,901 212,032 252 5,290 109,153 217,322
Investment contracts for risk of company 810 4,561 810 4,561 Investment contracts for risk of policyholders 1,588 8,067 1,588 8,067 Total provisions for investment contracts 2,398 12,628 2,398 12,628
As at 31 December 2013, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounts to EUR 343 million (2012: EUR 5,920 million). There was no provision for uncollectable reinsurance in 2013 and 2012.
In 2013, Changes in the composition of the group and other changes includes EUR –9,402 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
In 2013 excess cash in the banking operations was used to redeem short-term professional funding.
Trading liabilities 73,491 83,652 Non-trading derivatives 11,155 18,752 Designated as at fair value through profit and loss 13,855 13,399
Reference is made to Note 4 ‘Financial assets at fair value through profit and loss’ for information on trading assets.
The amount that ING Group is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit and loss is EUR 13,427 million (2012: EUR 12,987 million).
Deferred tax liabilities 1,056 2,813 3,611 Income tax payable 440 956 858 Net defined benefit liability 336 799 654 Other post-employment benefits 136 220 255 Other staff-related liabilities 558 650 1,111 Other taxation and social security contributions 833 918 898 Deposits from reinsurers 58 869 1,015
Amounts payable to brokers 4 50 72 Amounts payable to policyholders 464 2,139 2,171
Other staff-related liabilities Other staff-related liabilities includes vacation leave provisions, variable compensation provisions, jubilee provisions and disability/illness provisions.
In addition, in 2013, a reorganisation provision of EUR 61 million is recognised at ING Belgium (banking operations) related to an expected reduction of the workforce of around 1,100 FTE’s over a period of two years.
In 2012, a reorganisation provision of EUR 172 million was recognised in the segment Insurance Benelux and EUR 27 million was recognised in the Corporate line Insurance following the initiative to accelerate the transformation program in preparation for the stand-alone future of NN Group. In response to changing customer preferences and market dynamics, NN Group is undertaking actions to increase its agility in the current operating environment by delayering the support staff structure in the Netherlands and sharpen the strategic focus of its business units, in particular Nationale-Nederlanden (NN). These measures are expected to result in a reduction of the workforce of around 1,350 FTE’s over a period of two years.
Gross premium income from life insurance policies 7,848 8,973 9,597 Gross premium income from non-life insurance policies 1,682 1,733 1,695
Reinsurance assumed gross premiums written 26 24 23 6 –1 5 32 23 28
Reinsurance ceded –40 –40 –39 –103 –100 –103 –143 –140 –142
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Income from real estate investments 23 16 24 50 54 50 73 70 74
Income from investments in debt securities 1,922 2,088 2,146 1,922 2,088 2,146 Income from loans
Retail Belgium –1 –22 Retail Germany –135 Retail Rest of World –328 30 Commercial Banking –3 –26 –301 2 44 Netherlands Life –156 –131 –281 Netherlands Non-life –10 –9 –42 Insurance Europe –3 –16 –425 Japan Life –1 Corporate Line Banking –1 –11 –13 Insurance Other –3 –2 –9 26 RESULT ON DISPOSALS OF GROUP COMPANIES
– other non-trading derivatives 345 –2 –315 –2,662 –2,287 1,041 –2,317 –2,289 726 Net result on non-trading derivatives 1,220 –413 –1,272 –2,618 –2,294 1,022 –1,398 –2,707 –250
The Valuation results on assets and liabilities designated as at fair value through profit and loss includes fair value changes on private equity funds and certain issued debt securities. Valuation results on assets and liabilities designated as at fair value through profit and loss were mainly due to changes in the fair value of financial liabilities driven by changes in market conditions and changes in own credit risk as disclosed in Note 21 ‘Financial liabilities at fair value through profit and loss’. Market conditions includes in particular credit spread developments.
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The investment income and valuation results regarding investments for risk of policyholders is EUR 4,930 million (2012: EUR 5,517 million; 2011: EUR 206 million). This amount is not recognised in Investment income and valuation results on assets and liabilities designated at fair value through profit and loss but in Underwriting expenditure. As a result it is shown together with the equal amount of change in insurance provisions for risk of policyholders.
Reinsurance recoveries –58 –61 –72 Change in life insurance provisions –6,429 –2,592 1,830 Costs of acquiring insurance business 1,863 496 474 Other underwriting expenditure 92 75 84 Profit sharing and rebates 51 24 114
Expenditure from non-life underwriting Reinsurance and retrocession premiums 40 40 39
Reinsurance recoveries –12 –12 –9 Change in provision for unearned premiums –1 –22 –27 Change in claims provision 70 109 5 Costs of acquiring insurance business 258 263 261 Other underwriting expenditure 1 –2
Distributions on account of interest or underwriting results –26 –28 21 Bonuses added to policies 77 52 93
853 million (2012: EUR 1,369 million; 2011: EUR 623 million) referred to above and commissions recognised in Other underwriting expenditure of EUR –13 million (2012: EUR –472 million; 2011: EUR 280 million). Other underwriting expenditure also includes reinsurance commissions received of EUR 16 million (2012: EUR 23 million; 2011: EUR 26 million).
Software and other intangible assets 9 7 50 9 7 50
In 2013, EUR 78 million impairments are recognised on Property development (Commercial Banking segment) relating to various real estate development projects (especially Europe and Australia). The unfavourable economic circumstances in these regions and projects resulted in lower expected sales prices.
Other staff-related benefit costs –24 9 –2 –8 34 5 –32 43 3
ING grants three types of share awards, deferred shares, performance shares and upfront shares. The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period between the grant date and the vesting date, the entitlement becomes unconditional. In addition to the employment condition, the performance shares contain a performance condition. The number of ING depositary receipts that would ultimately be granted at the end of a performance period is dependent on ING’s performance over that period. Upfront and deferred shares, with retention periods as soon as it becomes unconditional, were awarded to the Management Board members of ING Bank and NN Group, as well as Identified staff. ING has the authority to apply a hold back to awarded but unvested shares and a claw-back to vested shares.
As per 31 December 2013 total options outstanding consists of 55,321,834 options (2012: 70,135,050; 2011: 90,620,708) relating to equity-settled share-based payment arrangements and 12,970,608 options (2012: 15,058,127; 2011: 17,517,843) relating to cash-settled share-based payment arrangements.
As at 31 December 2013, the aggregate intrinsic values of options outstanding and exercisable are EUR 82 million (2012: EUR 44 million) and EUR 82 million (2012: EUR 44 million), respectively.
As at 31 December 2013 total unrecognised compensation costs related to share awards amount to EUR 53 million (2012: EUR 102 million; 2011: EUR 149 million). These costs are expected to be recognised over a weighted average period of 1.5 years (2012: 1.2 years; 2011: 1.5 years).
Depreciation of property and equipment 345 361 371 37 31 29 382 392 400
(1) These figures excludes audit fees for entities presented as held for sale and discontinued operations. Total audit fees for 2013 amounted to EUR 36 million (2012: EUR 52 million; 2011: EUR 51 million).
Net result from disposal of discontinued operations (1) 17 752 995
The attribution in 2013 includes the premium of EUR 375 million (2012: EUR 375 million; 2011: EUR 1,000 million) paid in relation to the repayment of the EUR 750 million (2012: EUR 750 million; 2011: EUR 2,000 million) non-voting equity securities.
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Diluted earnings from continuing operations 2,472 2,328 3,451 3,833.5 3,802.4 3,789.1 0.65 0.62 0.91
NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS 39 NET CASH FLOW FROM INVESTING ACTIVITIES Information on the impact of companies acquired or disposed is presented in Note 55 ‘Companies and businesses acquired and divested’.
SEGMENT REPORTING 42 SEGMENTS a. General ING Group’s segments are based on the internal reporting structure by lines of business. The segments Insurance United States (US), Insurance US Closed Block VA, Investment Management US, and Corporate line US ceased to exist, due to the classification of Insurance ING U.S. as held for sale and discontinued operations. Furthermore during 2013, ING has adjusted its reporting structure for its insurance operations to better align its segmentation with the businesses that it comprises, their governance and internal management, and to reflect the decision to divest ING Japan with the intended base case IPO of NN Group. Reference is made to Note 59 ‘Other events’. The comparatives have been adjusted to reflect the new segment structure.
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ING Group evaluates the results of its banking segments using a financial performance measure called underlying result. Underlying result is defined as result under IFRS-EU excluding the impact of divestments and special items. Special items include items of income or expense that are significant and arise from events or transactions that are clearly distinct from the ordinary operating activities. Disclosures on comparative years also reflect the impact of current year’s divestments.
Netherlands Life Income from group life and individual life insurance products in the Netherlands. Netherlands Non-life Income from non-life insurance in the Netherlands including disability and accident, fire, motor and transport insurance. Insurance Europe Income from life insurance, pension products and to a small extent non-life insurance and retirement services in
Segments ING Group Total 2013 Total Banking Total Insurance Eliminations Total
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Special items in 2012, included costs mainly related to the strategic reorganisation measures taken in Retail Netherlands, Commercial Banking and the Insurance operations of approximately EUR 660 million, the separation and IPO preparation of Insurance of EUR 169 million, costs related to the final settlement with US authorities concerning transactions subject to sanctions by the US of EUR 386 million, which was partly offset by a pension curtailment of EUR 351 million following the new Dutch employee pension scheme announced in 2012.
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Fees and premium based revenues 461 507 436 444 136 1,984
Special items before tax –22 –16 –9 –79 –126 Result on divestments 6 –50 11 –34 Result before tax from continuing operations 325 66 243 192 131 –473 –669 102 –83
Net result from continuing operations 259 53 156 121 97 –380 –454 117 –32
For 2013, the separate reporting of the Japan Closed Block VA business line triggered a charge of EUR 575 million before tax to restore the reserve inadequacy of that business line to the 50% confidence level. This charge resulted in a write-off of all deferred acquisition costs (DAC) related to the Japan Closed Block VA business of EUR 1,405 million partly compensated by a release of the Life insurance provision related to unearned revenues of EUR 867 million, and an increase in the life insurance provisions for the remaining amount.
Total net result from discontinued operations ING U.S. 495 Total net result from discontinued operations Asia 696 Net result 1,030
Net result from continuing operations 578 75 –400 156 82 –238 81 96 430
Total net result from discontinued operations ING U.S. –613 Total net result from discontinued operations Asia 314 Total net result from discontinued operations Latin America 1,109 Net result 1,240
Interest income and interest expenses 2012 Total Banking Total Insurance Eliminations Total external
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In 2013, Changes in the composition of the group and other changes includes EUR –1,494 million as a result of the classification of ING U.S. as held for sale and EUR 45 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Weighted averages of basic actuarial assumptions in annual % as at 31 December Net defined benefit asset/liability Other post-employment benefits
The discount rate is the weighted average of the discount rates that are applied in different regions where the Group has defined benefit pension plans. The discount rate is based on a methodology that uses market yields on high quality corporate bonds of the specific regions with durations matching the pension liabilities as key input. Market yields of high quality corporate bonds reflect the yield on corporate bonds with an AA rating for durations where such yields are available. An extrapolation is applied in order to determine the yield to the longer durations for which no AA-rated corporate bonds are available. As a result of the limited availability of long-duration AA-rated corporate bonds, extrapolation is an important element of the determination of the discount rate.
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Discount rates – increase/ decrease of 1% –1,207 1,334 Mortality – increase/ decrease of 1 year 669 –676 Expected rates of salary increases (excluding promotion increases) – increase/ decrease of 0.25% 188 –173 Indexation – increase/ decrease 0.25% 871 –821
Effect of curtailment or settlement –40 –468 –20 –40 –468 –20
– Other bonds (developing markets) 909 1,151 909 1,151 Total fixed income investments 11,419 10,633 11,419 10,633
Equity security investments – Equity securities in developed markets 3,488 3,246 3,488 3,246 – Equity securities in developing markets 1,019 1,126 1,019 1,126 Total equity security investments 4,507 4,372 4,507 4,372
At 31 December 2013 the defined benefit fund in the Netherlands did not hold any investments in ING Groep N.V. At 31 December 2012 Debt securities included EUR 44 million (0.20% of total plan assets) of investments in ING Group.
45 TAXATION Balance sheet - Deferred tax Deferred taxes are recognised on all temporary differences under the liability method using tax rates applicable in the jurisdictions in which the Group is subject to taxation.
Pension and post-employment benefits –176 –230 197 8 276 75 Other provisions –19 –6 10 14 –1
Changes through net result for Unused tax losses carried forward and Loans and advances to customers in 2013 relates mainly to an intercompany transaction that resulted in taxable profit in 2013, but did not impact the consolidated result under IFRS.
In 2013, Changes in the composition of the group and other changes includes EUR 158 million as a result of the classification of ING U.S. as held for sale and EUR 551 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Total unused tax losses carried forward 3,725 8,807 Unused tax losses carried forward not recognised as a deferred tax asset –1,076 –3,304 Unused tax losses carried forward recognised as a deferred tax asset 2,649 5,503
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current year or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 501 million (2012: EUR 409 million).
In 2013, the deferred tax assets for banking operations, for which the utilisation is dependent of future taxable profits, as disclosed above, increased for Great Britain due to the expected profitability of the ING UK Branches which has led to the recognition of a deferred tax asset.
For the year 2013 the tax charge in the Netherlands increased with EUR 276 million to negative EUR 45 million caused by higher results in combination with less tax exempt income on divestments compared to 2012.
Result before tax from continuing operations 4,107 4,074 6,459 Weighted average statutory tax rate 29.7% 31.2% 27.2% Weighted average statutory tax amount 1,220 1,272 1,756
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– designated as at fair value through profit and loss 13,855 13,399 13,855 13,399
(1) Other assets do not include (deferred) tax assets, net defined benefit asset and property development and obtained from foreclosures. (2) Other liabilities do not include (deferred) tax liabilities, net defined benefit liability, insurance provisions, prepayments received under property under development, share-based payment plans, other provisions and other taxation and social security contributions.
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Financial assets at fair value through profit and loss and Investments Derivatives Derivatives contracts can either be exchange-traded or over the counter (OTC). The fair value of exchange-traded derivatives is determined using quoted market prices in an active market and those derivatives are classified in Level 1 of the fair value hierarchy. For those instruments not actively traded, fair values are estimated based on valuation techniques. OTC derivatives and derivatives trading in an inactive market are valued using valuation techniques because quoted market prices in an active market are not available for such instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instruments. The principal techniques used to value these instruments are based on discounted cash flows, Black-Scholes option models and Monte Carlo simulation. These valuation models calculate the present value of expected future cash flows, based on ‘no-arbitrage’ principles. These models are commonly used in the financial industry. Inputs to valuation models are determined from observable market data where possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via valuation model calibration procedures. The inputs used include prices available from exchanges, dealers, brokers or providers of pricing, yield curves, credit spreads, default rates, recovery rates, dividend rates, volatility of underlying interest rates, equity prices and foreign currency exchange rates. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus data, where available.
Financial liabilities Subordinated loans The fair value of the subordinated loans is estimated using discounted cash flows based on interest rates and credit spreads that apply to similar instruments.
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Non-trading derivatives 118 11,037 11,155 Financial liabilities designated as at fair value through profit and loss 1,912 11,600 343 13,855 Investment contracts (for contracts at fair value) 1,588 1,588
significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which the price at which an arm’s length transaction would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
Sale of assets –330 –15 –195 –1,021 –661 –2,222 Maturity/settlement –313 –2 –378 –1,096 –1,789
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Transfers out of Level 3 –63 –3,676 –8 –3,748 Exchange rate differences –3 –372 3 –371 Changes in the composition of the group and other changes –1,245 –5 –1,250
In 2013, Changes in the composition of the group and other changes includes EUR –1,250 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
In 2013, EUR 3.7 billion of Financial liabilities designated as at fair value through profit and loss were transferred from level 3 to level 2 due to refinements in the methodology used to classify these liabilities. It was observed that the valuation techniques used for calculating the fair values, for the majority of the portfolio, are not significantly impacted by unobservable inputs. These liabilities are reported in level 2. Furthermore, EUR 0.9 billion of Assets-Non trading derivatives were also transferred from level 3 to level 2 as the valuation is now not significantly impacted by unobservable inputs.
Financial liabilities Trading liabilities –110 –110 Non-trading derivatives 315 315 Financial liabilities designated as at fair value through profit and loss –137 –137 198 ING Group Annual Report 2013
Financial liabilities Trading liabilities 232 232 Non-trading derivatives –854 4 –850 Financial liabilities designated as at fair value through profit and loss 96 96 Investment contracts (for contracts at fair value)
Financial liabilities measured at fair value in the balance sheet as at 31 December 2013 of EUR 100 billion include an amount of EUR 1.4 billion (1.4%) is classified as Level 3 (31 December 2012: EUR 8.1 billion, being 6.6%). Changes in Level 3 from 31 December 2012 to 31 December 2013 are disclosed above in the table ‘Changes in Level 3 Liabilities’.
The remaining EUR 0.7 billion Level 3 financial assets includes EUR 0.7 billion of private equity investments that are recognised at fair value. Fair value is determined using both market-based and investment-specific inputs. In the absence of an active market, fair values are estimated on the basis of the analysis of the invested companies’ financial position, future prospects and other factors, considering valuations of similar positions and other market information. Given the bespoke nature of the analysis in respect of most significant positions, it is not practical to quote a range of key unobservable inputs or provide a sensitivity analysis on such unobservable inputs.
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The remaining EUR 0.9 billion of the fair value classified in Level 3 financial liabilities is established using valuation techniques that incorporates certain inputs that are unobservable.
The table below provides a summary of the valuation techniques, key unobservable inputs and the lower and upper range of such unobservable inputs, by type of level 3 asset/liability.
Valuation techniques and range of unobservable inputs (Level 3) - ING Bank 2013 Assets Liabilities Valuation techniques Significant unobservable inputs
Loans and advances 164 5 Price based Price (%) 1% 100% Net asset value Price (%) 32% 38% Present value techniques Credit spread (bps) 106 2,101 Loan pricing model Credit spread (bps) 696 696
Derivatives – Rates 303 387 Option pricing model Interest rate volatility (%) 11% 69%
– Credit 54 60 Present value techniques Credit spread (bps) 1 1,372 Implied correlation 0.4 1
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NON-FINANCIAL ASSETS AND LIABILITIES In addition to financial assets and liabilities, the following table presents the estimated fair values of ING Group’s non-financial assets and liabilities that are measured at fair value in the balance sheet. Reference is made to Note 1 ‘Accounting policies’ in the sections ‘Real estate investments’ and ‘Property in own use’ for the methods and assumptions used by ING Group to estimate the fair value of the non-financial assets.
Real estate investments 1,142 1,142 Property in own use 1,243 1,243
Real estate investments 1,142 1,142 Property in own use 1,243 1,243 203ING Group Annual Report 2013 1 W h o w e are 2 R
Amounts recognised in the profit and loss account during the year –5 –49 –54 Revaluation recognised in equity during the year –4 -4 Purchase of assets 200 39 240 Sale of assets –265 –34 –299 Maturity/settlement Reclassifications –61 –2 –63 Transfers into Level 3 Exchange rate differences –2 –27 –29 Changes in the composition of the group and other changes –13 –104 –117
Cyprus Government bonds 10 10 204 ING Group Annual Report 2013
For the year ended 31 December 2013, ING Group recognised EUR 865 million (2012: EUR –422 million) of fair value changes on derivatives designated under fair value hedge accounting in the profit and loss account. This amount was partly offset by EUR –960 million (2012: EUR 530 million) fair value changes recognised on hedged items. This resulted in EUR –95 million (2012: EUR 108 million) net accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2013, the fair values of outstanding derivatives designated under fair value hedge accounting was EUR –3,172 million (2012: EUR –6,111 million), presented in the balance sheet as EUR 1,383 million (2012: EUR 2,926 million) positive fair values under assets and EUR 4,555 million (2012: EUR 9,037 million) negative fair values under liabilities.
As at 31 December 2013, the fair value of outstanding non-derivatives designated under net investment hedge accounting was EUR 491 million (2012: EUR –1,133 million).
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Remaining assets (for which maturities are not applicable) (4) 5,242 5,242
Remaining assets (for which maturities are not applicable) (4) 5,945 5,945
49 LIABILITIES BY MATURITY The tables below include all financial liabilities by maturity based on contractual, undiscounted cash flows. Furthermore, the undiscounted future coupon interest on financial liabilities payable is included in a separate line and in the relevant maturity bucket. Derivative liabilities are included on a net basis if cash flows are settled net. For other derivative liabilities the contractual gross cash flow payable is included.
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The loan to the Dutch State in connection with the Illiquid Assets Back-Up Facility agreement as disclosed in Note 58 ‘Related parties’ is included in Loans and advances to customers (2013: EUR 2.7 billion; 2012: EUR 7.8 billion).
Transfer of financial assets that qualified for derecognition In 2013 ING transferred financial assets (mortgages loans) for an amount of approximately EUR 2 billion to a newly established special purpose entity (SPE). The transaction resulted in full derecognition of the financial assets from ING’s balance sheet. The derecognition did not have a significant impact on net result. Following this transfer ING continues to have two types of on-going involvement in the transferred assets: as counterparty to the SPE of a non-standard interest rate swap and as servicer of the transferred assets. ING has an option to unwind the transaction by redeeming all notes at their principal outstanding amount, in the unlikely event of changes in accounting and/or regulatory requirements that significantly impact the transaction. The fair value of the swap as at 31 December 2013 amounted to EUR 62 million; fair value changes on this swap recognised in the profit and loss account in 2013 were EUR 5 million. Fee income recognised in the profit and loss account in 2013 amounted to EUR 1 million.
Available-for-sale Reverse repurchase, securities borrowing and similar agreements Other 115 115 113 2
Other –26 26 –9,579 10,060 –481 213ING Group Annual Report 2013 1 W h o w e are 2 R
Guarantees relate both to credit and non-credit substitute guarantees. Credit substitute guarantees are guarantees given by ING Group in respect of credit granted to customers by a third party. Many of them are expected to expire without being drawn on and therefore do not necessarily represent future cash outflows. In addition to the items included in contingent liabilities, ING Group has issued guarantees as a participant in collective arrangements of national industry bodies and as a participant in government required collective guarantee schemes which apply in different countries.
Irrevocable letters of credit mainly secure payments to third parties for a customer’s foreign and domestic trade transactions in order to finance a shipment of goods. ING Group’s credit risk in these transactions is limited since these transactions are collateralised by the commodity shipped and are of a short duration.
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fixed duration and bear interest at a floating rate. ING Group’s credit risk and interest rate risk in these transactions is limited. The unused portion of irrevocable credit facilities is partly secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
Years after 2018 177 54 LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, broker-dealers, underwriters, issuers of securities, and investors and their position as employers and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Company’s management is of the opinion that some of the proceedings set out below may have or have in the recent past had a significant effect on the financial position, profitability or reputation of the Company.
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Apart from the aforementioned ‘collective action’, several other claim organisations and initiatives were established on behalf of policyholders, such as the organisation Wakkerpolis. This organisation primarily concentrates on the recovery of initial costs for policyholders, based on an interim ruling of the KiFiD issued on 13 May 2013 in an individual case. In this case, the KiFiD concluded that there is no contractual basis for charging initial costs (which are costs charged to the policy during a limited period of time). Apart from the initial costs, it can be derived from the interim ruling – in accordance with past rulings of the KiFiD – that an insurer is obliged to warn against the leverage and capital consumption effect (which is the effect caused by the dependency of life insurance premium on the value of the policy; the lower the value of the policy, the higher the life insurance premium). NN Group N.V. (‘NN’) and ING believe that this interim ruling is incorrect on several legal grounds.
In proceedings pending before the District Court in Rotterdam, the Court has upon the request of the parties, including NN, submitted prejudicial questions to the European Court of Justice to obtain clarity on principal legal questions with respect to cost transparency related to unit-linked policies. The main prejudicial question is whether European law allows for the application of information requirements based on general principles of Dutch law that extend beyond information requirements as explicitly prescribed by laws and regulations in force at the time the policy was written. Although the European Court does not decide on the applicable standards in specific cases, NN and ING believe the ruling of the Court of Justice can give clarification on this question of legal principle which is subject of other legal proceedings in the Netherlands. It is expected that the European Court of Justice will render its judgment at the earliest in 2014.
On 24 July 2012, ING announced that the Dutch State and ING were in dialogue with the European Commission on an amended and updated Restructuring Plan to be submitted to the European Commission. However, in order to safeguard its legal rights, ING filed an appeal with the General Court of the European Union against the European Commission’s decision of 11 May 2012, which re-approved ING’s Restructuring Plan that ING submitted in 2009.
In addition, like many other companies in the insurance industry, several of ING’s subsidiaries in the U.S. have received formal requests for information from various governmental and regulatory agencies regarding whether and to what extent they proactively ascertain whether customers have deceased, pay benefits even where no claim has been made, and comply with state laws pertaining to unclaimed or abandoned property. On 6 June 2013, ING U.S. executed a Global Resolution Agreement, which became effective 26 July 2013, establishing a process to resolve an audit of compliance with unclaimed property laws being conducted by a majority of the states. On 13 August 2013, ING U.S. executed a Regulatory Settlement Agreement (‘RSA’), which became effective on 14 September 2013, that settles with Departments of Insurance of forty seven states, two territories and the District of Columbia a multi-state market conduct examination regarding benefit payment practices, procedures and policy administration relating to claims, including efforts to identify owners and beneficiaries of unclaimed benefits.
Divestments announced in 2014 ING’s Taiwanese investment management business On 10 January 2014, ING announced that it has reached an agreement to sell ING Investment Management (IM) Taiwan, its Taiwanese asset management business, to Japan-based Nomura Asset Management in partnership with a group of investors. The transaction is not expected to have a significant impact on ING Group results. The transaction is subject to regulatory approval and expected to close in the second quarter of 2014.
Partial divestments effective in 2013 – ING U.S. In May 2013, ING U.S. was successfully listed on the NYSE reducing ING’s ownership interest from 100% to approximately 71.25%. In October 2013, the sale of a second tranche further reduced ING Group’s interest in ING U.S. to approximately 57%. Reference is made to Note 59 ‘Other events’.
Insurance in Hong Kong, Macau, Thailand In October 2012, ING reached an agreement to sell its life insurance, general insurance, pension and financial planning units in Hong Kong and Macau, and its life insurance operation in Thailand to Pacific Century Group for a combined consideration of EUR 1.6 billion (USD 2.1 billion) in cash. A net gain of EUR 945 million is recognised in 2013. The transaction closed on 28 February 2013.
Assets Cash and cash equivalents 290 103 171 564 Financial assets at fair value through profit and loss 763 4,292 5,055 Available-for-sale investments 3,503 9,874 13,377 Loans and advances to customers 6,437 163 1,523 8,123
(1) Cash outflow/inflow on group companies in the cash flow statement includes, in addition to the cash amounts in this table, also cash outflows/inflows on individually insignificant disposals.
Divestments effective in 2012 Insurance businesses in Malaysia In October 2012, ING reached an agreement with AIA Group Ltd. (AIA) on the sale of ING’s insurance operations in Malaysia, which include its life insurance business, its market-leading employee benefits business and its 60% stake in ING Public Takaful Ehsan Berhad. ING received a total cash consideration of EUR 1.3 billion. In December 2012, ING completed the sale with a net transaction gain of EUR 745 million after tax.
(2) Non-cash proceeds include the shares in Capital One Financial Corporation received. (3) The gain/loss on disposal comprises the sales proceeds, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves.
In October 2011, ING completed the sale of REIM’s Asian and European operations to US-based CBRE Group Inc., thereby completing the divestment of ING REIM. The divestment of ING REIM resulted in an after-tax gain on disposal of approximately EUR 245 million. As a result of the agreement at closing ING continues to have certain contingent income and expenses, however no significant impact on the result on divestment is expected. REIM’s Asian and European operations were previously included in the segment Commercial banking (ING Real Estate).
Clarion Partners In June 2011, ING completed the sale of the private market real estate investment manager of its US operations, Clarion Partners, to Clarion Partners management in partnership with Lightyear Capital LLC for USD 100 million. The sale resulted in a net gain on divestment of EUR 39 million. Clarion Partners was previously included in the segment Commercial banking (ING Real Estate).
% disposed 100% 100% 100% 100% 80% Various (2) Net assets disposed 16 28 61 361 37 1,478 1,981
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Companies treated as part of the insurance operations Proportion of ownership interest held by the Group
As not substantially all risks and rewards of the assets are transferred to the third party investors of the SPEs, ING Group continues to recognise these assets in the consolidated financial statements. Reference is made to Note 6 ‘Loans and advances to customers’.
In 2012, two synthetic securitisation were unwound and in 2013 one synthetic securitisation is unwound. There was no impact on the balance sheets and profit and loss accounts were not impacted by these unwinding. As at 31 December 2013, there is only one such transaction remaining.
For the majority of these funds, ING also acts as the fund manager. ING Group considers both ING Group’s financial interests for own risk and its role as investment manager to establish whether control exists and whether the fund is consolidated. In general, ING Group maintains a minority interest in these funds and ING receives a fixed fee over assets under management, at arm’s length basis, for its asset management activities. These funds are therefore generally not included in the consolidated financial statements of ING Group.
7) Investments – Third party managed structured entities As part of its investment activities, ING Group invests both in debt and equity instruments of various structured entities originated by third parties.
Most of the debt investments relate to asset backed securities. Reference is made to Note 5 ‘Investments’ in which Available for sale investments – Debt securities – ABS portfolio is disclosed.
8) Other structured entities In the normal course of business, ING Group enters into transactions with structured entities as counterparty. Predominantly in its structured finance operations, ING can be instrumental in facilitating the creation of these structured entity counterparties. These entities are generally not included in the consolidated financial statements of ING Group, as ING facilitates these transactions as administrative agent by providing structuring, accounting, funding, lending and operations services.
The governance of the insurance operations has changed during the reporting period and in early 2014. In 2013, all members of the Management Board of ING Insurance Eurasia N.V. have become members of the Management Board of ING Verzekeringen N.V. From the 1 March 2014 onwards, due to the legal merger between ING Verzekeringen N.V. and ING Topholding N.V. and the subsequent change of the name of the entity to NN Group, all members of the Management Board of ING Verzekeringen N.V. have become members of the Management Board of NN Group.
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Fixed compensation – Base salary 3,309 3,195 3,351 2,569 12,424 – Pension costs 549 938 745 409 2,641 – Retirement benefits – Termination benefits 765 765 Variable compensation – Upfront cash 473 395 3,469 4,337 – Upfront shares 473 395 868 – Deferred cash 710 593 1,303 – Deferred shares 710 593 9,198 10,501 – Other 517 517 Total compensation 3,858 6,499 6,837 16,162 33,356 One-time incentive award (5) 8,368 8,368 Total compensation including one-time incentive award 3,858 6,499 6,837 24,530 41,724
In 2013 and 2012, the Dutch Government imposed an additional tax charge of 16% on the income in excess of EUR 150,000 of each employee who is subject to Dutch income tax. The tax is charged to the company and does not affect the remuneration of involved staff. The tax imposed on ING for relevant members of the Executive Board and Management Boards amounts to EUR 2.2 million (2012: EUR 1.4 million), which is not included in the figures in the table above.
The table above shows the fixed remuneration, expense allowances and attendance fees for the Supervisory Board for 2013 and 2012. From 1 January 2013, new VAT legislation became effective based on which Dutch members of the Supervisory Board are considered as self-employed persons who’s compensation is subject to VAT in the Netherlands. The table presented above is including VAT of EUR 0.1 million for 2013.
Executive Board members 3,347 2,338 2.7% 3.3% 500 Management Board members of ING Bank, NN Group and ING U.S. 800 860 4.0% 3.7% 60 60 Supervisory Board members 282
Remuneration of the Executive Board, Management Board Bank and Management Board NN Group is recognised in the profit and loss account in Staff expenses as part of Total expenses. Remuneration in respect of ING U.S. is reflected in Net result from discontinued operations and does not impact the Total expenses. The total remuneration of the Executive Board, Management Board Bank and Management Board NN Group as disclosed in the table above (for 2013: EUR 17.2 million) includes all variable remuneration related the performance year 2013. Under IFRS, certain components of variable remuneration are not recognised in the profit and loss account directly, but are allocated over the vesting period of the award. The comparable amount recognised in Staff expenses in 2013, and therefore included in Total expenses in 2013, relating to the fixed expenses of 2013 and the vesting of variable remuneration of earlier performance years, is EUR 14.4 million.
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In connection with the sale of ING Direct USA as disclosed in Note 55 ‘Companies acquired and companies disposed’, ING has reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF). This adjustment served to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State and became effective at the closing of the sale in February 2012. Under the terms of the original transaction ING Direct USA held on its balance the remaining 20% of the Alt-A portfolio, ensuring an alignment of interests between ING and the Dutch state regarding the performance of the portfolio.
In 2013, ING reached a final agreement with the Dutch State on the unwinding of the IABF. The terms of the agreement were approved by the EC. Under the agreement, the IABF in its current form was terminated, the regular guarantee fee payments were settled for an amount of EUR 0.4 billion and the other restrictions as part of the IABF agreement are no longer applicable. Furthermore, under the agreement, the Dutch State committed to sell the Alt-A securities in the market.
The State used all repayments and net fees received to pay off the loan from ING, reducing the amount outstanding to EUR 2.7 billion at 31 December 2013 (2012: EUR 7.8 billion). This remaining amount was fully repaid in January 2014. Unwinding the IABF also resulted in eliminating a counter-guarantee that ING extended to the Dutch state in connection with the divestment of ING Direct USA in 2012.
ING Groep N.V. also has the right to convert all or some of the non-voting equity securities into ordinary shares on the basis of one non-voting equity security for 1.335 ordinary shares or bearer depositary receipts from three years after the issue date onwards, subject to certain conditions. This equates to an exchange price of EUR 7.49. The Dutch State in that case has the right to demand a redemption 230 ING Group Annual Report 2013
payment of EUR 10 per non-voting equity security, together with the pro-rata coupon, if due, accrued to such date. Both repayment and conversion of the securities must be approved by the Dutch Central Bank.
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Amendments to the Restructuring Plan in 2013 In November 2013 ING announced further amendments to the Restructuring Plan. ING announced that it will expand the scope of the base case Initial Public Offering (IPO) of NN Group to include ING Life Japan. In that context, ING and the Dutch State have reached an agreement with the European Commission (EC) on revised timelines for the divestment process of ING Life Japan and ING’s European insurance and investment management activities.
In addition, in connection with the initial public offering, of ING U.S., Inc., ING Groep N.V. entered into several other agreements with ING.U.S., Inc. such as a transitional intellectual property license agreement, a joinder agreement and an equity administration agreement.
As a result, the total impact on ING Group’s Total equity was EUR 1,060 million.
Minority interests increased with EUR 1,394 million due to these transactions. This amount represents 14.5% of the net asset value under IFRS-EU of ING U.S.
ING Japan After carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that a standalone divestment of ING Life Japan, including its Corporate Owned Life Insurance (COLI) and Closed Block VA businesses, is not feasible in a manner that would appropriately meet the demands of regulators and other interest holders in ING Group and ING Life Japan. Therefore, ING Life Japan will be included with ING’s European insurance and investment management businesses in the base case IPO of NN Group in 2014.
held for sale and presented in the usual consolidated balance sheet line items. The individual income and expenses of ING Japan will be classified out of Net result from discontinued operations and presented in the usual consolidated profit and loss account line items.
60 SUBSEQUENT EVENTS Defined Benefits Pension Fund in The Netherlands In February 2014 ING reached final agreement with the trade unions, the ING Pension Fund, the Central Works Council and the Association of Retired ING Employees (VSI) to transfer all future funding and indexation obligations under ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement makes the ING Pension Fund financially independent from ING.
The key elements of the agreement are: • Responsibility for future indexation and funding thereof is transferred to the Dutch ING Pension Fund; • ING’s obligation to restore the coverage ratio of the Dutch ING Pension Fund ceased; • The cross guarantees between ING Bank and NN Group to jointly and severally fund the obligations of the Dutch ING Pension Fund are terminated; • ING pays EUR 549 million (before tax) to the Dutch ING Pension Fund for the removal of these obligations; and • ING will reduce the employees’ own contribution to the pension premium under the new defined contribution plan by approximately
As at the end of the fourth quarter of 2013, the difference between the current book value and the estimated fair value of the GMDB reserves was EUR 219 million (before tax). Implementation of fair value accounting for GMDB represents a change in accounting policy under IFRS with a transitional impact of EUR 165 million after tax being reflected only in shareholders’ equity as of 1 January 2014. Results for comparative periods will be restated accordingly.
As a result of the decision to manage ING Bank and NN Group separately, ING has implemented two distinct risk appetite frameworks for both Bank and Insurance. The common concept however is that risk appetite is expressed as the tolerance to allow key capital and liquidity ratios to deviate from their target levels under adverse scenarios. These frameworks are discussed in more detail in the specific chapters of this risk management section.
MISSION The mission of ING Group’s risk management function is to support ING Group’s mission to set the standard in helping customers manage their financial future, by safeguarding ING’s current and future financial strengths. The following principles support this mission: • The risk management function is embedded in all levels of ING Group’s organisation and is part of the daily business activities and strategic planning to have a sustainable competitive advantage; • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines are monitored; • Delegated authorities are consistent with the overall Group strategy and risk appetite; • Transparent communication to internal and external stakeholders on risk management.
RISK DEVELOPMENTS IN 2013 Risk developments listed below are defined as the risks which may have a significant impact on our business and it is difficult to quantify this potential impact on the organisation. They are triggered in general by unexpected events and may introduce volatility in earnings or impact ING’s long-term strategy. The sequence in which the top risks are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.
Monitoring exposures and Eurozone developments The problems in the Eurozone have been a top priority for risk management throughout 2013, and will continue to be a top priority in 2014. ING closely monitors the exposures in debt securities, lending and credit derivatives, and regularly assesses whether the positions continue to be in line with its risk appetite. This assessment is supported by internal stress tests.
The table below provides information on ING’s risk exposure with regard to Greece, Italy, Ireland, Portugal, Spain and Cyprus. Unless otherwise indicated, the amounts represent risk exposure values and exposures are included based on the country of residence of the direct Obligor to which ING has primary recourse of repayment of the obligations, except most residential mortgage backed securities (RMBS), which exposures are based on country of risk.
(3) At the end of 2013 ING Bank holds CDS protection (notional value) on the Spanish government. (4) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate
Greece, Italy, Ireland, Portugal,Spain and Cyprus - Total risk exposures (1)
(1) The exposures reported are credit, market and real estate exposures based on source systems and measurement criteria that can differ from those of similar exposures reported in Note 5 ‘Investments’ of the annual accounts.
Total exposure to the GIIPSC countries was reduced by EUR 5,235 million in 2013. ING reduced its exposure in debt securities, with covered bonds going down by EUR 2,630 million and ABS exposure decreasing by EUR 1,087 million, and corporate lending with a decrease of EUR 1,576 million.
Impact ING Group The impact of the low interest rate environment for Bank and Insurance goes further than earnings and reserves, that are described in the sections above. Low interest rates result in addition to provisions for guarantees that are included in life insurance and variable annuity contracts, as the guarantees become more valuable to policy holders. Thereby the solvency position of the Insurance businesses is negatively impacted, which can also impact the proceeds of the Insurance divestment. The proceeds of the Insurance divestments are to be used to pay back the double-leverage. In case the Insurance proceeds are not sufficient to do so, ING Bank may need to upstream extra dividend to ING Group. Note however, that when future Bank earnings and future capital position are negatively impacted such capital up-streams are difficult to establish. This can be further hampered by the on-going increasing capital requirements for banks in general. In November 2013 ING repaid EUR 1.125 billion to the Dutch State. This was the second tranche of a series of four tranches thare are part of the amended EC Restructuring Plan which was announced on 19 November 2012
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Governance 293 Economic capital 294 Market risk in banking books 295 Market risk in trading books 301 Fair values of financial trading assets & liabilities 301 Capital at Risk 409
Bank’s market risks that occur in its Commercial Banking and Retail Banking activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank; and
Risk policies, procedures and standards ING Bank has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to define minimum requirements that are binding to all business units. The governance framework of the business units aligns with the Bank’s level framework and meets local (regulatory) requirements. Senior management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and emerging best practices.
The performance management process within ING is linked to remuneration to prevent rewarding for failure and to address the long term sustainability within the risk appetite framework. To establish relevant performance objectives, the ING financial and strategy plan is determined annually and translated into relevant business objectives. The business objectives of the Executive Board are cascaded to the rest of the Identified Staff and subsequent layers in the organisation. This process ensures the alignment of individual performance objectives with the short-term and long-term strategy of ING and involves input from control functions to ensure appropriate risk adjustment of the performance objectives on each level. In light of the Capital Requirements Directive (CRD) III compensation packages related to control functions, such as risk management, are structured such that they provide for a reduced emphasis on variable remuneration in order to mitigate risk relating to remuneration.
Step 2. Setting ING Bank risk appetite statements Based on ING Bank’s risk ambition, specific targets are set for both financial and non-financial risks: Financial risks For financial risks, ING Bank expresses its risk appetite as the tolerance to allow key ratios to deviate from their target levels. Therefore the high level risk ambition is translated into quantitative targets on ING Bank level for solvency risk, liquidity & funding risk and for concentration and event risk.
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The concentration and event risk appetite set at ING Bank level are directly translated into corresponding limits in the underlying credit, market and liquidity & funding risk appetite statements.
Key Control testing scorecards form one of the inputs of the Non-Financial Risk Dashboard (NFRD) which is a report that is discussed each quarter in the MBB and the Risk Committee. NFRD provides management at all organisational levels with information on their key operational, compliance and legal risks. NFRD is based on their risk tolerance within their business and a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
Stress testing Stress testing is an important risk management tool which supports the MBB with respect to strategic and capital planning. The purpose of stress testing is to investigate whether or not ING Bank will be able to meet its solvency and liquidity requirements in severe but plausible stress scenarios. Stress tests provide insight into vulnerabilities of certain portfolios, given certain assumptions related to the economy, financial markets and the political climate. Stress testing is also used to assess if the risk profile of ING Bank is in line with risk appetite.
Step 3. Data processing & proposal mitigating actions When the scenario parameters have been finalised, the impact of the scenario on the solvency and liquidity position is determined. Based on the scenario values for the relevant macro-economic and market variables, the impact on amongst others P&L, revaluation reserves, RWA and liquidity buffers is calculated. These outcomes are subsequently used to calculate the evolution of relevant solvency and liquidity ratios, such as the Core Tier 1 ratio, the leverage ratio and the CRD II liquidity buffer.
Core Tier 1 ratio Leverage ratio CRD II liquidity buffer Etc.
The EC for ING Bank involves the aggregation of the underlying EC of five risk types, namely credit, transfer, market, operational and business risks. Model disclosures are given in the respective risk sections. These risk types are aggregated to provide a total diversified ING Bank EC by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
Reporting framework For each business unit and product line, the gross EC for each risk type is delivered. The net EC figures are calculated by taking the product of the gross EC and one minus the diversification factor. Total EC is calculated as the sum of the net EC for each risk type at all reporting levels.
• For market risk in all underlying risk areas, the reported EC numbers decreased mainly due to reduced outright risk exposures. This especially applies for the largest contributors: interest rate risk in the banking books and equity investments.
• For operational risk, ING Bank obtained accreditation for the use of its enhanced Advanced Measurement Approach (AMA) in April 2013 and applied the model for regulatory reporting of capital requirements. The implementation of the upgraded model, which better reflects the risk profile of the business units, led to a slight decrease in reported RC.
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The above risk metrics and risk appetite framework do not cover liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities, at reasonable cost and in a timely manner, when they come due. ING Bank has a separate liquidity management framework in place to manage this risk, which is described in the liquidity risk section of ING Bank.
• Higher loss absorbency capacity and special resolution regimes for ‘systemically important banks’ (SIBs). ING Bank has been designated as a global SIB (G-SIB) by FSB and a domestic SIB (D-SIB) by DNB. In accordance with FSB requirements, ING Bank is required to disclose its ‘Indicators of global systemic importance’, which will be done in the course of 2014 via a separate document on ing.com.
Next to the implementation of these new requirements, ING Bank is preparing for the upcoming Banking Union whereby as part of the Single Supervisory Mechanism (SSM) prudential regulatory powers will be transferred from Eurozone national authorities to the European Central Bank (ECB). As a result, approximately 130 of the Eurozone’s largest banks will be directly supervised by the ECB from November 2014. In the opinion of ING the SSM constitutes an important first step in creating a European banking union. It will help to reduce the current inter-dependency between national governments and national banking systems, and at the same time will help restoring confidence and growth in the Eurozone and the wider European single market.
• The ECB Asset Quality Review (AQR) will consist of a wide ranging and thorough review of specific parts of the balance sheet, ensuring that credit exposures are sufficiently provisioned, collateral is appropriately valued and complex instruments and high-risk assets are sufficiently valued
• Stress test, building on the AQR by providing a forward-looking view of banks’ shock-absorption capacity under stress. The EBA and the ECB will closely cooperate for defining the methodological as well as the procedural aspects of this EU-wide stress test.
In 2013, the Basel Committee published new requirements for effective risk data aggregation and risk reporting. The requirements aim to strengthen risk data aggregation and risk reporting practices at banks to improve their risk management practices. Banks indicated as global SIB – including ING Bank - are required to implement the Principles by 2016. As a first step of the implementation, ING performed a ‘stocktaking’ self-assessment survey in 2013 that displays that ING Bank is on track of fulfilling these requirements. These new principles coincide with several projects and programs to strengthen risk data aggregation and risk reporting practices that were already underway before these new requirements were published.
RISK DEVELOPMENTS IN 2013 Risk developments listed below are defined as the risks which may have potentially a significant impact on our business and difficult to quantify the impact on the organisation. They are triggered in general by unexpected events, and they may introduce volatility in earnings or impact ING’s long-term strategy. The sequence in which the top risks are presented below is not indicative of their likelihood of occurrence or the potential magnitude of their financial consequences.
showed increased non-performing loan amounts, which was mainly driven by the sectors transportation logistics and media. The non-performing loan amounts in Belgium and Luxembourg decreased slightly over 2013.
Provisions and Pillar I capital levels for ING for the portfolios in scope are in line with the results of the Asset Quality Review CRE. In 2014, the ECB will also conduct an AQR for the total bank and the CRE portfolio will be included again.
ING Bank is continuously working on strengthening its global cybercrime resilience including strengthened collaboration against cybercrime with the financial industry, law enforcement authorities, government (e.g. National Cyber Security Center) and Internet Service Providers (ISPs).
Governance CRM within ING Bank belongs to the second line of defence (the front office being the first, internal audit the third) and aligns the credit risk taking with the strategic planning of ING Bank. It is responsible for reviewing and managing credit risk including environmental and social risk for all types of counterparties. CRM consists of line credit risk managers who are responsible for their business lines and manage specific portfolios and experts who support both the line credit risk manager as well as the business with tools like credit risk systems, policies, models and reporting. To ensure the independence of the risk function the CRM General Manager is functionally responsible for the global network of credit risk staff and the heads of the credit risk management functions for the business lines.
ING Bank’s credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of the top-down risk appetite framework, which sets concentration limits for countries, individual counterparties and counterparty groups and investment activities. The aim is to expand relationship-banking activities, while maintaining stringent internal risk/reward guidelines and controls. To ensure a proper risk reward balance in our portfolios, the risk appetite framework is linked to the MTP budget process.
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Global Credit Restructuring Global Credit Restructuring is the dedicated and independent corporate department within CRM that deals with non-performing loans and loans that hold a reasonable probability that ING will end up with a loss, if no specific action is taken. Clients can be transferred to GCR from both Retail and Commercial Banking but are usually the larger customers and often it concerns clients from Commercial Banking. A more detailed description regarding the Regional Restructuring Units, GCR and its specific characteristics are shown in the credit quality chapter at the end of this section.
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Credit risk appetite and concentration risk framework The credit risk appetite and concentration risk framework enables ING to prevent undesired high levels of credit risk and credit concentrations within various levels of the ING portfolio.
Credit risk appetite Credit risk appetite is the maximum level of credit risk ING Bank is willing to accept for growth and value creation. This credit risk appetite is linked to the overall Bank-wide risk appetite framework. Articulating the credit risk appetite is a complex task that requires balanced views. It can be expressed in quantitative and qualitative measures. Having a credit risk appetite achieves: • Clarity over the credit risks that ING Bank can strategically assume; focused execution in balancing ING Bank’s credit risk exposures within the boundaries of ING’s strategy, target setting and prudent risk management; • Consistent communication to different stakeholders; • Guidelines how to align reporting and monitoring tools with the organisational structure and strategy; • Alignment of business strategies and key performance indicators of business units with the overall ING Bank credit risk appetite by means of the MTP.
Reference benchmarks A reference benchmark defines the appetite for credit risk per obligor or related group of obligor’s counterparty group. It is expressed as an EAD Exposure at the concentration risk level, which corresponds to a (maximum) internal capital consumption for credit risk. It is used as a reference amount tool in the credit approval process and can be waived on the basis of proper arguments but requires consent from a higher approval authority.
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Economic capital reflects ING Bank’s own view on credit risk, which allows it to be used in decision making processes at transaction level, counterparty level and (sub) portfolio levels. Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. EC is the minimum amount of capital required to cover for unexpected losses within a 99.95% confidence level and a 12 months’ time horizon. It is used throughout ING Bank in the decision making process (mainly commercial banking), in risk adjusted counterparty and portfolio profitability measurement tools (commercial banking and retail), in investment and divestment decisions, in the country risk framework and in concentration risk management such as risk appetite statements (RAS) and the systemic risk reports (sector concentration report).
In the Solvency Report Other non-credit obligation assets (ONCOA) is included.
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