Added to this, for both banking and insurance there is ongoing uncertainty about the exact nature and timing of the implementation of many of the new regulatory measures, which are putting considerable pressure on costs. This is an area of concern, because if the financial sector is to facilitate sustainable economic growth, one needs to be careful about the timing and extent of the measures.
We are maintaining an active dialogue with our stakeholders to explain our strategy, and to find out what they think and feel about ING. Personally, I have spoken to large numbers of customers this year at home and abroad on company visits, as well as at special customer seminars organised by ING. By actively engaging with customers, we can find out what really matters to them and get a better idea of what we can do to improve our services.
These steps were necessary in order to remain competitive and to be able to face the challenging external environment. The economic and financial market conditions in which we operated in 2012 were difficult, especially in the eurozone, a key geographical area for our company. Financial markets were influenced by the European sovereign debt crisis, with an interbank market that had virtually stopped functioning. Unemployment grew and consumer confidence in Europe declined.
Specifically in the Netherlands, current levels of debt are still too high, which is hampering economic growth. The need for companies and households to deleverage further is bound to have negative effects on business banking in the Netherlands. For Europe as a whole, the demand for lending remained weak in 2012. The 2013 4 ING Group Annual Report 2012
Until that date, I remain fully dedicated to leading ING as it shapes its future. There are still many tasks ahead as we work towards completing our restructuring programme.
ING Bank intends to be a strong, predominantly European bank, with leading domestic full-service banking positions in attractive, stable home markets, as well as a leading commercial bank in the Benelux with a strong position in Central and Eastern Europe.
ING’s mission is to set the standard in helping our customers manage their financial future. We aim to deliver financial products and services in the way our customers want them delivered: with exemplary service, convenience and at competitive prices.
So far ING has repaid EUR 10.2 billion, which consists of a principal amount of EUR 7.8 billion and EUR 2.4 billion of premiums and interest.
Retail Banking provides retail and direct banking services to individuals and small and medium-sized enterprises throughout Europe and Asia, with a base in our Northern European home markets. Our ambition is to transform ING Direct into a full-service bank.
Staff expenses and operating expenses Banking operations 9,632 9,889 9,649 9,665 10,122
Core Tier 1 securities (in EUR million) 2,250 3,000 5,000 5,000 10,000
Insurance IGD Solvency I ratio 245% 225% 230% Underlying return on equity based on IFRS-EU equity 5.2% 6.5% 6.3% Employees (FTEs, year-end, excluding FTEs in discontinued operations) (2) 84,718 87,866 88,203 Market capitalisation (in EUR billion) 27 21 28
(2) Comparatives are excluding FTEs in entities divested in the years thereafter.
Insurance operations 456 –230 –1,252 Underlying net result 2,603 2,746 –5.2% 2,584 Divestments, discontinued operations and special items 1,291 3,020 226 8 ING Group Annual Report 2012
Better community Donations to UNICEF (in EUR million) (5) 2.8 3.5 3.8
(1) We aim to offer our financial products and services to all segments of society, including young people, the physically challenged and the economically disadvantaged. Our branches therefore have barrier free access, ATMs are adapted for the visibly challenged and we develop products such as savings accounts for children and insurance products for cancer patients.
(4) Annually, we survey the level of employee engagement. We define employee engagement as the extent to which our employees are committed to contributing to our business performance and are willing to walk the extra mile to achieve ING’s success. Given the operational split of ING Bank and ING Insurance, employee engagement surveys have been held at both companies.
* You can find more information on the members of the Executive Board on pages 66–67 and on the members of the Supervisory Board on pages 70–71.
Remuneration Committee Peter Elverding, chairman Piet Klaver Jeroen van der Veer Lodewijk de Waal
SHAREHOLDERS AND DEPOSITARY-RECEIPT HOLDERS WITH STAKES OF 5% OR MORE To the best of our knowledge, as at 31 December 2012, there were no shareholders or holders of depositary receipts for shares who reported to hold an interest of 5% or more as mentioned in the Dutch Financial Supervision Act, other than Stichting ING Aandelen (ING Trust Office) and Stichting Continuïteit ING (ING Continuity Foundation).
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,831.6 3,831.6 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 30.1 49.3 (Depositary receipts for) ordinary shares outstanding in the market 3,801.5 3,782.3
INvESTOR RELATIONS To be kept informed of press releases and other ING news, you can subscribe to the email service through our Investor Relations section at www.ing.com. You can also download the ING Investors and Media app on www.ing.com, which gives you access to the latest financial information and press releases both online and offline.
Both in the eurozone and the US, credit spreads followed a similar pattern during the year. In the first quarter, they decreased as market sentiment improved, which was fuelled by the ECB’s Long Term Refinancing Operation (of which ING made no use). However, market sentiment deteriorated again at the end of the second quarter due to concerns about a possible break-up of the eurozone. From the third quarter onwards credit market sentiment improved (and therefore credit spreads were down) again, mainly because of the ECB expressing its commitment to the euro. The ECB president’s promise of unlimited, if conditional, sovereign bond buying – the so called Outright Monetary Transactions – in August and September 2012 eased immediate stress. Since then, there has been an uneasy market balance, despite no actual ECB intervention. During 2012, equity indices followed a pattern that mirrored credit spreads, with an overall improvement over the whole year.
EUROPE FALLS BEHIND, SIGNS OF REVIVAL IN US ECONOMY Austerity measures started to weigh heavily on the eurozone economy in 2012. As unemployment increased, consumer spending remained weak and companies postponed investment decisions. Economic growth in the eurozone turned negative in the second quarter and remained negative for the rest of 2012. European financial markets remained under stress in the first half of the year.
The prolonged low growth period in the advanced economies had a negative impact on consumption, capital investment expenditures and job creation in the emerging countries. Governments in China, India, Brazil, Turkey and other emerging markets shifted their focus to reducing government deficits. Risk aversion by foreign investors around the world reduced non-debt capital flows to emerging markets, forcing them to increase domestic savings to finance new capital investments. China suffered a growth slowdown in 2012, but the economy showed signs of picking up again towards the end of the year.
ING GROUP FINANCIAL DEVELOPMENTS The operating environment was challenging throughout 2012, with volatile financial markets and an uncertain macroeconomic environment. Against this backdrop, ING Group’s 2012 net result declined to EUR 3,894 million, from EUR 5,766 million a year earlier. Special items after tax were EUR –1,060 million in 2012, compared with EUR 60 million in 2011. The 2012 special items predominantly reflect costs for various restructuring programmes, which are essential to reduce our future annual expenses. Furthermore, special items include EUR 169 million in separation and IPO preparation costs, EUR 386 million in settlement costs with the US authorities, partly offset by the favourable impact of a EUR 305 million provision release following the announcement on 3 July 2012 of the new Dutch employee pension scheme. The 2011 special items include a EUR 718 million net gain from the liability management transaction offset by costs for various restructuring programmes and separation costs.
The result from discontinued operations was EUR 550 million in 2012 versus EUR 678 million in 2011 and relates to Insurance Asia/ Pacific and Insurance Latin America. The decrease was due to the sale of Latin American pension, life insurance and investment management operations in 2011.
EU CRISIS MANAGEMENT FRAMEwORK The draft Crisis Management Framework Directive was published in June 2012, and is still under discussion at the European Parliament and the European Council. The most important elements are: recovery and resolution planning, bail-in requirements and the financing of resolution arrangements. Bail-in requirements are planned to enter into force by 2018, the other parts in 2014.
GLOBAL SYSTEMICALLY IMPORTANT INSURERS (G-SIIs) In 2012, discussions on the methodology to identify Global Systemically Important Insurers, or ‘G-SIIs’ in the terminology of the International Association of Insurance Supervisors (IAIS), continued. In those discussions, insurers have stressed that non-traditional, non-insurance activities should lie at the heart of G-SII identification. Regulators appear to prefer a much broader assessment also taking into account size and interconnectedness. A list of G-SIIs identified with this methodology is expected in the second quarter of 2013. In the meantime, the IAIS developed a policy on dealing with G-SIIs that was published for consultation. More discussions on this policy are expected in 2013.
15ING Group Annual Report 2012 1 W h o w e are 2 R
The target level of the fund will be 1% of total guaranteed deposits in the Netherlands. This is about EUR 4 billion now, to be built up, in principle, in 15 years. The main element of the proposal is that for each bank the individual target amount is defined as 1% of its guaranteed deposit base. To reach this individual target amount, every bank pays a base premium of 0.0167% per quarter of its guaranteed deposits. Additionally, a risk add-on of 0%, 25%, 50% or 100% of the base premium has to be paid by every bank, depending on its risk weighting. We expect the cost for ING to amount to EUR 100 to 150 million on a yearly basis as of the start date of the DGS contribution. The banking industry is in discussions with the Ministry of Finance on several aspects of the DGS, including banks’ individual contributions and the fund’s target size.
The Banking Code Monitoring Committee A committee to monitor banks’ compliance with the Dutch Banking Code was set up in 2010 and in December 2012 it presented its report. It concluded that Dutch banks had made good progress on implementing the Code, but that more could be done and that banks should put more effort into communicating their efforts to the general public.
> Continued focus on customer centricity and sustainability > Solid financial results, continued active de-risking and a further strengthening of the capital and liquidity position > Good progress on restructuring amid a challenging environment > Agreement reached with the EC on amended Restructuring Plan > Further progress towards State repayment and double leverage reduction > Portfolio streamlined and businesses strengthened
STRENGTHENING THE FINANCIAL POSITION ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the real economy. Despite persistent market volatility and uncertain economic recovery in the eurozone and elsewhere, which caused ING Group’s net result to decline to EUR 3,894 million, we gained in financial strength in 2012. We said that capital, funding and liquidity would come before profit in 2012 and we delivered in full on that promise. Capital and funding improved, our liquidity position remained strong, earnings remained resilient, and net exposure to riskier asset classes and activities declined.
operations in 2011. • The sale of ING Direct USA, completed in February 2012. • The first three sales of the Asian Insurance/IM units, announced in October 2012. Two additional sales were announced in November and December 2012.
be 12.5%, well above the minimum 10% demanded by the EC. ING Group and the Dutch State are also still linked via the Illiquid Assets Back-up Facility (IABF), as described in the Strategy chapter of ING Group Annual Report 2011. This situation remained unaltered in 2012. At year-end the mortgages portfolio held by the Dutch State was close to break-even or even exceeded that point.
On 9 October 2012, ING announced that it had reached an agreement to sell ING Direct UK to Barclays. This transaction was closed in the first quarter of 2013. The combined loss for the transfer of the business and the investment portfolio to Barclays of EUR 0.3 billion will be offset by an expected total capital release of EUR 0.3 billion due to risk-weighted asset release. The total transaction will therefore be capital neutral to ING Bank’s core Tier 1 ratio.
The remaining ING Direct units in Australia, Austria, France, Germany, Italy and Spain were not affected by the divestments. ING continues to invest to evolve the ING Direct business model, increasing the product offering and extending distribution, while integrating the balance sheet with the rest of ING Bank.
In 2012, several factors continued to put pressure on margins and limit the Bank’s ability to grow. These factors included regulation more than 50% of the Insurance/IM Europe operations has been sold, whichever date comes first. Furthermore, ING has agreed to a maximum ratio for mortgage production at Retail Banking Netherlands in relation to mortgage production of NationaleNederlanden Bank until year-end 2015.
Among the short-term and medium-term focus areas for ING Bank are strengthening the capital and liquidity position, optimising the balance sheet (including in each country), adjusting the governance structure of individual business units and countries (including the appointment of CEOs for each country), and creating a consolidated Bank Treasury function for the entire Bank which helps it better coordinate its programme of funding, liquidity and investment portfolio.
Since customer centricity remains crucial to all we do, we are converging our retail banking business models in terms of product offerings and distribution channels. We believe that operational excellence is crucial for meeting the demands of our customers, especially when regulatory costs and bank taxes increase costs. In order to remain competitive and to be able to face the challenging external environment, it has been necessary to cut costs. However, at the same time we focus on achieving true operational excellence, helping our customers obtain simple products through convenient and safe multi-channel access while at the same time streamlining our organisation and systems. These initiatives will offset some of the increasing regulatory costs and bank taxes, helping ING Bank to lower its current cost/income ratio of 62.5% in 2012 to 50-53% by 2015. Once the restructuring of the Group is complete and the
INSURANCE/INVESTMENT MANAGEMENT ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service as it continues to restructure in preparation for a stand-alone future.
Our commitment to sustainable development is also clearly reflected in our sustainability key performance indicators (KPIs). In 2012, we began the process of sharpening our goals and KPIs to enhance our accountability. Our refined sustainability KPIs reflect our ambition to provide suitable products and services that enhance the financial capabilities of our customers and that help provide solutions to problems that stem from long-term social trends in such areas as climate change, education and health. They indicate that ING is committed to playing its part to stimulate economic development, a sustainable environment and a stable society.
The voices and views of our stakeholders are an essential compass in identifying the risks and opportunities for our business. We therefore seek feedback from stakeholders on various issues and try to engage them in a constructive dialogue. Such engagements range from conducting large studies among our customers about our brand values, and the co-creation of new products together with customers, to meeting employee representatives, shareholders or civil society organisations. We are also member or partner of a wide range of international organisations, which helps prioritise issues and take action where necessary.
Active capital management is an important factor in achieving ING’s strategic and financial objectives. At a time of turbulence in the financial markets and in depressed economic conditions, capital adequacy at all levels within the organisation, and generating value for our shareholders, are top priorities. Maintaining sufficient financial flexibility is especially needed, given the rapidly changing regulatory landscape and the restructuring measures that have been approved by the European Commission.
ING BANK – ING Direct USA 6.3 6.9 – Capital One (ING’s stake in)* 2.0 2.4 – ING Direct Canada 1.4 2.4
* Capital One shares received as part of ING Direct USA proceeds.
cAPITAL MANAGEMENT AT THREE LEVELS ING Group continues to manage capital on a consolidated basis at three levels – ING Group, ING Insurance and ING Bank – due to the fact that ING has set strategic objectives at each of those levels. Within ING Bank and ING Insurance 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 same time the fungibility of capital is being preserved to ensure that the Group can continue to benefit from the diversification between its banking and insurance activities.
Capital Management is integral to the way the Group manages its businesses and legal entities. ING’s Capital Management strategy is driven by the strategic aims of the Group and the risk appetite set by the Board. Following the annual budgeting process, each year a capital plan is prepared for the Group as a whole and each of its material businesses. This plan is updated on a quarterly basis and it is assessed to what extent additional management actions are required. At all times maintaining sufficient financial flexibility should be preserved to meet important financial objectives such as the repayment of the core Tier 1 securities. At the foundation of the capital plan are ING’s risk appetite statements that determine target setting. These constraints are being cascaded to the different businesses in line with our risk management strategy.
cAPITAL MANAGEMENT DEVELOPMENTS AT ING INSURANcE The base case scenario for Insurance Europe and ING U.S. is for them to become standalone businesses through an initial public offering (IPO). The timing of the divestments will depend on market conditions, readiness and performance. To be ready for an IPO these businesses need to be capitalised in line with their peers. Another key requirement is that they have access to the debt markets on a stand-alone basis with their own ratings, whereas financial entanglements with other Group entities need to be at arm’s-length. An important step in preparing for the divestments was the liability management transaction that was executed in March 2012. With this transaction ING was able to remove substantial assets disposal clauses in senior debt securities issued by ING Verzekeringen N.V. totalling EUR 2.6 billion that otherwise could have been triggered.
Currently, ING U.S. is at an advanced stage of IPO preparation. Historically it operated with a capital structure that reflected its status as a wholly-owned subsidiary of ING Group, and has not historically relied on direct access to the capital markets for financing needs. On 9 November 2012, ING U.S., Inc. (the US parent company of ING U.S., which constitutes ING Group’s US-based retirement, investment and insurance operations) filed an initial registration statement on Form S-1 with the U.S. Securities and Exchange Commission (‘SEC’) in connection with its proposed IPO. On 23 January 2013, ING U.S., Inc. filed an Amendment No. 1 to its Form S-1 registration statement to include financial results for the 9-month period which ended 30 September 2012 and to respond to comments received from the staff of the SEC. Today ING U.S. is focusing on maintaining and strengthening its standalone credit ratings, migrating the company towards a targeted financial leverage to capital ratio and a combined Risk Based Capital (RBC) ratio of the US insurance company subsidiaries that meets these objectives. Another objective is to increase liquidity at the holding company level. To help achieve these objectives in 2012 it has already completed a USD 5.0 billion senior unsecured credit facility, and a USD 850 million inaugural senior notes offering in the US capital markets. Another important step in ING U.S.’s capital plan is the receipt of extraordinary distributions from its insurance subsidiaries with an aggregate amount of USD 800 million in the second quarter of 2012.
ING Bank is managing its banking business based on a variety of metrics including its own economic capital model but it is primarily the published core Tier 1 capital that is the main steering variable. ING Bank’s capital position has been significantly strengthened over the last few years, including in 2012. In 2012, EUR 8.3 billion of regulatory capital was generated, of which EUR 1.125 billion was used to repay the Dutch State and an additional EUR 1 billion was paid as a dividend to ING Groep N.V. At the end of 2012, ING Bank’s core Tier 1 ratio was strong at 11.9%. The fully loaded pro-forma Basel III core Tier 1 ratio at the end of 2012 stood at 11.0%; including the anticipated impact of the revised IAS 19, which took effect on 1 January 2013, it stood at 10.4%.
ANTICIPATING CHANGES The essence of risk management is the power to prevent and manage surprises. 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. Risk management at ING is about anticipating this change.
During 2012 the long-term funding issuance further continued with EUR 33.1 billion, also in order to reduce short-term professional funding. Growth in funds entrusted continued to develop favourably at Retail Banking, which more than offset a net outflow within Commercial Banking. 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) moved to 1.13. The Bank therefore improved its funding profile and ensured its liquidity position stayed within conservative internal targets.
Another important non-financial risk issue is cybercrime, particularly now that distribution and communication channels are more internet-based and electronic banking is growing exponentially. This has increased the speed and convenience with which our customers can communicate with us to access their funds and our services, but we are committed to providing this convenience without compromising security standards. We have therefore increased monitoring and controls to enhance our defences against external attacks and to reduce the level of losses.
In 2012 ING Bank delivered on its strategic priorities in the face of continuing volatile markets and weak economic activity, largely due to the eurozone sovereign debt crisis. The bank strengthened its capital and funding positions and contained expenses. Through its balance sheet optimisation programme, it curbed balance sheet growth while maintaining lending. Strong deposit generation meant the bank could reduce its reliance on short-term funding. It continued to de-risk and ‘term out’ (extend the term of longer term funding) its balance sheet. The bank strengthened its businesses in markets where it has long-term sustainable positions through solid customer-centric initiatives. The retail banking operations focused on delivering cost-effective, simple and transparent products through multi-channels. Commercial Banking adapted its business operations to meet the challenging economic conditions and increasing regulatory demands. In all, ING made significant progress towards its overall objective of building the preferred bank for its customers.
FinanCiaL deVeLoPMentS The underlying result before tax (excluding the impact of divestments and special items) dropped by 22.0% to EUR 3,219 million in 2012, from EUR 4,128 million in 2011. This decline mainly reflects higher risk costs due to the weak economic and business fundamentals, negative credit and debt valuation adjustments (CVA/DVA), and the new Dutch bank levy. In 2012, the result furthermore included EUR 601 million of losses from proactive de-risking in the European debt securities portfolio, while the result in 2011 included EUR 181 million of de-risking losses and EUR 588 million of impairments on Greek government bonds. CVA/DVA adjustments in Commercial Banking and the Corporate Line had a negative impact of EUR 587 million in 2012, mainly reflecting a tightening of ING Bank’s credit spread, compared with EUR 275 million of positive CVA/DVA impacts in 2011. Excluding these and other market-related items, underlying result before tax was 14.0% lower, fully attributable to higher risk costs.
Underlying operating expenses increased slightly, by 0.9% to EUR 8,900 million, compared with EUR 8,824 million in 2011. The increase was mainly due to inflationary and regulatory pressure, including the EUR 175 million Dutch bank levy partly offset by strong cost control and lower impairments on real estate development projects. The underlying cost/income ratio rose to 62.5%, from 61.8% in 2011. Excluding market-related impacts and the Dutch bank levy, the cost/income ratio was 57.6% in 2012.
ING Bank worked towards meeting its Ambition 2015 targets. These are performance goals aimed at achieving a return on (IFRS-EU) equity of 10–13%, while maintaining a core Tier 1 ratio of at least 10%, both under Basel III, and bringing the cost/income ratio down to 50–53%.
ING’s strong retail franchise continued to draw solid retail deposit volumes with EUR 28.1 billion of retail net funds entrusted in 2012. ING’s large retail deposit base is an important source of funding and is increasingly important, enabling the company to rely less on short-term wholesale funding.
27ING Group Annual Report 2012 1 W h o w e are 2 R
In 2012, there were many operational excellence initiatives in the Netherlands home market. Dutch business banking customers were migrated to a new, more efficient IT environment and four million retail customers in the Netherlands were transferred to a new, more user-friendly and accessible online banking system.
Cost reduction initiatives at Retail Banking Netherlands, announced in 2011, progressed ahead of plan in 2012. These measures are focused on further process improvements by reducing complexity and streamlining workflow. In February 2013, an expansion of the Retail Banking Netherlands transformation programme was announced. The expanded programme will help drive future performance and will ensure the organisation is best structured to meet customers’ changing financial needs, which are increasingly moving towards mobile banking. Unfortunately this will lead to further job cuts. ING is ensuring staff whose positions are made redundant are treated with utmost care. The total programme is expected to result in EUR 430 million of annual pre-tax cost savings by 2015.
Social media and mobile banking are playing an increasingly important role in the financial services industry and ING is working to be at the forefront of this trend. In 2012, ING in the Netherlands was awarded the title ‘Best Social Media organisation’. ING Direct France was the first bank in France to launch a mobile application that allows customers to open saving accounts from their smartphones.
For effective leadership management, the Bank has a strategy in every country of identifying, developing, appraising and retaining talent for senior and executive positions. It ensures that the right management teams are in place and creates succession planning for all key roles within ING Bank. Performance management and rewards continued to be an important area of focus in 2012.
ING established a dedicated Sustainable Lending Team to implement recommendations by its employees to make ING’s lending activities more sustainability-oriented. The team looks for new commercial opportunities in the field of sustainable lending and seeks to increase the number of relationships with customers that already have a strong sustainability track record and a progressive sustainability strategy.
ConCLUSionS and aMBitionS In 2012, ING made significant progress towards building the preferred bank for its customers. In a challenging environment, ING’s earnings remained resilient and our strong funding position enabled us to continue to support customers. The lacklustre global economy, ongoing debt crisis in Europe and the cost of stricter regulation will require a continued disciplined, proactive approach to managing our business. ING will continue to focus on further strengthening its capital and funding and concentrating on solvency and liquidity.
There was continued focus on customer centricity, operational excellence and being a top employer. Other focal points were mobile banking and cybercrime.
Total underlying income decreased by 2.9% to EUR 9,019 million. The interest result was 3.2% lower on EUR 8,030 million, as the impact of higher volumes was more than offset by lower margins on savings in most countries, reflecting the low interest rate environment and the impact of de-risking. Only Retail Belgium reported an increase in interest result. Commission income was 2.4% down, mainly due to lower fees from the securities business. Investment and other income improved slightly, but was still negative, due to the losses from the selective de-risking of mainly southern European debt securities. ING Bank completed the planned de-risking of its investment portfolio in the fourth quarter of 2012.
Underlying operating expenses were stable at EUR 6,154 million as the cost-reduction programmes largely offset the impact of salary increases, inflation and business growth. The underlying cost/ income ratio increased to 68.2%, from 66.2% in 2011.
Retail Netherlands 878 1,261 Retail Belgium 609 455 Retail Germany 441 395 Retail Rest of World –230 172 Total Retail Banking 1,698 2,282
All of ING’s business units focus on operational excellence. We therefore continually review business processes and implement improvements throughout the year. A focal point was ‘cybercrime’ and the Retail Standards Board therefore held a ‘cybercrime awareness session’ with the senior management of Retail Banking, including a demonstration of a sophisticated cyber-attack. As security is as much a responsibility of the business as it is of IT, key security-related commercial issues will be addressed by a special international taskforce launched in late 2012. Through sharing the knowledge and experiences of countries where cybercrime is prevalent, we prepare our other business units to effectively combat the inevitable increase in cybercrime in their local territories. In 2012, we improved our infrastructure and security to deal with the increasing threat of cybercrime.
Sustainable financial products The Dutch government decided to continue facilitating tax benefits for sustainable savings. ING retail customers in the Netherlands can deposit their savings or buy notes in ING Groenbank, which had a balance sheet total of EUR 804 million at year-end 2012. The Dutch government certifies all projects financed by Groenbank as environmentally friendly.
During the renovation of ING Belgium’s head office, the building’s façade was covered with a huge urban-art digital work by Belgian artist, Jean-Luc Moerman. One hundred multiples were auctioned
“Coltiva il tuo sogno” is an educational project run by ING Direct Italy to teach young children the value of saving. Some 4,000 ‘saving kits’ were distributed to schools across the country, and 3,000 copies of the book Le avventure del Folletto Seminasogni to Italian bookshops. ING Direct Italy donated EUR 2.00 to the ING Chances for Children programme for every book purchased.
Funds entrusted showed a strong net inflow of EUR 9.0 billion, supported by successful marketing campaigns. The net production in residential mortgages was EUR 1.8 billion, while interest margins improved slightly. Other lending, mainly business lending, declined by EUR 3.0 billion as demand for credit remained low.
Retail NL’s overall results remained solid, albeit affected by these adverse economic circumstances. The profit over 2012 was affected by the low interest rate environment, lower business lending demand and a stagnating housing market.
Over the past five years, we have reduced the number of different savings products significantly, from over 60 to fewer than 10 now. All information, including current interest rates, is available on www.ing.nl. Despite continued competition for customer deposits (which eased in the course of 2012) and reduced margins, ING’s market share in savings remained stable. The Bank continued its efforts to attract savings and deposits across all channels (net inflow EUR 7.9 billion) and this will remain a priority in 2013. Funds entrusted were up to EUR 115.8 billion at year-end.
Due to decreasing demand for business lending, market shares and revenues came under pressure. During the fourth quarter, a large re-classification of customer groups was carried out within the ING business segment. This has resulted in an internal re-organisation of staff and 30,000 additional small and medium-sized enterprises (SMEs) now having a personal relationship manager. Furthermore, we have extended our product offering to SME customers and are focused on becoming the preferred bank for these customers.
Strategy Retail NL’s strategy is linked to ING Bank’s overall strategy to build a leading retail and commercial bank. In November, ING Netherlands (ING NL) launched ‘Orange is ING’ – a new brand campaign which reflect the Bank’s convenience, simplicity, expertise and personal commitment. The aim is to become the Preferred Bank of the Netherlands.
All parts of ING NL continued to focus on knowledge sharing across the business and a number of local collaboration projects were started across the Bank’s entire product range, to share knowledge and expertise on how to improve customer service.
In 2012, ING was also in constant dialogue with the Netherlands Authority for the Financial Markets (AFM) through stakeholder and round-table sessions. AFM supervises savings, investments, insurance and loans and this dialogue has improved our working relationship and created more mutual trust and understanding for each other’s motives.
The Bank’s anti-cybercrime efforts in 2012 resulted in delivering several large projects, including improvements to authentication, enhanced detection of banking malware, and better fraud detection and payment blocking in the backoffice. Lessons learnt were shared with representatives from the business and risk departments in Belgium, Spain, Italy, Poland and Germany, where similar projects were running.
Customer centricity Retail NL took a number of initiatives to improve its product and service offering as customers demand simple, transparent products and quick and flawless delivery.
The mobile app, introduced for retail customers in 2011, reached a milestone of 1.9 million downloads, reflecting increased customer demand for mobile banking services. Mobile traffic had increased from 9 million (year-end 2011) to over 25 million visits a month by year-end.
In 2013-14, around 240 ING Service Points will be opened, following a successful pilot in February 2012. Service Points are service desks in shops and other retail outlets offering payment and savings services and where staff can answer basic queries from customers.
All these initiatives met with broad recognition: ING NL was awarded ‘Best Bank in the Netherlands’ by The Banker, as well as ‘Best Business Service Provider for Commercial Finance’ by Incompany Magazine for its ‘Most popular financial website’, and for being the ‘Best traceable bank online 2012 based on Search Engine Optimization’. It was also rewarded ‘Best Social Media Company in the Netherlands’ by Social Media Monitor 5.
Top Employer To become and remain a Top Employer, we need to ensure that employees are eager to work for ING and be proud ambassadors. ING NL has defined a number of ways of achieving this. One of them is Enter@ING, an induction course for new recruits introduced in January 2012.
The Connect & Het Nieuwe Werken (‘remote working’) programme allows certain employees to work away from the office and outside office hours. It has provided more flexible working conditions for some 1,500 staff at head office locations, with 89% of them having positive things to say about it. They feel it raises productivity and allows them to maintain a better work/life balance. The majority of ING Bank employees in the Netherlands (except employees at the ING bank branches) will switch to this new form of working between 2013 and 2018.
For further information on WUB, please refer to the Strategy chapter on page 18.
RETAIL BELGIUM FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Belgium increased by 33.8% compared with 2011 to EUR 609 million as a result of a strong increase in income supported by volume growth.
These efforts are paying off, evidenced by the extensive use of the mobile banking app by smartphone and tablet users. In 2012 the Bank launched an Android version of MyING.be, resulting in 85% of smartphone users now being able to manage their ING accounts from this device. At year-end, there were 105,000 active mobile users. The number of daily mobile transactions rose from 1,500 to 5,000.
We also completed the pilot phase of transforming our bigger branches. The objective is to create equal focus on closer contact with the customer and on direct banking. An e-w@ll in these branches provides access to ing.be and Home’Bank, and a virtual wall displays products and services by means of a QR code. By the end of 2012, 20 of these renewed big branches had been opened.
It is the same for our business customers. Relationship banking is still central to our approach in order to meet their specific needs,
Another example of making banking easier and more convenient for our customers is the launch of a Download Documents Centre for business customers with a legal entity, allowing them to access certain documents online.
Customer centricity In 2012 the Bank added to its mobile product range by offering customers the opportunity to open a savings account or current account, or take out a travel insurance, using the mobile app MyING.be. In 2012 this app was downloaded 128,000 times (2011: 54,000 times).
One of our goals is to expand our universal direct business model to all segments. To this end, the Bank launched a new website for business customers, including a broader online offer. ING customers can use the new bank guarantees service to apply for a bank guarantee online.
In addition to self-employed professionals and local businesses, medium-sized enterprises can now also apply for a loan online, by using ING Business Credit.
Top Employer The local Top Employer programme was extended during the year. Initiatives included improving recruitment practices and support for new staff, advanced management training programmes for all managers and increasing flexible working.
Record Bank Retail BE includes Record Bank, the fourth-largest retail savings bank in Belgium, with close to 700,000 customers. Its strength is the personal approach taken by its network of around 1,500 independent agents, credit brokers and vendors. Its growth in funds entrusted volumes went up by 14% compared with 2011, with a strong increase in savings of EUR 1.0 billion, as a result of its excellent position in the Belgian savings market.
BUSINESS DEVELOPMENTS Retail Germany consists of ING-DiBa Germany, ING-DiBa Austria and Interhyp.
In Germany, one of our key markets in Europe, ING-DiBa is the third-largest bank in terms of number of customers and the country’s most favoured banking brand.
ING-DiBa offers an easy to understand, high-service product range, with only 10 different products, 24 hours a day – the ingredients to meet all the main needs of its customers. ING-DiBa focuses on values such as fairness, transparency and solidity in order to strengthen its position as ‘Germany’s most preferred bank’.
Interhyp – Germany’s biggest mortgage broker – was awarded ‘Best Mortgage Financer’, with best service, advice and price for the seventh time in a row. Interhyp expanded its local branches and tied-agents network to over 50 in 2012.
Operational excellence ING-DiBa is constantly responding to customers’ needs by improving its products so that customers can manage their current and future financial situation. It launched, for example, a new, more user-friendly website, meeting the rising need to offer the best usability for all end-devices, especially tablets.
ING-DiBa’s ATM design underwent an optical overhaul and got a new look and feel. The first new ATMs have been installed and will be rolled out step-by-step.
ING-DiBa Austria launched an internal campaign to put customers at the centre of employees’ minds. ‘Die Hubers’ (The Huber Family) are a fictional customer family who continuously remind employees about the customers they work for.
RETAIL REST OF WORLD FINANCIAL DEVELOPMENTS Retail Rest of World reported an underlying loss before tax of EUR 230 million in 2012 compared with an underlying profit before tax of EUR 172 million in 2011. This decrease was mainly due to EUR 563 million of losses from the selective de-risking in the investment portfolio in 2012, while 2011 included EUR 133 million of de-risking losses and EUR 210 million of impairments on Greek government bonds.
In 2012 it was decided to sell ING Direct Canada and ING Direct UK as part of ING Group’s strategic repositioning. The Canada transaction was closed in 2012 and the UK transaction was closed in the first quarter of 2013. The other ING Direct businesses were not affected by these sales. The sale – announced in 2011 – of ING Direct USA closed in February 2012.
The results were significantly affected by the transformation of the investment portfolio. As part of the long-term balance sheet optimisation strategy, priority is given to the own-originated assets, while investments portfolios fulfil the role of liquidity pools. At the same time the balance sheet was shortened by a reduction in shortterm professional funding, further improving the leverage ratio.
The ING Direct investment portfolios were constructed under a different strategic regime, before the financial crisis. Then, they mainly consisted of triple A mortgage-backed securities and covered bonds. New regulations and the deterioration of the ratings brought the average rating of the ING Direct investment portfolios to AA- level. ING therefore decided to reduce the portfolios to protect its capital and the medium-term results of the Bank. In 2012, EUR 6 billion in bonds were sold from the ING Direct investment portfolios, which resulted in a pre-tax capital loss of EUR 584 million (including EUR 21 million at ING-DiBa). These sales were concentrated on a material reduction of Spanish exposure and capital intensive mortgage-backed securities. The sales released EUR 7 billion in risk-weighted assets, freeing up core Tier 1 capital for the Bank. Secondly, the sale of Spanish covered bonds and asset-backed securities contributed significantly to a marked improvement of the balance between Spanish assets and Spanish liabilities on the Bank’s balance sheet.
In line with the overall retail strategy, the RoW countries invested much time and effort in developing the integrated distribution channels. Internet platforms were upgraded in Italy and Poland. An innovative online platform for the SME segment in Poland was awarded the best in its category. New projects in the mobile banking area were undertaken at all business units.
ING Direct’s transformation into a full bank also includes the selective opening of bank shops and cafés in Spain, Italy and France.
ING Bank Slaski showed a solid performance and crossed the milestone of three million retail customers. The number of SME customers increased to 162,676. In Turkey, the customer base grew by 127,000 and now stands at 1.4 million. After the successful launch of the Orange Savings Account in 2011, ING Bank Turkey demonstrated excellent performance in 2012. Loan growth amounted to 22% and deposit growth to 27%. ING Bank Turkey aspires to be one of the leading savings banks in Turkey. ING Direct Spain’s customer base increased by 255,117 and totalled over 2.6 million at year-end.
Operational excellence A highlight was ING Direct Italy enabling customers to open and activate a payment account in only 12 minutes at its bank shops. The newly launched mobile app had been downloaded 13,000 times within a week’s time.
A prime example was ING Direct Australia, which – in September – launched a new superannuation pension product (Living Super) providing members with control, fee transparency, and simplicity. It is Australia’s first balanced fund with no fees, a rare proposition in this market. By year-end, 5,754 accounts had been opened, which raised over AUD 30 million in funds under management. ING Vysya Bank launched a first-of-its-kind savings product ‘ING FD+’, a fixed-deposit savings scheme, which enables customers to make a fixed deposit by sending an SMS. ING Direct France was the first bank in France to launch a mobile app that allows customers to open saving accounts from their smartphones and ING Bank Slaski launched a new iPhone app.
The social media approach and the Social Media Project Team findings will be extended across the retail organisation in 2013.
Risk costs doubled to EUR 955 million, or 72 basis points of average risk-weighted assets, compared to EUR 477 million, or 35 basis points, in 2011. The increase is mainly due to higher risk costs in Industry Lending as well as for the lease run-off business.
Total underlying income 4,963 5,023 Underlying operating expenses 2,436 2,527 Underlying additions to loan loss provisions 955 477 Underlying result before tax 1,572 2,019 Underlying cost/income ratio 49.1% 50.3% Underlying cost/income ratio (excl. market impacts and CVA/DVA) 43.1% 45.6% Client balances: net production funds entrusted (EUR billion) –5 –4 Client balances: net production lending (EUR billion) –11 –2 Underlying risk costs in bp of average RWA 72 35 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 124 145 Underlying return on equity based on 10% core Tier 1** 8.6% 11.2%
INDUSTRY LENDING Our Industry Lending activity includes Structured Finance (SF) and Real Estate Finance (REF). These are specialised commercial lending activities, in which ING originates well-structured loans with an emphasis on achieving good risk adjusted returns.
The Energy, Transport and Infrastructure Group (ETIG) specialises in capital-intensive industry sectors such as oil and gas, mining, offshore services, shipping, power utilities and infrastructure. ING saw continuing demand for project finance, notably for investments in renewable energy, offshore oil production and infrastructure through public-private partnerships. Container finance remained a market with reasonable opportunity, although the shipping markets are depressed. Our approach to this market has been cautious for many years and the loan book is performing within expectations.
International Trade and Export Finance (ITEF) includes Trade and Commodity Finance (TCF, which supports the international trade in basic commodities such as oil, oil products, metals, grain, sugar and cotton) and Structured Export Finance (SEF, which supports the export of capital goods and services with long-term financing supported by export credit agencies). ITEF had a good year in 2012. In TCF there were increases in both volumes and margins as a result of ING’s consistent approach to the market over many years. ING has become the leading bank in the syndicated loan market for commodity clients. In SEF, Commercial Banking was able to grow the business, particularly in Germany.
REAL ESTATE FINANCE Real Estate Finance’s (REF) primary activity is lending to investors in income-producing real estate backed by first mortgages. About half of the business is in the Netherlands, where the portfolio extends to middle market lending. During 2012, REF sought to maintain the quality of its credit portfolio, despite the challenging market circumstances, with a strategy to reduce exposure to this asset class, while avoiding loss from forced sales. As part of this strategy REF has placed activities in Australia and the US into run-off.
Commercial Banking has a market leading franchise in the Benelux and has a strong position in Central and Eastern Europe (CEE). Internationally, it is a leader in selected areas within Industry Lending and Financial Markets. It serves its clients, ranging from mid-sized enterprises to multinationals, also including governments and supranational organisations, through an extensive global network of operations in more than 40 countries.
Against the backdrop of challenging economic conditions, increasing regulatory demands, higher capital requirements, additional bank taxes, and heightened funding costs, Commercial Banking initiated a review of its business to reconsider the operating fundamentals of all activities.
However, while recognising and responding to the challenges in the market, Commercial Banking’s strategy remains consistent. During
d d itio n al in fo rm atio n undertaking a multi-year strategic programme to improve cost efficiency, improve client service across Europe, adopt marketcompetitive new technology and comply with new regulatory obligations (especially those relating to the Single Euro Payments Area, SEPA). The programme includes a major upgrade of all related IT platforms and channels, customer processes and operating models.
TRANSACTION SERVICES ING established the Transaction Services (TS) business line in 2011, bringing together all the basic transaction banking products under one umbrella with the objective of providing a more integrated and effective product offering to clients across Europe. The products are Payments & Cash Management (PCM), Trade Finance Services, Working Capital Solutions, Securities Services, Bank Mendes Gans and Leasing and Factoring.
Structured Finance maintains many strong positions in its markets. ING has a leading global franchise in Trade and Commodity Finance, consistently maintaining a top three position: by several measures, ING is the market leader. In 2012, it was awarded ‘Best European Bank’ by Project Finance International; ‘Best Trade Bank in Metals & Mining’ by Trade Finance Review; and ‘Best Global Commodity Finance Bank’ by Global Trade Review based upon ING’s consistent sector coverage backed by strong expertise and an effective global infrastructure. The Bank is leading in other niche areas such as the offshore oil sector, through provision of finance for drilling and production platforms, in finance for the container industry and in the Russian natural resource sector.
Commercial Banking’s Transaction Services business line also collected a number of Global Finance’s Transaction Processing awards, including ‘World’s Best Trade Finance Bank 2012’ in the Netherlands and ‘World’s Best Foreign Exchange Provider’ in the Netherlands. ING was also recognised as ‘Best Cash Management Bank’ in Eastern Europe by Treasury Management International.
While market conditions have been challenging, ING executed major benchmark transactions, strengthening its relationships with core clients. For example, a USD 2 billion five-year unsecured revolving credit facility (RCF) and USD 3 billion high yield issue was closed for LyondellBasell Industries, the world’s third largest independent chemical company. ING acted as bookrunner and joint Mandated Lead Arranger (MLA) on the RCF, and as joint bookrunner on the high yield bond issue. The transaction team was able to broaden and deepen the overall client relationship in challenging market conditions.
Other notable transactions include TNT’s award of a mandate for cash management in seven Central and Eastern Europe countries, the Belgian-Brazilian beer company AB InBev (joint bookrunner and MLA on a USD 14 billion facility), and Dutch brewer Heineken (joint bookrunner on two dual tranche Eurobond issues; one for EUR 1.35 billion and the other for EUR 1.75 billion).
REAL ESTATE & OTHER The Real Estate & Other (RE & O) division consists of the residual assets of the legacy businesses sold or discontinued within the former Real Estate Development (RED) and Real Estate Investment Management (REIM) businesses, plus a number of General Lease operations which have been placed in ‘run-off’ in 2011 and 2012.
ING (along with two other banks) arranged EUR 1.55 billion in credit facilities to help its client Coca-Cola Hellenic Bottling Company (CCHBC) to move its headquarters from Greece to Switzerland and to become listed on the primary segment of the London Stock Exchange. CCHBC is the world’s second biggest bottler of Coke. The deal is a prime example of how ING can use its international network to complete high-profile deals for its clients on demand and within a very short time. A number of different business lines within Commercial Banking were involved.
OPERATIONAL ExCELLENCE Commercial Banking continued with its strategic investment programme in 2012 in its Payments and Cash Management (PCM) division. The programme will transform all aspects of PCM, from sales and client services, to more efficient work processes.
New sales (APE) 2,830 2,648 Administrative expenses/operating income (Life & ING IM) 47.5% 43.3% Life general account assets (in EUR billion) 132 133 Administrative expenses (total) 3,072 2,882 Underlying Return on equity based on IFRS-EU Equity*** 1.8% –1.1% Employees (FTEs, year-end, adjusted for divestments) 18,891 20,661 * Underlying numbers are derived from IFRS-EU, excluding the impact of divestments, discontinued operations and special items.
ING Investment Management 200 198 Corporate Line insurance –516 –410 total 311 –325 operating result** in EUR million 2012 2011
BUSIneSS deVeLoPMentS ING made good progress in 2012 in restructuring its insurance and investment management operations. In Asia, ING’s life insurance business in Malaysia was sold. Sales agreements were announced
In November, key revisions to ING’s 2009 European Commission (EC) Restructuring Plan were announced, after ING and the Dutch State reached agreement with the EC. Among other things, the deadlines for Insurance divestments were extended beyond the original deadline of year-end 2013. The amended Restructuring Plan gives ING more time and flexibility to complete the required restructuring while leaving its strategic objectives unchanged. Under the amended Restructuring Plan, more than 50% of the Asian insurance and investment management businesses must be divested by year-end 2013, with the remainder divested before year-end 2016. The divestment of at least 25% of ING U.S. has to be completed by year-end 2013, more than 50% has to be divested by year-end 2014, with the remaining interest divested by year-end 2016. The divestment of more than 50% of Insurance/IM Europe has to be completed by year-end 2015, with the remainder divested by year-end 2018. ING is committed to completing all restructuring as quickly as possible. However, these deadlines give the company more flexibility to complete divestments, given the challenging market environment and more stringent regulatory requirements.
The composition of the Management Board ING Insurance EurAsia is as follows: • Jan Hommen • Patrick Flynn • Wilfred Nagel • Lard Friese • Matthew Rider (until 31 December 2012) • Gilbert Van Hassel • Delfin Rueda (from 1 November 2012) • Dorothee van Vredenburch (from 1 November 2012) • Doug Caldwell (from 1 December 2012).
In other countries, new life insurance and investment-based insurance products were introduced to help customers more easily build their wealth and protect it.
d d itio n al in fo rm atio n appropriate solutions for the treatment of long-term guarantees in the framework. Subsequent to the outcome of that discussion, the insurance industry needs time to finalise preparations for the final Solvency II regime.
Until then, ING will continue to take an active role in discussions with the industry and with regulators on developing a European Solvency II framework that is robust and enables life insurance companies to continue to provide solutions for the long-term financial needs of their customers.
BUSINESS LINES For Insurance Benelux, the focus is to become a more customerdriven company. At the end of 2012, Nationale-Nederlanden announced the acceleration of the insurer’s transformation programme to improve processes, deal with legacy systems and reduce expenses.
CONCLUSIONS AND AMBITIONS ING Insurance/Investment Management will continue to focus on providing first-class products and services to its customers, as it works towards a standalone future. The company is mindful of its responsibility to society and will continue to pursue sustainability initiatives such as responsible investing.
Plans for an IPO of ING U.S. remain on track. Depending on market conditions, ING anticipates an IPO of the business in 2013.
The macro-economic environment in the Benelux was marked by volatile financial markets, low to negative GDP growth and a low interest rate environment. Despite the challenging market circumstances, Nationale-Nederlanden maintained its strong position in the insurance market in the Netherlands. In November 2012, Nationale-Nederlanden announced the acceleration of its transformation programme, commenced in 2011 to improve processes, deal with legacy systems and reduce expenses.
The operating result decreased by 31.8% in 2012 as a result of a lower investment margin, a lower technical margin and a lower non-life result. The investment margin declined by 9.3% during the same period as a result of lower fixed interest income from de-risking, low reinvestment yields, lower dividends on public equity and real estate funds, all of which were partly offset by higher volumes and also offset by EUR 51 million lower profit sharing to policyholders in the Netherlands in line with underlying results in 2012.
The technical margin decreased by 43.9% to EUR 177 million, from EUR 315 million in the previous year. This was mainly due to additions to the guarantee provisions for group life and retail life contracts, largely due to lower interest rates, as well as a EUR 70 million gain from the surrender of a contract with a large pension fund in 2011. Life administrative expenses increased by 1.3% due to higher expenses related to Solvency II compliance costs.
New sales (APE) decreased by 23.1% to EUR 387 million in 2012 due to lower sales of group and individual pensions in the Netherlands and lower sales in Belgium due to product re-pricing.
Improving customer-experience Insurance Benelux is committed to continuously improving the customer experience. In 2012, Nationale-Nederlanden established a Net Promoter Score (NPS) programme to collect customer feedback which will be used to further improve new products and services. It also launched a number of other customer-centric initiatives – workshops, webinars and a pension application – to help customers gain a better understanding of their finances.
In Luxembourg, the back-office was redesigned to create a single point of contact for all customers and partners. Key customerrelated processes (e.g. complaint management, application acceptance, etc.) were also reviewed.
To improve the customer experience, Nationale-Nederlanden focused on more straight-through processing and easy-to-use portals. This resulted in an upgraded website including sales tools. To prepare for new regulation, Nationale-Nederlanden helped its broker channel, through workshops and information toolkits, to prepare for the transition towards a ban on commissions on complex retail insurance products, which became effective on 1 January 2013.
Our efforts in responsible investing did not go unnoticed. Nationale-Nederlanden ranked fifth out of 29 in the VBDO Benchmark on responsible investment by Dutch insurance companies, up from an 11th position in 2011. The increase was due to improved transparency in the Environmental and Social risk framework, greater integration of the environmental, social and governance aspects into our investment processes and expansion to different asset classes.
Insurance Benelux’s ambition is to become the most cost-efficient and most customer-driven company, based on modern IT systems and great customer service. For Nationale-Nederlanden, the acceleration of the transformation programme will improve processes, deal with legacy systems and reduce expenses. In the new company structure, Nationale-Nederlanden Bank will concentrate on the retail market offering a full range of savings, investment, mortgages, long-term savings and insurance products. A new to be created Pension Solutions group will combine ING’s strengths in pension administration, insurance and investment management offering Defined Contribution pension solutions to employers. NationaleNederlanden Non-Life will continue consolidating and expanding its market position in the non-life market.
Despite the challenging macroeconomic environment in most countries as a result of the ongoing European sovereign debt crisis, Insurance Central and Rest of Europe (CRE) recorded double-digit sales growth in 2012. This was achieved through growth in most distribution channels, improved customer value propositions (new terms for health, cancer and critical illness) and improved service levels which were reflected in higher NPS scores. Cost containment remained a key priority; it ensured growth was achieved with expenses lower than in 2011.
New sales (APE) increased by 11.3% to EUR 396 million compared with the previous year. Life sales grew in all countries except Hungary – a very successful 2011 Hungarian campaign boosted sales in that year – and were EUR 31 million higher compared with 2011. The increase was largely due to strong sales of the third pillar pension fund in the Czech Republic, classified as life insurance products, and the sale of life products in Turkey. Pension sales grew in Romania, Slovakia and especially in Turkey. They were EUR 9 49ING Group Annual Report 2012 1 W h o w e are 2 R
In the Czech Republic, ‘For You’, a unique breast cancer insurance product was launched which goes beyond being a product and includes online access to information and help. The online component involves using social media to build a community for women to share health problems and to seek advice and guidance. For You is a CRE regional project, and is planned to be introduced in Spain in the first half of 2013.
Business improvements Using a new business process management platform, ING is now able to introduce new interactive customer processes faster in Poland, Hungary and Romania. Also in Hungary, Bulgaria and Romania, client portals were introduced or enhanced to provide online applications, E-statements or transactions, and risk profiling. Websites and portals were boosted against external threats, such as hacking. ING maintains a strong focus on enhancing IT security enabling effective and integrated risk mitigation.
insurance product which gives people the option of insuring themselves against critical illness. ING Insurance Bulgaria was named the most dynamic pension insurance company in the 2012 Insurer of the Year awards. It was among the best-performing pension funds according to a jury of associations representing Bulgarian pension and insurance companies and other financial institutions. In Greece as well as in Hungary, ING took the title ‘Top Corporate Brand’ in the Insurance Services category for the second consecutive year.
Fees and premium-based revenues increased by 11.7%, primarily due to growth in the term life business, and higher fee income, due to strong net flows in the full-service retirement business and higher equity market levels.
In 2012, ING U.S. continued to strengthen its capital position, reduced financial leverage, contained expenses further and continued to develop products and services to help individual and institutional customers accumulate and protect their wealth.
ING U.S. offers products and services through a broad group of financial intermediaries, independent producers, affiliated advisers and dedicated sales specialists throughout the US to help its customers save, protect and enjoy their wealth to and through retirement.
Retirement Solutions ING U.S. is a leading provider of retirement services and products in the US with an extensive product range which addresses both the wealth accumulation and income needs of customers, through a broad distribution capacity of almost 2,500 affiliated representatives and thousands of non-affiliated agents and third party administrators (‘TPAs’).
Retirement provides tax-deferred, employer-sponsored retirement savings plans and administrative services to more than 49,000 plan sponsors covering approximately 5.3 million plan participants in corporate, education, healthcare and government markets. Retirement also provides rollover IRAs (Individual Retirement Accounts), and other retail financial products as well as comprehensive financial advisory services to individual customers. The business serves a wide variety of employers ranging from small companies to very large corporations and government entities. It ranks in the top 5 in the US defined contribution retirement plan market by number of retirement plans administered and plan participants served, and by assets under management and administration at 31 December 2012. ING U.S. also ranks in the top 5 in the K-12 education market and in the higher education market by assets at 31 December 2012.
Employee Benefits provides stop loss, group life, voluntary employee-paid and disability products to mid-sized and large businesses. The company has 55 employee benefits sales representatives across 19 sales offices, with average industry experience of 16 years. In the Employee Benefits market in 2012, ING U.S. launched a new voluntary accident and critical illness insurance product suite that makes administration simple and easy for employers, employees and financial professionals.
ING U.S.’s broad presence in the market positions it well for the future. It has leading positions with its Retirement Solutions and Insurance Solutions businesses and a prominent Investment Management business with top-tier investment performance across 52 ING Group Annual Report 2012
an array of asset classes. It has an extensive, multi-channel distribution network with strong producer relationships. ING U.S. has developed a highly scalable business model which positions the company well for future growth opportunities. The company’s operating platform supports both current and significantly higher volumes of business, positioning it favourably for margin expansion in the future.
The investment margin decreased to EUR 7 million compared with EUR 28 million in 2011, primarily due to lower yields on investments backing reserves due to higher liquidity balances and the low interest rate environment.
ING IM ASIA/PACIFIC Despite the sale process, the business kept delivering consistent performance, which was recognised by two AsianInvestor magazine awards for performance in Asian fixed income (hard currency) and global equity categories.
Fees and premium-based revenues increased by 5.2% to EUR 824 million in 2012, from EUR 783 million in 2011, to a large extent as a result of currency effects and to a lesser extent as a result of the higher asset base. The annualised fourth quarter ratio of fees to average AuM remained flat at 27 basis points compared with the previous year. This ratio is calculated using an average of opening and closing AuM balances for the period.
In January 2012, ING announced an update on the restructuring of the insurance and investment management businesses whereby it decided to review strategic options for its Asian Insurance and Investment Management businesses. During the course of the year, ING announced the sale of its 33% stake in China Merchant Fund as well as the sale of ING Funds Berhad in Malaysia and ING IM Thailand. It also stated its intention to keep an ING IM presence in Singapore and Japan as part of the Europe-based ING IM organisation in order to protect global investment capabilities and key client relationships.
CUSTOMER INITIATIVES Customer centricity is at the heart of ING IM’s strategy. Client satisfaction surveys are held every year to measure and analyse where products and services to clients can be improved. In 2012 as in previous years, various initiatives to improve client satisfaction 54 ING Group Annual Report 2012
CONCLUSIONS AND AMBITIONS ING IM will continue to focus on delivering best-in-class performance and services for its customers throughout 2013. ING IM International will continue its preparations for a standalone future together with ING Insurance Europe while further developing its third-party business and new insurance solutions capabilities in selected areas.
For ING IM US, the focus remains on improving and sustaining strong investment performance in 2013 while adhering to the guiding principles of Stewardship & Service – putting customers first – to help them achieve their long-term investment goals. Additionally, IM US will continue to increase sales force productivity in the institutional and retail intermediary channels, and will continue efforts to increase the capture rate in the US Retirement channels.
The Corporate governance section starting on page 60 and the paragraphs of the Remuneration report ‘Remuneration policy for senior management’ and ‘2012 remuneration structure senior management’ on pages 85-86 are incorporated by reference in this Report of the Executive Board.
55ING Group Annual Report 2012 1 W h o w e are 2 R
The Supervisory Board and the Executive Board met for eight regular meetings and five additional meetings in 2012. The strategy, the progress in executing the Restructuring Plan as approved by the European Commission as well as the impact of the sovereign debt crisis in the eurozone for the banking, the insurance and the investment management operations were important topics on the agenda.
GENERAL SUPERVISORY BOARD MEETINGS The Supervisory Board met 13 times in 2012 of which 8 meetings were regular meetings. On average, 94% of the Supervisory Board members were present at the scheduled meetings. As some of the extra meetings were scheduled on short notice the presence at these meeting was on average 77%. Apart from closely monitoring the financial results in 2012, the Supervisory Board also monitored the progress in executing the 2009 Restructuring Plan as approved by the European Commission (EC), including the preparation of the divestment of Insurance/IM Asia, the preparation of the initial public offerings (IPOs) for Insurance Europe and Insurance US as well as the repayment of the outstanding core Tier 1 securities to the Dutch State. The Supervisory Board was regularly updated on the discussions with the EC on an amended Restructuring Plan following the European Court ruling in March 2012. The sovereign debt crisis in the eurozone and its impact on the banking and insurance businesses also remained important topics on the agenda.
Also in January, the Supervisory Board held its annual meeting on ING’s strategy as well as the medium-term plan (MTP) 2012-2015 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, ING Insurance/IM EurAsia, ING Insurance US and ING Group while taking into account the regulatory changes, the economic developments, the volatility on the financial markets, the sovereign debt crisis in the eurozone, the execution of the 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, ING Insurance/IM as well as for ING Group.
In September and November the Supervisory Board discussed the future composition of the Supervisory Board as well as Executive Board succession matters and approved the format for the 2012 Supervisory Board self-assessment. In November the Supervisory Board approved adjusted guidelines on severance pay for senior management as well as a new performance management model for Identified Staff Bank and a specific compensation structure for Dutch general managers banking.
The successive quarterly figures of 2012 were discussed in May, August and November, respectively. The Annual Accounts and the SOX 404 sign-off were approved in March. Following the ruling of the European Court on the Restructuring Plan, the Supervisory Board met in April to discuss possible scenarios taking into perspective the position of the EC, the Dutch State and the Dutch central bank (DNB), as well as the market circumstances.
In May the investor feedback on ING’s performance over 2011 was presented to the Supervisory Board and measures were presented to mitigate capital volatility, especially within Insurance EurAsia. An extra meeting took place in May following the press release issued by the EC on ING’s restructuring. The Supervisory Board was informed that new business scenarios were being prepared for Insurance Europe and a product overview of life insurance products Insurance Europe was presented. The Supervisory Board was reported that an agreement had been reached with the labour unions on a new pension scheme for Dutch employees. The 2012 General Meeting was evaluated in June and various scenarios with regard to ING’s Restructuring Plan were again discussed during an extra meeting in July.
In September the Supervisory Board visited the ING-DiBa banking business in Germany. During this visit the Supervisory Board was briefed extensively on the various operations of ING-DiBa. Furthermore, a mid-year review of ING Bank’s ambition for 2015 was presented and the Supervisory Board was informed on the preparations for an IPO for Insurance US.
In November the Supervisory Board met to discuss and approve the initial SEC S1 filing as a first step in the Insurance US IPO process. Due to macro-economic circumstances, the continued financial crisis and increased competition, an accelerated change programme for Nationale-Nederlanden was presented, including an adjusted business plan and a reduced workforce for NationaleNederlanden and at the head office of Insurance Europe, which the Supervisory Board approved.
57ING Group Annual Report 2012 1 W h o w e are 2 R
Corporate Governance Committee meetings The Corporate Governance Committee met twice in 2012. In February the Corporate Governance Committee discussed the agenda for the 2012 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 ING Insurance Eurasia N.V. In November the Committee reviewed the charters of all boards and advised on various recommendations regarding the 2013 annual General Meeting.
The Audit Committee regularly discussed financial reporting, internal controls over financial reporting, capital management, compliance and regulatory matters. The risk costs and cost development in general were also topics of frequent debate during the year. Furthermore, solvency volatility, hedging activities and other measures to protect the solvency of Nationale-Nederlanden and Insurance US were frequently discussed. Next to that the Audit Committee discussed topics such as reserve adequacy levels in Asia and the policy holder behaviour assumptions for the US Closed Block VA. The decrease of the exposures in Spain was closely monitored. Upon request of the Audit Committee an update on IT risk for banking was presented in August. An evaluation of the performance of the external auditor Ernst & Young was discussed in the February and March 2012 Audit Committee meetings. The Audit Committee discussed and confirmed the topics mentioned in the management letter by Ernst & Young in the November meeting. Directly following the Audit Committee meetings, the members of the Audit Committee met with the internal and external auditors to confirm that all relevant topics were discussed in the Audit Committee meeting.
Nomination Committee meetings The Nomination Committee met three times in 2012, with one absentee once and two absentees once, to discuss succession matters for the Executive Board and the Management Boards as well as the future composition of the Supervisory Board. The Nomination Committee interviewed three candidates for the Management Board Insurance EurAsia and advised positively on their nomination following a review in the Nomination Committee.
Currently, only one Supervisory Board member, Luc Vandewalle qualifies as ‘non-independent’ as defined in best-practice provision III.2.2 of the Dutch Corporate Governance Code. Luc Vandewalle is considered to be not independent because of his previous position at ING Bank Belgium.
ANNUAL ACCOUNTS AND DIVIDEND The Executive Board has prepared the Annual Accounts and discussed these with the Supervisory Board. The Annual Accounts will be submitted for adoption at the 2013 General Meeting as part of the Annual Report. ING will not propose to pay a dividend over 2012 at the 2013 annual General Meeting.
APPRECIATION FOR THE EXECUTIVE BOARD, MANAGEMENT BOARDS AND EMPLOYEES The Supervisory Board would like to thank the members of the Executive Board and the Management Boards for their continued hard work in 2012. During 2012 decisive steps were once more taken in executing the Restructuring Plan as approved by the EC. The Supervisory Board would also like to thank all employees of ING who have continued to serve the interests of customers, shareholders and other stakeholders of ING and have shown continued commitment in the past year.
Following the 2012 annual General Meeting in May, Jan Holsboer joined the Audit Committee. Yvonne van Rooy joined the Audit Committee per 1 October 2012. Robert Reibestein succeeded Piet Klaver as chairman of the Risk Committee per 1 January 2013.
The Nomination Committee and the Supervisory Board will continue to strive for an adequate and balanced composition of its Supervisory Board when selecting and nominating new members for appointment.
DUTCH INSURERS’ CODE The Dutch Insurers’ Code (‘Insurers’ Code’) is applicable to the Dutch subsidiaries of ING Insurance Eurasia N.V. pursuing insurance business and not to ING Group, ING Verzekeringen N.V. or ING Insurance Eurasia N.V. The Insurers’ Code can be downloaded from the website of the Dutch Association of Insurers (www.verzekeraars.nl). However, insurance companies that are part of a group (concern) can decide whether to apply all or parts of the Insurers’ Code at the group level. ING Insurance Eurasia N.V. voluntarily applies the corporate governance related principles of the Insurers’ Code. ING Insurance Eurasia N.V.’s remuneration policy for its Management Board and Senior Management is compliant with these principles. The application of the Insurers’ Code principles is described in the publication ‘Application of the Insurers’ Code by ING Insurance Eurasia’ available on the website of the Company (www.ing.com).
ING Group believes the following to be the significant differences between its corporate governance practices and NYSE corporate governance rules applicable to US companies: • ING Group has a two-tier board structure, in contrast to the one-tier board structure used by most US companies. In the Netherlands, a public limited liability company (naamloze vennootschap) with a two-tier board structure has an Executive Board as its management body and a Supervisory Board which advises and supervises the Executive Board. In general, members of the Executive Board are employees of the company while members of the Supervisory Board are often former state or business leaders and sometimes former members of the Executive Board. Members of the Executive Board and other officers or employees of the company cannot simultaneously be a member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Executive Board. Under the Corporate Governance Code, all members of the Supervisory Board with the exception of not more than one person, should be independent. All members of ING Group’s Supervisory Board, with the exception of Luc Vandewalle, are independent within the meaning of the Corporate Governance Code. The definition of independence 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.
These arrangements entail among other things that the Dutch State may recommend two candidates (‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Nominees. These decisions are specified in the section on the Supervisory Board on page 67.
ING Group’s depositary-receipts structure was evaluated by the Executive Board and the Supervisory Board in 2010. On the basis of this evaluation, the Executive Board and the Supervisory Board concluded that it would be premature to change or abolish ING Group’s depositary-receipts structure in 2010 and that it would be appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring of ING Group and the completion of the divestments approved in the 2009 extraordinary General Meeting. The outcome of the aforementioned evaluation was discussed in the 2010 annual General Meeting.
61ING Group Annual Report 2012 1 W h o w e are 2 R
The holder of a depositary receipt is entitled to receive from ING Trust Office payment of dividends and other distributions corresponding to the dividends and other distributions received by ING Trust Office on an ordinary share.
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 sufficient unissued ordinary shares are 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 the Company, up to a maximum of 20% of the issued capital; and
Pursuant to the European Regulation on short selling any person who acquires or disposes of a net short position relating to the issued share capital of ING Group, whether by a transaction in shares, depositary receipts or American depositary receipts, or by a transaction creating or relating to any financial instrument where the effect or one of the effects of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a change in the price of such shares, depositary receipts or American depositary receipts is required to notify, in accordance with the provisions of the above-mentioned Regulation: a. The Dutch Authority for the Financial Markets (Autoriteit
ING Group participates in several industry conferences and generally hosts one or two Investor Relations Days each year. These events are announced in advance on the company website, and presentation materials are made available in real time on the website. This is in accordance with the applicable regulatory requirements intended to ensure that all shareholders and other market participants may have equal and simultaneous access to information that could potentially influence the price of the company’s securities. ING Group’s Investor Relations Days can be accessed by means of live webcasts or telephone conferencing. No Investor Relations Day or conference in which ING Group participates is held shortly before the publication of quarterly financial information.
When repurchasing shares, the Executive Board is to observe the price ranges prescribed in the authorisation. For the ordinary shares and depositary receipts for such shares, the authorisation currently in force stipulates a minimum price of one eurocent and a maximum price equal to the highest stock price on Euronext Amsterdam by NYSE Euronext on the date on which the purchase agreement is concluded or on the preceding day of stock market trading.
SPECIAL RIGHTS OF CONTROL No special rights of control referred to in Article 10 of the EU Directive on takeover bids are attached to any share.
SHAREHOLDERS’ STRUCTURE Pursuant to the Dutch Financial Supervision Act (Wet op het financieel toezicht), any person who, directly or indirectly acquires or disposes of an interest in the voting rights and/or the capital of ING Group as a result of which acquisition or disposal the percentage of his voting rights or capital interest, whether through ownership of shares, depositary receipts, American depositary shares or any other financial instrument whether stock settled or cash settled, such as call or put options, warrants, swaps or any other similar contract, reaches, exceeds or falls below certain thresholds, is required to notify in writing the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) immediately after the acquisition or disposal of the triggering interest in ING Group’s share capital. These thresholds are 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% or 95% of the issued share capital of ING Group; as of 1 July 2013, there will be an additional threshold of 3%.
63ING Group Annual Report 2012 1 W h o w e are 2 R
RECORD DATE Pursuant to Dutch law, the record date for attending a general meeting and voting on the proposals at that general meeting is the twenty-eighth day before the day of the general meeting. Shareholders and holders of depositary receipts who hold shares and/or depositary receipts for shares at the record date are entitled to attend the general meeting and to exercise other rights related to the general meeting in question on the basis of their holding at the record date, notwithstanding a subsequent sale or purchase of shares or depositary receipts for shares. The record date is published in the notice for the general meeting. In accordance with US requirements, the depositary sets a record date for the American Depositary Shares (‘ADSs’), which date determines which ADSs are entitled to give voting instructions. This record date can differ from the record date set by ING Group for shareholders and holders of depositary receipts.
ING Group may decide not to accommodate or accept any requests or invitations to enter into a dialogue with potential investors, or to accommodate or accept such request or invitation under certain conditions.
ING Group presented at 12 industry conferences throughout the year. In total, there were 433 meetings (including conference calls) with equity investors and 136 meetings (including conference calls) with fixed income investors. Combined conference presentations and face-to-face meetings with investors took place in 40 different cities across the globe. In 2012, ING Group hosted one Investor Day, which took place on 13 January 2012.
MAIN POWERS OF THE GENERAL MEETING The main powers of the General Meeting are to decide on: • the appointment, suspension and dismissal of members of the
Executive Board and members of the Supervisory Board, subject to a binding nomination or a proposal of the Supervisory Board as set forth in the Articles of Association; • the adoption of the annual accounts; • the declaration of dividends, subject to the power of the
• the authorisation of a repurchase of outstanding shares and/or a cancellation of shares.
The following restrictions apply in respect of grants of voting proxies to holders of depositary receipts by ING Trust Office: • the relevant holder of depositary receipts must have announced his or her intention to attend the general meeting observing the provisions laid down in the Articles of Association; and
of large stock-listed companies and experience in the political and social environment.
The recommendation right of the Dutch State is subject to applicable law and to corporate governance practices, generally accepted under stock exchange listing regimes applicable to ING Group and continues as long as the IABF continues. Should the IABF be discontinued, the State Nominees will remain in office and complete their term of appointment.
Candidates recommended by the Dutch State will be nominated for appointment by way of a binding nomination, unless one or more specified situations occur. Such situations include when: • the candidate is not fit and proper to discharge his duties as a Supervisory Board member; • upon appointment the composition of the Supervisory Board would not be appropriate and/or not be in accordance with the Supervisory Board Profile; • the appointment would be incompatible with any provision of the Articles of Association, the Supervisory Board Charter, any principle or best-practice provision of the Corporate Governance Code as applied by ING Group and/or any other generally accepted corporate governance practice or requirement which is applicable to ING Group as an internationally listed company; • the relevant candidate has a structural conflict of interest with ING Group; and
PATRICK G. FLYNN, CHIEF FINANCIAL OFFICER (Born 1960, Irish nationality, male; appointed in 2009, term expires in 2013) Patrick Flynn is a Chartered Accountant and a member of the Association of Corporate Treasurers in the UK. He also holds a bachelor’s degree in Business Studies from Trinity College Dublin. He was appointed a member of the Executive Board of ING Group on 27 April 2009. From 2007 to 2009, he was the chief financial officer of HSBC Insurance Holdings Ltd. Patrick Flynn is responsible for ING’s finance departments and Investor Relations.
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. Wilfred Nagel 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. Wilfred Nagel is responsible for ING’s risk management departments including compliance.
CHANGES IN THE COMPOSITION The current terms of appointment of Jan Hommen and Patrick Flynn will expire at the end of the 2013 annual General Meeting. At this meeting, they will be nominated for reappointment. The Supervisory Board will propose to reappoint Patrick Flynn as a member of the Executive Board for a consecutive period of four years, ending after the annual General Meeting in 2017. The Supervisory Board will propose to reappoint Jan Hommen as a member of the Executive Board for the period until 1 October 2013. The Supervisory Board will propose to the annual General Meeting of 13 May 2013 to appoint Ralph Hamers (born 1966, Dutch nationality, male) as a member of the Executive Board for a consecutive period of four years, ending after the annual General Meeting in 2017. The Supervisory Board intends to appoint Ralph Hamers as chairman of the Executive Board and CEO as of 1 October 2013.
of the Supervisory Board may be a former member of the Executive Board. In addition, this member must wait at least one year after resigning from the Executive Board before becoming eligible for appointment to the Supervisory Board. Former members of the Executive Board are not eligible for appointment to the position of chairman or vice-chairman of the Supervisory Board.
requires all members of the Supervisory Board, including the State Nominees, to act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all the 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.
On 31 December 2012, the members of the Audit Committee were: Joost Kuiper (chairman), Tineke Bahlmann, Henk Breukink, Jan Holsboer, Yvonne van Rooy and Luc Vandewalle.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting and advises the Supervisory Board on improvements. On 31 December 2012, the members of the Corporate Governance Committee were: Henk Breukink (chairman), Jeroen van der Veer and Lodewijk de Waal.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, ING Verzekeringen N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING’s internal and external auditors.
69ING Group Annual Report 2012 1 W h o w e are 2 R
PIET C. KLAVER (Born 1945, Dutch nationality, male; appointed in 2006, will resign in 2013) Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: chairman of the Supervisory Board of PostNL N.V. (listed company). Chairman of the Supervisory Board of each of Koninklijke Dekker B.V., Credit Yard Group B.V., Dura Vermeer Groep N.V. and Blokker Holding B.V. Vice-chairman of the Supervisory Board of SHV Holdings N.V. Member of the Board of the African Parks Foundation.
Other business activities: until the end of the AGM in May 2013, non-executive director of Royal Dutch Shell plc. Chairman of the Supervisory Board of Koninklijke Philips Electronics N.V. (listed companies). Member of the Supervisory Board of Het Concertgebouw N.V. Chairman of the Supervisory Council of Nederlands Openluchtmuseum. Member of the Board of Nationale Toneel (theatre). Chairman of the Supervisory Council of Platform Bèta Techniek. Chairman of the Advisory Council of Rotterdam Climate Initiative. Member of the Governing Board of European Institute of Innovation & Technology (EIT).
J.P. (TINEKE) BAHLMANN (Born 1950, Dutch nationality, female; appointed in 2009, term expires in 2013) Professor in Business Administration, University of Utrecht. Other business activities: vice-chairman of the Supervisory Board of N.V. Nederlandsche Apparatenfabriek ‘Nedap’ (listed company). Member of the Supervisory Board of Stedin Netbeheer B.V. Member of the Board of Maatschappelijk Verantwoord Ondernemen Nederland (CSR). Chairman of the Supervisory Council of Maasstad Ziekenhuis (hospital). Chairman of Stichting Max Havelaar. Member of the Board of Toneelgroep Amsterdam (theatre).
FINANCIAL REPORTING A description of the main features of ING Group’s internal control and risk management systems in relation to the financial reporting process is included in the statement with respect to Section 404 Sarbanes-Oxley Act on page 78, which is deemed to be incorporated by reference herein.
LUC A.C.P. VANDEWALLE (Born 1944, Belgian nationality, male; appointed in 2011, term expires in 2014) Former chairman and non-executive member of ING Belgium NV/SA. Other business activities: chairman of the Supervisory Board of each of Bakker Hillegom B.V., Domo Real Estate, Matexi Groep, Plu Holding, Transics International and Alinso N.V. Member of the Supervisory Board of each of Allia Insurance Brokers, Arseus, Besix Groep, Galloo, Masureel Veredeling, Sea-Invest, Sioen Industries, Vergroup, Veritas and Willy Naessens Industriebouw.
CHANGES IN THE COMPOSITION At the 2012 annual General Meeting Jan Holsboer, Robert Reibestein and Yvonne van Rooy were appointed as members of the Supervisory Board. Aman Mehta retired at the end of the 2012 annual General Meeting.
71ING Group Annual Report 2012 1 W h o w e are 2 R
The external auditor may be questioned at the annual General Meeting in relation to its audit opinion on the annual accounts. The external auditor will therefore attend and be entitled to address this meeting. The external auditor may only provide audit, auditrelated, tax and other services to ING Group and its subsidiaries with the permission of the Audit Committee. The Audit Committee generally pre-approves certain types of audit and audit-related services to be provided by the external auditor on an annual basis. Services that have not been pre-approved by the Audit Committee should not be provided by the external auditor unless they are specifically pre-approved by the Audit Committee at the recommendation of local management.
In these meetings, among other things, the following topics were discussed: – The preparation of the meeting of holders of depositary receipts of 21 November 2012. – The annual General Meeting of ING Group of 14 May 2012
(‘AGM’), the items on the agenda of the AGM, the proxy voting results and the voting by ING Trust Office.
– The promotion of participation in the decision-making in annual general meetings of shareholders and holders of depositary receipts and the exercise of voting rights in general.
– The functioning of ING Trust Office, the composition of the Board, the 2011 balance sheet and statement of income and expenses of ING Trust Office.
In these meetings, among other things, the following topics were discussed: – The activities and performance of ING Group in 2011 on the basis of the press release of 9 February 2012 and the 2011 figures, the activities and performance of ING Group over the first six months of 2012 on the basis of the press release of 8 August 2012 and the activities and performance of ING Group over the first nine months of 2012 on the basis of the press release of 7 November 2012.
73ING Group Annual Report 2012 1 W h o w e are 2 R
OUTSTANDING DEPOSITARY RECEIPTS On 31 December 2012, the nominal value of administered ordinary shares amounted to EUR 919,265,820.96 for which 3,830,274,254 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts decreased by 4,200.
A profile and an overview of relevant positions held by the members of the Board can be found on the website of ING Trust Office (www.ingtrustoffice.com).
In accordance with the Articles of Association and the Trust Conditions, ING Trust Office voted at its own discretion on the shares for which it did not issue voting proxies and did not receive voting instructions, representing 49.2% of the total votes that might be cast at the AGM. In voting such shares, ING Trust Office was guided primarily by the interests of all holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprise. As a result, ING Trust Office voted on these shares in favour of all voting items on the agenda of the AGM.
A call-option agreement concluded between ING Continuity Foundation and ING Groep N.V. (‘ING Group’) vests ING Continuity Foundation with the right to acquire cumulative preference shares in the share capital of ING Group up to a maximum of 4.5 billion cumulative preference shares. The acquisition of cumulative preference shares by ING Continuity Foundation is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares may not exceed one-third of the total issued share capital of ING Group. If new shares other than cumulative preference shares are subsequently issued, ING Continuity Foundation may again exercise its right, subject to the provisions of the preceding sentence. On acquisition of cumulative preference shares, at least 25% of the nominal value must be paid on said shares.
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2012. 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. 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 2012.
of cash flows and consolidated statement of changes in equity for the year then ended. Our report dated 18 March 2013 expressed an unqualified opinion thereon.
TO THE SHAREHOLDERS, THE SUPERVISORY BOARD AND THE EXECUTIVE BOARD OF ING GROEP N.V.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, ING Groep N.V. maintained, in all material respects, effective internal control over financial reporting as of 31 December 2012, based on the COSO criteria.
In 2012, ING fully implemented the required changes to its remuneration policies in order to comply with the Capital Requirements Directive III (CRD III). This includes arrangements to defer, hold back and where necessary claw back variable compensation.
The base salary level of the Executive Board remained at the 2010 level and for the fourth consecutive year no variable compensation was paid to the Executive Board. Remuneration of the Executive Board of ING is now in the lowest decile of compensation for managerial positions of equivalent significance and complexity in Europe and the gap between market median levels and total compensation of the Executive Board has become very significant. This could have severe consequences for the ability to attract and retain qualified senior management.
Total direct compensation: moderation and reduced emphasis on variable remuneration Total direct compensation levels are based on market data that include peers both inside and outside the financial sector in the international context in which ING operates. Total direct compensation is benchmarked against a peer group of companies that, in the opinion of the Supervisory Board, are comparable with ING in terms of size and scope. In line with the foregoing, the Supervisory Board has determined that the peer group consists of the companies in the Dow Jones EURO STOXX 50 index. These are 50 companies, in a range of financial and non-financial industries, which are based in countries within the Economic and Monetary Union of the European Union. In accordance with the Dutch Banking Code, ING’s remuneration policy for the Executive Board aims for total direct compensation levels slightly below market median levels for comparable positions in the relevant markets.
The long-term component, consisting of two equal portions of cash and stock, will be 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.
Executive Board members are not allowed to sell depositary receipts for shares, obtained as a member of the Executive Board ING Group, and within a period of five years from the grant date. However, they are allowed to sell part of their depositary receipts for shares at the date of vesting to pay tax over the vested share award.
4. Reduce leverage in Insurance US in preparation for IPO base case 5. Reduce leverage in Insurance EurAsia to prepare for standalone future
Benefits Executive Board members will continue to be eligible for a range of additional benefits (e.g. the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances). Executive Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that apply to most other comparable employees of ING. In addition, tax and financial planning services will be provided to ensure compliance with the relevant legislative requirements.
OTHER ITEMs fOR sUPERVIsORY BOARD DIsCRETION CLAW BACK AND ADJUsTMENTs The Supervisory Board has the authority to reclaim variable remuneration allocated to a member of the Executive Board based on inaccurate data and/or behaviour that led to significant harm to the company. The Supervisory Board also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in undesired outcomes. Accordingly, the Supervisory Board has decision authority in situations not addressed in the policy.
ING’s remuneration policy is leading the way in moderating pay in the international financial markets. The Supervisory Board and the Executive Board also have an obligation to safeguard the continuity of the company. The Supervisory Board will therefore evaluate from time to time how these two responsibilities relate to each other. If and when appropriate, it can make adjustments.
2012 Executive Board base salary The base salary of all Executive Board members was set at the time of the introduction of the remuneration policy in 2010. The base salary of the Executive Board has not been raised since 2010 as the Executive Board decided voluntarily to forego any increase until ING has repaid outstanding core Tier 1 securities from the Dutch State along with the restrictions put in force by the new Legislation in 2012. As a consequence the base salary level remained at the 2010 level.
One-off crisis levy of taxable income In 2012, the Dutch Government imposed an additional tax charge of 16% on the income in excess of EUR 150 thousand 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 members of the Executive Board amounts to EUR 0.4 million, which is not included in the figures in the table above.
(1) Jan Hommen does not participate in the pension plan. (2) Wilfred Nagel was appointed to the Executive Board on 14 May 2012.
The 2012 pension costs for this member reflect the partial year as an Executive Board member.
The Executive Board members are not allowed to sell depositary receipts for shares obtained as a member of the Executive Board ING Group and within a period of five years from the grant date. They are only allowed to sell part of their depositary receipts for shares at the date of vesting to pay tax over the vested performance-share award. Depositary receipts for shares obtained as a member of the Executive Board ING Group and from exercised stock options may only be sold within a period of five years from the grant date of the options to pay tax over the exercised award.
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2012, 2011 and 2010.
Furthermore, and in addition to financial indicators, performance is also assessed based on non-financial drivers. The incorporation of non-financial indicators in the overall assessment is particularly aimed at further improving sustainable business practices within ING. Therefore, a number of targets have been set for ING’s performance in several areas, including customer satisfaction, workforce diversity, stakeholder engagement and sustainable business practices.
The 2013 performance management approach for ING Bank will be based on the same core principles of balancing financial and non-financial performance, leadership through living our ING
The remuneration policy for the Executive Board, which permits a combination of fixed compensation (base salary) and variable remuneration (together ‘total direct compensation’), pension arrangements and benefits will apply in full to members of the Management Board Banking. For senior management in banking, a gradual shift to a more balanced mix of fixed and variable remuneration, in line with the remuneration policy for the Executive Board, was initiated in 2010 and will continue during the coming year. During the year 2012, the remuneration structure of senior management in the Netherlands, employed by the Bank, has been further rebalanced with a reduced emphasis on variable remuneration. Exceptions may exist for high value specialists and senior management working in certain divisions and/or geographical areas. In addition, the remuneration policy for senior management has been amended in line with the requirements of the Capital Requirements Directive III.
For the Management Board EurAsia and senior management in ING’s EurAsia Insurance operations, remuneration is in line with the general principles of the remuneration policy for the Executive Board and the requirements under the Capital Requirements Directive III.
We have continued to review and amend the remuneration for a select group of ING Bank and Insurance EurAsia employees, in order to comply with the Capital Requirements Directive III. The amendments relate to the allocation of variable remuneration and the ratio between fixed and variable remuneration and are intended to mitigate risk relating to remuneration. Measures include an ex-ante and ex-post assessment of variable remuneration prior to award and vesting respectively, significant deferral of variable remuneration, an equal divide between variable remuneration in cash and in shares, as well as retention periods on all equity remuneration as soon as it becomes unconditional.
The regulatory environment is still in development. The structure as set out above is based on information currently available. Should it become clear, after everything has been clarified, that amendments are necessary, ING will amend the structure as deemed appropriate.
(4) Peter Elverding was chairman of the Supervisory Board from April 2009 until May 2011. He has been vice-chairman since May 2011.
(6) Aman Mehta retired in May 2012. The compensation figure for 2012 reflects a partial year as a member of the Supervisory Board.
(1) The numbers of depositary receipts for shares reflect the shares held by the members of the Supervisory Board and their partners.
87ING Group Annual Report 2012 1 W h o w e are 2 R
Independent auditor’s report 321 Proposed appropriation of result 322 7 Additional information
ASSETS Cash and balances with central banks 1 17,657 31,194 Amounts due from banks 2 39,053 45,323 Financial assets at fair value through profit and loss 3 – trading assets 114,895 123,688 – investments for risk of policyholders 98,765 116,438 – non-trading derivatives 13,951 17,159 – designated as at fair value through profit and loss 4,760 5,437 Investments 4 – available-for-sale 193,584 208,539 – held-to-maturity 6,545 8,868 Loans and advances to customers 5 563,404 602,525
EQUITY Shareholders’ equity (parent) 13 54,357 46,663 Non-voting equity securities 13 2,250 3,000
Gross underwriting expenditure 35,711 27,321 37,419 Investment result for risk of policyholders –11,246 186 –10,120 Reinsurance recoveries –1,833 –1,760 –1,620
Earnings per share 50 Basic earnings per ordinary share 0.86 1.12 0.63 Diluted earnings per ordinary share 0.86 1.12 0.63
Net result from continuing and discontinued operations attributable to: Equityholders of the parent 3,894 5,766 2,810
Net result from continuing operations attributable to: Equityholders of the parent 2,986 4,093 2,405
Unrealised revaluations after taxation (1) 6,949 1,139 2,603 Realised gains/losses transferred to profit and loss (1) –840 723 86 Changes in cash flow hedge reserve 737 1,124 475 Transfer to insurance liabilities/DAC –2,181 –2,004 –1,644 Exchange rate differences –709 –156 2,859 Other revaluations 39 –2 –1 Total amount recognised directly in equity (other comprehensive income) 3,995 824 4,378
Unrealised revaluations after taxation comprises EUR –10 million (2011: EUR –16 million; 2010: EUR –2 million) related to the share of other comprehensive income of associates.
Reference is made to Note 49 ‘Taxation’ for the disclosure on the income tax effects on each component of the other comprehensive income.
– deferred acquisition costs and value of business acquired –484 277 1,159 – increase in provisions for insurance and investment contracts –3,174 4,239 4,278 – addition to loan loss provisions 2,125 1,670 1,751
Cash and cash equivalents at beginning of year 34,280 20,768 20,959 Effect of exchange rate changes on cash and cash equivalents 219 –200 265 Cash and cash equivalents at end of year 56 24,150 34,280 20,768
As at 31 December 2012 Cash and cash equivalents includes cash and balances with central banks of EUR 17,657 million (2011: EUR 31,194 million; 2010: EUR 13,072 million). Reference is made to Note 56 ‘Cash and Cash equivalents’.
Employee stock option and share plans 115 115 115 Repayment of non-voting equity securities –2,000 –2,000 Repurchase premium –1,000 –1,000 –1,000 Changes in the composition of the group –1 –1 Dividend –34 –34 Purchase/sale of treasury shares 50 50 50 96 ING Group Annual Report 2012
97ING Group Annual Report 2012 1 W h o w e are 2 R
AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. for the year ended 31 December 2012 were authorised for issue in accordance with a resolution of the Executive Board on 18 March 2013. The Executive Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Group are described in the section ‘ING at a glance’ in section 1.
The comparison of balance sheet items between 31 December 2012 and 31 December 2011 is impacted by the disposal of companies as disclosed in Note 31 ‘Companies acquired and companies disposed’ and by the held for sale classification as disclosed in Note 11 ‘Assets and liabilities held for sale’ and Note 26 ‘Discontinued operations’. Changes in assets and liabilities as a result of classification as held for sale are included in the notes in the line ‘Changes in the composition of the group’. In 2012, this relates mainly to ING’s Insurance and investment management businesses in Asia and the reinsured Japan SPVA business in corporate reinsurance (‘Asia’) and ING Direct UK. In 2011, this related mainly to ING Direct USA.
Assets held for sale Assets – other –2,440 Impact on Total assets –2,440
Liabilities held for sale 4 Liabilities – other 136 Impact on Total liabilities 140
Amendments to IAS 1 ‘Presentation of Financial Statements’ The amendments to IAS 1 ‘Presentation of Financial Statements’ introduce changes to the presentation in the Statement of Other Comprehensive income, including a split of Other comprehensive income into items that may be recognised in the profit and loss account in future periods and items that will never be recognised in the profit and loss account. There will be no impact on Shareholders’ equity, Net result and/or Other comprehensive income.
Amendments to IFRS 7 ‘Financial instruments: Disclosures’ The amendments to IFRS 7 ‘Financial instruments: Disclosures’ introduce additional disclosures on offsetting (netting) of financial instruments in the balance sheet and on the potential effect of netting arrangements. There will be no impact on Shareholders’ equity, Net result and/or Other comprehensive income.
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 2012, 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 implementation of IFRS 10 is expected not to have significant impact on Shareholders’ equity, Net result and/or Other comprehensive income.
The use of different assumptions about these factors could have a material 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.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair values of financial assets and liabilities are determined using quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices may be obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
All debt and equity securities (other than those carried at fair value through profit and loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may be unlikely to pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline of the fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities. Generally 25% and 6 months are used as triggers. Upon impairment, the full difference between the (acquisition) cost and fair value is removed from equity and recognised in net result. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities cannot be reversed.
The identification of impairment is an inherently uncertain process involving various assumptions and factors, including financial condition of the counterparty, expected future cash flows, statistical loss data, discount rates, observable market prices, etc. Estimates and assumptions are based on management’s judgement and other information available prior to the issuance of the financial statements. Significantly different results can occur as circumstances change and additional information becomes known.
A list of principal subsidiaries is included in Note 30 ‘Principal subsidiaries’.
Reference is made to Note 35 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair value of financial instruments.
Accounting policies for the consolidated annual accounts of ING Group continued 104 ING Group Annual Report 2012
In certain circumstances ING grants borrowers postponement and/or reduction of loan principal and/or interest payments for a temporary period of time to maximise collection opportunities and, if possible, avoid default, foreclosure or repossession. When such postponement and/or reduction of loan principal and/or interest payments is executed based on credit concerns it is also referred to as ‘forbearance’. In general, forbearance represents an impairment trigger under IFRS. In such cases, the net present value of the postponement and/or reduction of loan and/or interest payments is taken into account in the determination of the appropriate level of Loan loss provisioning as described below. If the forbearance results in a substantial modification of the terms of the loan, the original loan is derecognised and a new loan is recognised at its fair value at the modification date.
If there is objective evidence that an impairment loss on an asset carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (‘Loan loss provision’) and the amount of the loss is recognised in the profit and loss account under ‘Addition to loan loss provision’. If the asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rent free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
ING Group owns a real estate portfolio, diversified by region, by investment segment (Office, Retail and Residential) and by investment type (Core, Value Add and Opportunistic). 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 main direct properties in its main locations, the yields applied in the 2012 year-end valuation generally are in the range of 6% to 9%.
Assets under operating leases Assets leased out under operating leases in which ING Group is the lessor are stated at cost less accumulated depreciation and any impairment losses. The cost of the assets is depreciated on a straight-line basis over the lease term. Reference is made to the section ‘Leases’.
The initial accounting for the fair value of the net assets of the companies acquired during the year may be determined only provisionally as the determination of the fair value can be complex and the time between the acquisition and the preparation of the Annual Accounts can be limited. The initial accounting shall be completed within a year after acquisition.
Goodwill is only capitalised on acquisitions after the implementation date of IFRS-EU (1 January 2004). Accounting for acquisitions before that date has not been restated; goodwill and internally generated intangibles on these acquisitions were recognised directly in shareholders’ equity. Goodwill is allocated to reporting units for the purpose of impairment testing. These reporting units represent the lowest level at which goodwill is monitored for internal management purposes. This test is performed annually or more frequently if there are indicators of impairment. Under the impairment tests, the carrying value of the reporting units (including goodwill) is compared to its recoverable amount which is the higher of its fair value less costs to sell and its value in use.
Accounting policies for the consolidated annual accounts of ING Group continued 112 ING Group Annual Report 2012
reverse in the foreseeable future. The tax effects of income tax losses available for carry forward are recognised as an asset where it is probable that future taxable profits will be available against which these losses can be utilised.
Provision for life insurance The Provision for life insurance is calculated on the basis of a prudent prospective actuarial method, taking into account the conditions for current insurance contracts. Specific methodologies may differ between business units as they may reflect local regulatory requirements and local practices for specific product features in the local markets.
The adequacy test continues to be applied to businesses that are presented as discontinued operations; the relevant businesses continue to be evaluated as part of the adequacy test of the business line in which these were included before classification as discontinued operations.
The value of any plan asset recognised is restricted to the sum of any past service costs not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
117ING Group Annual Report 2012 1 W h o w e are 2 R
Loans and advances to banks 14,527 13,752 22,775 29,556 37,302 43,308 Cash advances, overdrafts and other balances 1,227 1,322 552 700 1,779 2,022
Loans and advances to banks include balances (mainly short-term deposits) with central banks amounting to EUR 1,057 million (2011: EUR 2,704 million).
As at 31 December 2012, Amounts due from banks includes receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 1,109 million (2011: EUR 2,925 million) and receivables related to finance lease contracts amounting to EUR 133 million (2011: EUR 76 million).
Trading assets 114,895 123,688 Investment for risk of policyholders 98,765 116,438 Non-trading derivatives 13,951 17,159 Designated as at fair value through profit and loss 4,760 5,437
Trading assets and trading liabilities include mainly assets and liabilities that are classified under IFRS as ‘Trading’ but are closely related to servicing the needs of the clients of ING. ING Bank offers institutional and corporate clients and governments products that are traded on the financial markets. A significant part of the derivatives in the trading portfolio are related to servicing corporate clients in their risk management to hedge for example currency or interest rate exposures. In addition, ING Bank provides its customers access to equity and debt markets for issuing their own equity or debt securities (‘securities underwriting’). Although these are presented as ‘Trading’ under IFRS, these are related to services to ING’s customers. Loans and receivables in the trading portfolio mainly relate to (reverse) repurchase agreements, which are comparable to collateralised borrowing (lending). These products are used by ING Bank as part of its own regular treasury activities, but also relate to the role that ING Bank plays as intermediary between different professional customers. Trading assets and liabilities held for ING’s own risk are very limited. From a risk perspective, the gross amount of trading assets must be considered together with the gross amount of trading liabilities, which are presented separately on the balance sheet. However, IFRS does not allow netting of these positions in the balance sheet. Reference is made to Note 20 ‘Financial liabilities at fair value through profit and loss’ for information on trading liabilities.
In 2012, the change in Investments for risk of policyholders is mainly the result of the income for the year as well as the classification as held for sale of ING’s Insurance and investment management business in Asia. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Notes to the consolidated annual accounts of ING Group continued 120 ING Group Annual Report 2012
2012 – Greece, Italy, Ireland, Portugal, Spain and Cyprus In the first half of 2010 concerns arose regarding the creditworthiness of certain southern European countries, which later spread to a few other European countries. As a result of these concerns the value of sovereign debt decreased and exposures in those countries are being monitored closely. With regard to the sovereign debt crisis, ING Group’s main focus is on Greece, Italy, Ireland, Portugal, Spain and Cyprus as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the European Central Bank (‘ECB’) via government bond purchases in the secondary market. For these countries, ING Group’s main focus is on exposure to Government bonds and Unsecured Financial institutions’ bonds.
Notes to the consolidated annual accounts of ING Group continued 122 ING Group Annual Report 2012
EUR 67 million), bringing the total impairments on Greek government bonds to EUR 978 million (Bank: EUR 588 million, Insurance: EUR 390 million). The total Greek government bond portfolio was written down by approximately 80%.
Amortisation –371 –226 –15 –14 –386 –240 Transfers and reclassifications 1,288 1,288 Changes in the composition of the group and other changes –1,327 –188 –30,920 –23,232 –444 –32,247 –23,864
Carrying value as at 31 December 4,465 16,906 857 Fair value as at 31 December 4,594 16,099 889 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –491 –633 –65 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made 129 –807 32 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (mainly interest income) 89 467 34 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Loans to, or guaranteed by, public authorities 35,857 29,281 14,917 25,867 50,774 55,148
As at 31 December 2012, 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 320 million (2011: EUR 1,228 million).
Unearned future finance income on finance leases -2,996 -3,228 Net investment in finance leases 16,396 17,440
The allowance for uncollectable finance lease receivables includes in the loan loss provisions amounted to EUR 322 million as at 31 December 2012 (2011: EUR 223 million).
127ING Group Annual Report 2012 1 W h o w e are 2 R
Increase in loan loss provisions 2,125 1,670 29 33 2,154 1,703 Exchange rate differences 20 –83 1 –2 21 –85 Other changes –37 –72 –37 –72
‘Increase in loan loss provisions’ relating to insurance operations is presented under Investment income. The ‘Increase in the loan loss provisions’ relating to banking operations is presented under Addition to loan loss provisions on the face of the profit and loss account. Reference is made to the section ‘Risk management’.
Notes to the consolidated annual accounts of ING Group continued 128 ING Group Annual Report 2012
CBRE Retail Property Fund Iberica LP 29 147 1,666 1,146 96 65 CBRE Lionbrook Property Partnership LP 20 102 604 92 50 17 CBRE Property Fund Central Europe LP 25 90 897 536 87 4 ING Real Estate Asia Retail Fund 26 87 868 512 81 37
In 2011, Transfers to and from Investments relates mainly to the real estate funds for which significant influence ceased to exist due to the sale of ING Real Estate Investment Management, as disclosed in Note 31 ‘Companies acquired and companies disposed’.
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2012 is EUR 162 million (2011: EUR 184 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2012 is nil (2011: nil).
Notes to the consolidated annual accounts of ING Group continued 130 ING Group Annual Report 2012
Changes in the composition of the group –25 –28 Transfers to and from Real estate investments 31 Transfers to and from Other assets –1 –31 Depreciation –25 –28 Revaluations –30 –21 Impairments –24 –29 Reversal of impairments 7 11 Disposals –49 –27 Exchange rate differences 5 –26 Closing balance 1,423 1,535
Changes in the composition of the group –25 –11 –31 –29 –56 –40 Disposals –7 –16 –15 –24 –22 –40 Depreciation –181 –176 –226 –236 –407 –412 Impairments –1 –1 –1 –2 –1 Exchange rate differences 4 –6 6 –14 10 –20 Other changes –2 5 –13 –40 –15 –35
Gross carrying amount as at 31 December 9 16 9 16 Accumulated depreciation as at 31 December –4 –10 –4 –10 Net carrying value as at 31 December 5 6 0 5 6
Notes to the consolidated annual accounts of ING Group continued 132 ING Group Annual Report 2012
2012 – Impairment In 2012, a goodwill impairment of EUR 48 million is recognised relating to the reporting unit Insurance Benelux. The reporting unit Insurance Benelux equals the segment Insurance Benelux. In the impairment test of Insurance Benelux, the IFRS book value (including goodwill) is 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 Insurance Benelux 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 Insurance Benelux 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 is 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 Corporate Line Insurance.
2011 – Impairment In 2011, a goodwill impairment of EUR 32 million was recognised that related to the reporting unit Commercial Banking (ING Real Estate). During 2011, the ING Real Estate business changed significantly. The Real Estate Development business was reduced by selling/closing development projects and ING sold REIM (the ING Real Estate Investment Management business). As a consequence, there were indications in the fourth quarter of 2011 that the recoverable amount of the reporting unit ING Real Estate had fallen below book value. A full goodwill impairment review was performed for the reporting unit ING Real Estate in the fourth quarter of 2011. In 2011, the reporting unit Real Estate equals the segment Commercial Banking (ING Real Estate). However, as disclosed in Note 52 ‘Segments’, following the divestment of ING Real Estate Investment Management the remaining business was included in the segment Commercial Banking and the segment ING Real Estate ceased to exist. The 2010 impairment test for ING Real Estate showed that the recoverable amount based on fair value using market multiples for Price/Book was at least equal to book value. The outcome of the impairment test performed in the fourth quarter of 2011 indicated that the fair value had become less than book value by an amount that exceeded the goodwill of ING Real Estate, indicating that the full amount of goodwill relating to ING Real Estate was impaired. As a result, the goodwill of EUR 32 million (pre-tax) was impaired. The related charge was included in the profit and loss account in the line ‘Intangibles amortisation and other impairments’. Goodwill is recognised in the Corporate Line and, therefore, this charge was included in the segment reporting in Corporate Line Bank.
2012 – Changes in composition of the group and other changes In 2012, ‘Changes in composition of the group and other changes’ represents the reclassification of goodwill to ‘Assets held for sale’. This includes all goodwill that relates to businesses that were classified as held for sale. For 2012, the amount is EUR 485 million and relates 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 relate to are now classified as held for sale, the related goodwill is no longer evaluated at the level of the reporting unit to which it was allocated in the regular goodwill impairment test. Instead, it is reviewed as part of the valuation of the disposal unit that is presented as held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Allocation of Goodwill to reporting units After the above changes, the remaining goodwill is allocated to goodwill reporting units as follows: Goodwill allocation to reporting units
As a first step of the impairment test, the best estimate of the recoverable amount of reporting units to which goodwill is allocated is determined separately for each relevant reporting unit based on Price to Earnings, Price to Book, and Price to Assets under management ratios. The main assumptions in this valuation are the multiples for Price to Earnings, Price to Book and Price to Assets under management; these are developed internally but are either derived from or corroborated against market information that is related to observable transactions in the market for comparable businesses. Earnings and carrying values are equal to or derived from the relevant measure under IFRS-EU.
Notes to the consolidated annual accounts of ING Group continued 134 ING Group Annual Report 2012
11 ASSETS AND LIABILITIES HELD FOR SALE Assets and liabilities held for sale includes disposal groups whose carrying amount will be recovered principally through a sale transaction rather than through continuing operations. This relates to businesses for which a sale is agreed upon but for which the transaction has not yet closed or a sale is highly probable at the balance sheet date but for which no sale has yet been agreed. As at 31 December 2012 this relates to ING’s Insurance and investment management businesses in Asia and the reinsured Japan SPVA businesses in corporate reinsurance (‘Asia’) and ING Direct UK.
Cash and balances with central banks 1,342 4,980 Amounts due from banks 123 314 Financial assets at fair value through profit and loss 26,688 3 Available-for-sale investments 24,805 22,605 Held-to-maturity investments 444 Loans and advances to customers 8,705 31,805 Reinsurance contracts 98 Investments in associates 37 Property and equipment 56 75 Intangible assets 176 166 Deferred acquisition costs 5,124 Other assets 1,318 2,091
For businesses classified as held for sale, the related goodwill is no longer evaluated at the level of the reporting unit to which it was allocated in the regular goodwill impairment test. Instead, it is reviewed as part of the valuation of the disposal unit that is presented as held for sale. In 2012, goodwill of EUR 180 million in Investment Management Korea, EUR 200 million in ING Life Korea, EUR 15 million in ING Vysya Life Insurance and EUR 16 million in ING Direct UK was written off, as the related businesses have been or are expected to be sold below IFRS book value. The related charge is included in the profit and loss account in Net result from classification as discontinued operation (for the Insurance and Investment Management businesses in Asia) and in Result on disposals of group companies (for ING Direct UK).
Disclosures in respect of deferred tax assets and pension assets are provided in Note 21 ‘Other liabilities’.
The allowance for uncollectable reinsurance and insurance receivables amounts to EUR 50 million as at 31 December 2012 (2011: EUR 66 million). The allowance is deducted from this receivable.
Gross carrying amount as at 31 December 2,297 2,720 Accumulated impairments as at 31 December –1,077 –1,136 Net carrying value 1,220 1,584
As at 31 December 2012, Other reserves includes an amount of EUR 911 million (2011: EUR 836 million; 2010: EUR 741 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Depositary receipts for ordinary shares held by iNG Group (treasury shares) As at 31 December 2012, 30.1 million (2011: 49.3 million; 2010: 51.3 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 are held by ING Groep N.V. or its subsidiaries. These depositary receipts for ordinary shares were purchased to hedge option rights granted to the Executive Board members and other employees. In December 2010 ING Groep N.V. announced that it will no longer rebalance its hedge portfolio. This decision is an effort to simplify the management and administration of ING’s various employee share and option programmes. The remaining shares in the hedge portfolio will be used to fund the obligations arising out of exercise and vesting. Once all shares in the hedge portfolio are used ING will fund these obligations by issuing new shares (subject to approval by Executive Board and Supervisory Board).
Non-distributable reserves 4,007 9,221 13,228 2011 ING Bank ING Insurance Other Total
Regulatory capital invested 49,145 20,335 69,480 Required minimum regulatory capital 29,860 8,826 38,686
Result for the year 3,894 3,894 Unrealised revaluations after taxation –79 –79 Changes in treasury shares 255 255 Transfer to share of associates reserve –236 236 Employee stock options and share plans 7 7 Repurchase premium –375 –375
Result for the year 5,766 5,766 Unrealised revaluations after taxation 16 16 Changes in treasury shares 50 50 Transfer to share of associates reserve –383 383 Employee stock options and share plans 115 115 Repurchase premium –1,000 –1,000
The repurchase premium of EUR 1 billion is paid in relation to the repayment of the EUR 2 billion non-voting equity securities.
Result for the year 2,810 2,810 Unrealised revaluations after taxation –156 171 15 Changes in treasury shares 22 22 Transfer to share of associates reserve –91 91 Employee stock options and share plans 36 36
Notes to the consolidated annual accounts of ING Group continued 142 ING Group Annual Report 2012
In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted EUR 3 billion and included a 50% repurchase premium. On 26 November 2012 ING repaid another EUR 1.125 billion also including a 50% repurchase premium. ING funded these repayments from retained earnings. ING intends to repay the remaining EUR 2.250 billion non-voting equity securities (core Tier 1 securities) in three equal tranches over the next 3 years. While ING has committed to redeem these securities per the defined schedule, ING has the ability to defer a repayment in full or in part, in which case the subsequent tranche will be increased with a corresponding amount. In the event that ING does not repay in full 2 consecutive repayment tranches or does not pay in total EUR 4.5 billion by 15 May 2015 (including the EUR 1.125 billion paid in 2012), the Dutch State will re-notify to the Commission who may in principle require compensatory measures. All repayments are conditional upon the approval of the Dutch central bank (DNB). The terms for the remaining non-voting equity securities, including restrictions on remuneration and corporate governance, remained unchanged. Reference is made to Note 34 ‘Related parties’.
Furthermore, ING Groep N.V. is subject to legal restrictions with respect to repayment of capital to holders of cumulative preference shares. Capital may be repaid to the holders of cumulative preference shares pursuant to (i) an amendment of ING Groep N.V.’s articles of association whereby the cumulative preference shares are written down or (ii) a resolution to redeem and cancel the cumulative preference shares.
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 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 ING Groep N.V. was repaid. In addition, ING Groep N.V. issued one new senior bond with a nominal value of EUR 0.7 billion and ING Bank issued two new senior bonds with a nominal value of GBP 0.4 billion and EUR 0.4 billion respectively. The overall transaction resulted in a total gain of EUR 955 million (EUR 716 million after tax), including related hedge results and transaction costs. This gain is recognised in Other income. From this amount, EUR 767 million (EUR 574 million after tax) relates to ING Groep N.V., EUR 93 million (EUR 71 million after tax) to ING Bank N.V. and EUR 95 million (EUR 71 million after tax) to ING Verzekeringen N.V. This affects the subordinated securities as disclosed in this note and in Note 16 ‘Other borrowed funds’.
On 8 March 2012, ING launched three separate exchange offers and consent solicitations on a total of three series of senior debt securities of 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 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 the first quarter of 2012. The settlement date of the exchange offers and consent solicitations was on 4 April 2012.
Preference shares of group companies comprises non-cumulative guaranteed Trust Preference Securities which are issued by wholly owned subsidiaries of ING Groep N.V. These securities have a liquidation preference of a certain amount plus any accrued interest and unpaid dividend. Dividends with regard to these preference securities are presented as an interest expense in the profit and loss account. These trust preference securities have no voting rights.
Claims incurred but not reported (IBNR) 558 493 2 3 560 496
Investment contracts for risk of company 4,561 6,259 4,561 6,259 Investment contracts for risk of policyholders 8,067 6,939 8,067 6,939 Total provisions for investment contracts 12,628 13,198 12,628 13,198
Prior year provisions – benefit payments to policyholders –16,074 –13,872 –14,919 –12,548 –668 –700 –31,661 –27,120 – interest accrual and changes in
In 2012, ‘Effect of changes in other assumptions’ includes EUR –104 million relating to the assumptions refinement for the Insurance US Closed Block Variable Annuity (VA) business. Reference is made to Note 44 ‘Underwriting expenditure’.
In 2011, ‘Effect of changes in other assumptions’ includes EUR 611 million relating to the assumption review for the Insurance US Closed Block Variable Annuity (VA) business. Reference is made to Note 44 ‘Underwriting expenditure’.
As at 31 December 2012, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounts to EUR 5,920 million (2011: EUR 6,536 million). There was no provision for uncollectable reinsurance in 2012 and 2011.
Changes in the composition of the group –12 –8 –2 –14 –8
Claim settlements and claim settlement costs – for the current year –473 –472 –1 –1 –474 –473 – for prior years –643 –665 –13 –6 –656 –671
Where discounting is used in the calculation of the claims provisions, based on weighted averages, the rate is within the range of 3.0% to 4.0% (2011: 3.0% to 4.0%).
Notes to the consolidated annual accounts of ING Group continued 148 ING Group Annual Report 2012
Cumulative payments –695 –751 –812 –647 –780 –827 –813 –720 –464 –6,509
The decrease in Customer deposits and other funds on deposit includes the disposal of ING Direct Canada and the announced disposal of ING Direct UK (classified as held for sale) as a result of which funds decreased by EUR 43.6 billion.
Debt securities 11,826 11,271 Funds entrusted 513 632 Subordinated liabilities 1,060 1,118
Comprising: – deferred tax liabilities 3,679 3,157 – deferred tax assets –2,801 –1,653
Sections 382 and 383 of the U.S. Internal Revenue Code, as amended, operate as anti-abuse rules, the general purpose of which is to prevent trafficking in tax losses and credits, but which can apply without regard to whether a ‘loss trafficking‘ transaction occurs or is intended. These rules are triggered when an ‘ownership change‘ - generally defined as when the ownership of a company, or its parent, changes by more than 50% (measured by value) on a cumulative basis in any three year period - occurs. If triggered, the amount of the
Opening balance 599 434 Changes in the composition of the group –1
Additions to the reorganisation provision are mainly related to the restructurings for Retail banking in the Netherlands, Commercial banking and Insurance Eurasia.
Releases –27 –7 –39 –2 –66 –9 Charges –40 –21 –33 –56 –73 –77 Exchange rate differences –1 –5 –6 3 –7 –2
Notes to the consolidated annual accounts of ING Group continued 156 ING Group Annual Report 2012
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 extrapolate 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. The extrapolation was further refined for the eurozone in 2012. The discount rate decreased from 5.3% in 2011 to 3.7% in 2012. This decrease reflects the decrease in market interest rates, the narrowing of credit spreads and the above refinement of the extrapolation. The decrease in the discount rate resulted in an increase of the defined benefit obligation of approximately EUR 6 billion, which includes EUR -1.5 billion as a result of the above refinement of the extrapolation; this refinement of the extrapolation is part of the ‘Actuarial gains and losses’ and did not impact Shareholders’ equity and/or net result. As at 31 December 2012 the methodology remained to be based on AA-rated corporate bond yields. Discussions are ongoing, both in the industry and at the IASB, on whether the definition of ‘high quality corporate bonds’ for setting the discount rate for defined benefit pension liabilities should be broader than only AA-rated corporate bonds. ING Group will reconsider the methodology for setting the discount rate if and when appropriate.
Loans and advances to customers 61,733 13,909 32,494 127,836 325,490 1,942 563,404
(4) Included in remaining assets for which maturities are not applicable are property and equipment, real estate investments and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
Customer deposits and other funds on deposit 385,934 25,895 40,658 12,205 2,079 776 467,547 Financial liabilities at fair value through profit and loss
Transfer of financial assets Securities lending Sale and repurchase 2012 Equity Debt Equity Debt
161ING Group Annual Report 2012 1 W h o w e are 2 R
Associated liabilities at carrying amount Amounts due to banks n.a n.a 11,145 Customer deposits and other funds on deposit n.a n.a 5,730 Financial liabilities at fair value through profit and loss n.a n.a 4,768 33,243
For the year ended 31 December 2012, ING Group recognised EUR –410 million (2011: EUR –1,028 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 511 million (2011: EUR 1,047 million) fair value changes recognised on hedged items. This resulted in EUR 101 million (2011: EUR 19 million) net accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2012, the fair values of outstanding derivatives 162 ING Group Annual Report 2012
As at 31 December 2012, the fair value of outstanding non-derivatives designated as hedging instruments for cash flow hedge accounting purposes was EUR 267 million (2011: EUR –21 million).
Included in Interest income and interest expense on non-trading derivatives is EUR 2,598 million (2011: EUR 2,966 million) and EUR 2,620 million (2011: EUR 2,959 million), respectively, relating to derivatives used in cash flow hedges.
163ING Group Annual Report 2012 1 W h o w e are 2 R
In 2011, ING’s pension, life insurance and investment management activities in Latin America (‘Latin America’) were classified as discontinued operations. The divestment of Latin America was completed in December 2011.
Latin America 114 216 Net result from discontinued operations 548 684 414
In 2012, Net result from disposal of discontinued operations includes the divestment gain on the sale of the Insurance businesses in Malaysia. In 2011, Net result from disposal of discontinued operations includes the divestment gain on the sale of Latin America. Reference is made to Note 31 ‘Companies acquired and companies disposed’.
The net cash flow from discontinued operations was as follows: Net cash flow from discontinued operations 2012 - Asia (2011 and 2010: Asia and Latin America)
The table does not include assets relating to securities lending as well as sale and repurchase transactions. Reference is made to Note 24 ‘Transfer of financial assets’.
31 COMPANIES ACQUIRED AND COMPANIES DISPOSED Acquisitions effective in 2012 There were no significant acquisitions in 2012.
169ING Group Annual Report 2012 1 W h o w e are 2 R
(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.
ING Investment Management Australia In October 2011 ING completed the sale of ING Investment Management (ING IM) Australia to UBS AG. ING IM Australia’s business provided a number of investment strategies and products directly to the Australian institutional and wholesale markets. This transaction supported ING’s objective to actively manage its capital and portfolio of businesses to ensure an attractive and coherent combination for the announced divestment of its insurance and investment management activities. ING IM Australia was previously included in the segment ING Investment Management.
171ING Group Annual Report 2012 1 W h o w e are 2 R
Clarion Real Estate securities ING REIM Asia and Europe ING Car Lease
(2) Comprises various entities as explained in the description of the disposal. (3) The gain/loss on disposal comprises the sales proceed, the net assets disposed, the expenses directly related to the disposal and the realisation of unrealised reserves.
Disposals effective in 2010 In October 2009 ING reached an agreement to sell its Asian Private Banking business for a consideration of USD 1,463 million (EUR 985 million). The Asia franchise offers private banking services in 11 markets, including Hong Kong, the Philippines and Singapore. The transaction generated a net profit for ING of EUR 332 million. The sale was completed in the first half of 2010. The Asian Private Banking business was previously included in the segment Retail Rest of World (Retail Asia).
173ING Group Annual Report 2012 1 W h o w e are 2 R
In January 2011 the Association of Stockholders (Vereniging van Effectenbezitters, ‘VEB’) has issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now: Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank, and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB states that the impact and the risks of the subprime crisis for Fortis and Fortis’ liquidity position have been reflected incorrectly in the prospectus. The VEB requests a declaratory decision stating that the summoned parties have acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. The amount of damages of EUR 18 billion has not been substantiated yet. ING is defending itself against this claim; at this time ING is not able to assess the outcome of the court proceeding. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect of such action.
On 12 June 2012, ING Bank entered into a Settlement Agreement with U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Deferred Prosecution Agreements with the Department of Justice, the United States Attorney’s Office for the District of Columbia and the District Attorney of the County of New York (together the ‘U.S. Authorities’) in relation to the investigation by those agencies into compliance with U.S. economic sanctions and U.S. dollar payment practices until 2007. Under the terms of the Deferred Prosecution Agreements, no further action will be taken against ING Bank if it meets the conditions set forth in the agreements during an 18 months period. As part of the settlement, ING Bank has paid a total penalty of EUR 473 million. As announced on 9 May 2012, ING Bank recognised a provision in the first quarter of 2012 by which this issue has been sufficiently covered. ING Bank has cooperated closely and constructively with regulators and other authorities throughout this process. The U.S. Authorities have recognised ING’s substantial cooperation in the resolution and ING’s efforts and commitment to continuously enhance compliance within the organisation.
For the decrease in ‘Associates’ reference is made to Note 6 ‘Investments in associates’.
Assets from ING Bank N.V. and ING Verzekeringen N.V. mainly include long-term funding. Liabilities to ING Bank N.V. mainly include short-term deposits.
Key management personnel compensation Transactions with key management personnel (Executive Board, Management Boards and Supervisory Board) and post-employment benefit plans are transactions with related parties. These transactions are disclosed in more detail as required by Part 9 Book 2 of the Dutch Civil Code in the remuneration report in the annual report. The relevant sections of the remuneration report therefore are part of the annual accounts. For the post-employment benefit plans see Note 21 ‘Other liabilities’.
In 2011, ING made a number of changes in the structure and composition of the Management Boards for ING Verzekeringen N.V. and ING Bank N.V.. As of November 2011 the members of the Management Board ING Insurance Eurasia N.V. and the Board of ING U.S., Inc. are considered to be key management personnel and their compensation is therefore included in the tables below. Before November 2011 the members of the Management Board ING Insurance Eurasia N.V. were members of the Management Board ING Verzekeringen N.V.
– Termination benefit 1,873 1,873 Variable compensation – Upfront cash 2,696 2,696
– Retirement benefit 1,828 1,828 Variable compensation – Upfront cash 1,101 1,101
Loans and advances to key management personnel Amount outstanding 31 December Average interest rate Repayments amounts in thousands of euros 2012 2011 2012 2011 2012 2011
Members of the Management Boards of ING Bank, ING Insurance, Insurance EurAsia and ING U.S. 860 2,314 3.7% 3.4% 60 388 Supervisory Board members 282 8.6% 282
The transaction resulted in a reduction of the negative revaluation -and therefore an increase in equity- of EUR 4.6 billion (after tax).
As at 31 December 2012, the remaining outstanding amount from the transaction price that remained payable by the Dutch State is EUR 7.8 billion (2011: EUR 10.3 billion). The net amount of other unamortised components of the total sales proceeds, as explained above, amounts to EUR 0.1 billion payable (2011: EUR 0.6 billion payable).
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 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.
Under the terms of the original Restructuring Plan, ING was required to divest WestlandUtrecht Bank. However, due to market circumstances and changing regulatory requirements, a divestment of WestlandUtrecht has not occurred. Under the amended Restructuring Plan, the commercial operations of WestlandUtrecht Bank will be combined with the retail banking activities of Nationale-Nederlanden, which is to be divested as part of Insurance/IM Europe. Of WestlandUtrecht Bank’s EUR 36.4 billion Dutch mortgage portfolio, EUR 2.6 billion will be transferred to Nationale-Nederlanden Bank. ING Bank will retain the remaining EUR 33.8 billion mortgage portfolio and in relation to this will contribute EUR 350 million to the capital of Nationale-Nederlanden Bank. To service existing WestlandUtrecht Bank labelled mortgages, insurance policies and real estate finance agreements, part of WestlandUtrecht Bank will become a separate entity within ING Retail Banking Netherlands. Part of the employees of WestlandUtrecht Bank will transfer to Nationale-Nederlanden Bank. This transaction is expected to be completed in 2013. The integrated retail banking business will operate under the ‘Nationale-Nederlanden’ brand, with the goal of becoming a competitive retail bank in the Dutch market with its own funding 180 ING Group Annual Report 2012
capabilities and a broad distribution network. Nationale-Nederlanden Bank is expected to start in the course of 2013 and will offer a broad and coherent product line, with mortgages, savings, bank annuities (‘banksparen’), investments and consumer credit products, combined with the core retail insurance products of Nationale-Nederlanden.
Financial assets Cash and balances with central banks 17,657 31,194 17,657 31,194 Amounts due from banks 39,126 45,269 39,053 45,323 Financial assets at fair value through profit and loss
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 banking 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 consensus 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.
Fair value hierarchy ING Group has categorised its financial instruments that are measured in the balance sheet at fair value into a three level hierarchy based on the priority of the inputs to the valuation. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques based on unobservable inputs. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. The fair value hierarchy consists of three levels, depending upon whether fair values were determined based on quoted prices in an active market (Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Financial assets in Level 3 include for example illiquid debt securities, complex OTC and credit derivatives, certain complex loans (for which current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available) and asset backed securities for which there is no active market and a wide dispersion in quoted prices.
Financial liabilities designated as at fair value through profit and loss 1,833 6,464 5,102 13,399 Investment contracts (for contracts carried at fair value) 3,716 4,339 12 8,067
Financial liabilities designated as at fair value through profit and loss 1,150 7,599 4,272 13,021 Investment contracts (for contracts carried at fair value) 3,279 3,648 12 6,939
Level 2 – Valuation technique supported by observable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model), where inputs in the model are taken from an active market or are observable. If certain inputs in the model are unobservable, the instrument is still classified in this category, provided that the impact of those unobservable inputs on the overall valuation is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are modified based on other market observable external data and items whose value is derived from quoted prices but for which there was insufficient evidence of an active market.
185ING Group Annual Report 2012 1 W h o w e are 2 R
Early repayment of liabilities –705 –49 –402 –3 –1,159 Maturity/settlement –928 –400 –645 –1,973
Transfers out of Level 3 –175 –2 –80 –9 –266 Exchange rate differences –2 63 7 68 Changes in the composition of the group –16 –16
Liabilities Trading liabilities 46 46 Non-trading derivatives 194 –11 183 Financial liabilities designated as at fair value through profit and loss 113 113
Greece, Italy, Ireland, Portugal, Spain and Cyprus Of the Government and Unsecured Financial institutions’ bonds exposure in Greece, Italy, Ireland, Portugal, Spain and Cyprus as disclosed in Note 4 ‘Investments’, EUR 5.0 billion (2011: EUR 5.1 billion) is classified as available-for-sale and is measured at fair value (with the revaluation recognised in equity, taking into account impairments that are recognised in the profit and loss account). The table below provide the fair value hierarchy per year-end 2012 for the Greek, Italian, Irish, Portuguese, Spanish and Cyprian Government and Unsecured Financial institutions’ bond exposure measured at fair value.
Fair value hierarchy of Greek, Italian, Irish, Portuguese, Spanish and Cyprian bonds at fair value 2011 Level 1 Level 2 Level 3 Total
Income from real estate investments 16 24 128 54 53 54 70 77 182
Income from investments in debt securities and loans 6,255 6,107 5,752 6,255 6,107 5,752
Realised gains/losses on disposal of equity securities 367 39 338 443 379 141 810 418 479 Impairments of available-for-sale equity securities –22 –65 –32 –143 –173 –37 –165 –238 –69 Realised gains/losses and impairments of equity securities 345 –26 306 300 206 104 645 180 410
The result on disposal of the Malaysian operations (2011: Latin American operations) is not included above but in the result on disposal of discontinued operations. Reference is made to Note 26 ‘Discontinued operations’
Reference is made to Note 31 ‘Companies acquired and companies disposed’ for more details.
Asset management fees related to the management of investments held for the risk of policyholders of EUR 521 million (2011: EUR 486 million; 2010: EUR 358 million) are included in Commission income. The decrease in asset management fees in 2012 is explained by the sale of ING REIM in 2011.
Change in fair value of derivatives relating to – fair value hedges –428 –956 –679 18 –72 –69 –410 –1,028 –748 – cash flow hedges (ineffective
– other non-trading derivatives –2 –315 –720 –1,896 701 –667 –1,898 386 –1,387 Net result on non-trading derivatives –413 –1,272 –1,397 –1,889 619 –755 –2,302 –653 –2,152
Change in fair value of assets and liabilities (hedged items) 536 989 686 –25 58 66 511 1,047 752 Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading) –1,101 504 69 –27 102 91 –1,128 606 160 Net valuation results –978 221 –642 –1,941 779 –598 –2,919 1,000 –1,240
Foreign exchange transactions results –142 –374 648 22 –11 –277 –120 –385 371
Securities trading results includes the results of making markets in instruments such as government securities, equity securities, corporate debt securities, money-market instruments, and interest rate derivatives such as swaps, options, futures and forward contracts. Foreign exchange transactions results include gains and losses from spot and forward contracts, options, futures, and translated foreign currency assets and liabilities.
Income from real estate development projects 22 31 36 22 31 36
In 2011, Other includes a gain of EUR 955 million on the repurchase of subordinated loans as disclosed in Note 14 ‘Subordinated loans’.
Trading income mainly relates to trading assets and trading liabilities which include mainly assets and liabilities that are classified under IFRS as ‘Trading’ but are closely related to servicing the needs of the clients of ING. ING Bank offers institutional and corporate clients and governments products that are traded on the financial markets. A significant part of the derivatives in the trading portfolio are related to servicing corporate clients in their risk management to hedge for example currency or interest rate exposures. In addition, ING Bank provides its customers access to equity and debt markets for issuing their own equity or debt securities (‘securities underwriting’). Although these are presented as ‘Trading’ under IFRS, these are related to services to ING’s customers. Loans and receivables in the trading portfolio mainly relate to (reverse) repurchase agreements, which are comparable to collateralised borrowing (lending). These products are used by ING Bank as part of its own regular treasury activities, but also relate to the role that ING Bank plays as intermediary between different professional customers. Trading assets and liabilities held for ING’s own risk are very limited. From a risk perspective, the gross amount of trading assets must be considered together with the gross amount of trading liabilities, which are presented separately on the balance sheet. However, IFRS does not allow netting of these positions in the balance sheet. Reference is made to Note 3 ‘Financial assets at fair value through profit and loss’ and Note 20 ‘Financial liabilities at fair value through profit and loss’ for information on trading liabilities.
The total amount of commission paid and commission payable with regard to the insurance operations amounted to EUR 1,590 million (2011: EUR 1,634 million; 2010: EUR 1,633 million). This includes the commissions recognised in Costs of acquiring insurance business of EUR 1,465 million (2011: EUR 1,414 million; 2010: EUR 1,294 million) referred to above and commissions recognised in Other underwriting expenditure of EUR 125 million (2011: EUR 220 million; 2010: EUR 339 million). Other underwriting expenditure also includes reinsurance commissions received of EUR 14 million (2011: EUR 152 million; 2010: EUR 156 million).
Intangible amortisation and (reversals of) impairments Impairment losses Reversals of impairments Total
197ING Group Annual Report 2012 1 W h o w e are 2 R
(1) The average number of employees includes, on an average basis, employees of entities that were sold or classified as held for sale during the year.
Share-based compensation arrangements includes EUR 139 million (2011: EUR 146 million; 2010: EUR 84 million) relating to equity-settled share-based payment arrangements and EUR 22 million (2011: EUR 24 million; 2010: EUR 29 million) relating to cash-settled share-based payment arrangements.
In 2012, a curtailment was recognised due to a change to a new pension scheme. Reference is made to Note 21 ‘Other liabilities’.
Remuneration of senior management, Executive Board and Supervisory Board Reference is made to Note 34 ‘Related parties’.
In 2012 no share awards (2011: nil; 2010: nil) were granted to the members of the Executive Board of ING Groep N.V., 643,644 share awards (2011: 154,440; 2010: nil) were granted to the Management Boards of ING Bank, ING Insurance, Insurance Eurasia and ING U.S.. To senior management and other employees 19,802,692 share awards (2011: 20,135,968; 2010: 26,369,146) were granted.
The obligations with regard to the share plans will in the future be funded either by cash, newly issued shares or remaining shares from the portfolio of own shares at the discretion of the holder.
Options non-vested (in numbers) Weighted average grant date fair value (in euros)
As at 31 December 2012, the aggregate intrinsic values of options outstanding and exercisable are EUR 44 million (2011: EUR 39 million) and EUR 44 million (2011: nil), respectively.
Share awards (in numbers) Weighted average grant date fair value (in euros)
As at 31 December 2012 total unrecognised compensation costs related to share awards amount to EUR 102 million (2011: EUR 149 million; 2010: EUR 158 million). These costs are expected to be recognised over a weighted average period of 1.2 years (2011: 1.5 years; 2010: 2.1 years).
Fees as disclosed above relate to the network of the Group’s auditors.
Associates exemption –602 –329 –403 Other income not subject to tax –227 –251 –128 Expenses not deductible for tax purposes 123 122 102 Impact on deferred tax from change in tax rates 36 15 8 Deferred tax benefit from previously unrecognised amounts –6 –3 Current tax benefit from previously unrecognised amounts –37 4 Write-off/reversal of deferred tax assets 305 280 737 Adjustment to prior periods –41 25 –43 Effective tax amount 799 1,246 1,146
The attribution in 2012 includes the premium of EUR 375 million (2011: EUR 1,000 million) paid in relation to the repayment of the EUR 750 million (2011: EUR 2,000 million) non-voting equity securities.
The potential conversion of the non-voting equity securities has an anti-dilutive effect on the earnings per share calculation in 2012, 2011 and 2010 (the diluted earnings per share becoming higher or less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account in the calculation of diluted earnings per share for these years.
203ING Group Annual Report 2012 1 W h o w e are 2 R
Less: Net result from discontinued operations 908 1,673 405 Basic earnings from continuing operations 2,344 2,573 1,964 3,796.1 3,783.7 3,781.5 0.62 0.68 0.52
Diluted earnings from continuing operations 2,344 2,573 1,964 3,802.4 3,789.1 3,788.1 0.62 0.68 0.52
52 SEGMENTS a. General ING Group’s segments relate to the internal segmentation by business lines. As of 2012 the internal management reporting structure for the banking operations was changed in order to improve transparency and to reflect the impact of the divestments of ING Direct USA and ING Real Estate Investment Management. The segments have changed accordingly. The comparatives have been adjusted to reflect the new segment structure for the banking operations. ING Group identifies the following segments: Segments of ING Group Banking Insurance
ING Group evaluates the results of its segments using a financial performance measure called underlying result. The information presented in this note is in line with the information presented to the Executive and Management Board. Underlying result is defined as result under IFRS-EU excluding the impact of divestments and special items. Disclosures on comparative years also reflect the impact of current year’s divestments.
Income from retail and private banking activities in the Netherlands, including the SME and mid-corporate segments. The main products offered are current and savings accounts, business lending, mortgages and other consumer lending in the Netherlands.
Retail Rest of World Income from retail banking activities in the rest of the world, including the SME and mid-corporate segments in specific countries. The main products offered are similar to those in the Netherlands.
– Total investment and other income 368 5,006 –61 5,313 Total underlying income 14,241 26,688 –147 40,783
Special items in 2012, includes 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 is partly offset by a pension curtailment of EUR 305 million following the new Dutch employee pension scheme announced in 2012.
207ING Group Annual Report 2012 1 W h o w e are 2 R
Divestments in 2010 mainly relates to the sale of the three US independent retail broker-dealer units, the sale of the Private Banking businesses in Asia and Switzerland and to the sale of ING’s 50% stake in Summit Industrial Fund LP as well as the operating result of the in 2010 and 2011 divested units.
Special items in 2010 includes mainly restructuring expenses for the combining of the Dutch retail activities, the Belgium retail transformation program, the cost related to the separation of Banking and Insurance and the expenses related to the goodwill impairment in the United States of EUR 513 million (after tax) in 2010. Reference is made to Note 9 ‘Intangible assets’.
– Additions to loan loss provision 665 168 83 251 955 2,122
– Additions to loan loss provision 457 145 91 167 477 1,336
– Additions to loan loss provision 560 160 120 118 490 1,448
d. Insurance activities With regard to insurance activities, ING Group analyses the underlying result through a margin analysis, which includes the following components: • Operating result; and • Non-operating items Both are comprised of various sub-components. The total of operating result and non-operating items (gains/losses and impairments, revaluations and market & other impacts) equals underlying result before tax.
unlocking, VA/FIA Guaranteed Benefit Reserve unlocking and DAC offset on gains/losses on debt securities.
As of the fourth quarter of 2010, the Legacy Variable Annuity segment in the US is reported and analysed separately from the other US business in the internal management reporting. Therefore as of 1 October 2010 ING reports the Insurance US Legacy VA business as a separate segment to improve transparency and ongoing business. ING Group’s accounting policy for reserve adequacy as set out in the Accounting policies for the consolidated annual accounts of ING Group requires each segment to be adequate at the 50% confidence level. The separation of the Legacy VA business into a separate segment triggered a charge in the fourth quarter of 2010 to bring reserve adequacy on the new Insurance US Closed Block VA segment to the 50% level. This charge is reflected as a DAC write-off of EUR 975 million before tax. For 2011 the impact of the assumption adjustments includes a charge of EUR 177 million to restore the reserve adequacy of the Insurance US Closed Block VA segment to the 50% level at 31 December 2011. Reference is made to Note 44 ‘Underwriting expenditure’.
A net reserve inadequacy exists using a prudent (90%) confidence level for the segment Insurance US Closed Block VA. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confidence level.
Non-life operating result 82 6 89 Corporate Line operating result –491 –491
Life & ING IM operating result 794 201 666 20 187 1,869
Non-life operating result 179 5 184 Corporate Line operating result –394 –394
Life & ING IM operating result 521 285 565 49 126 1,545
Special items –33 –46 –66 –34 –539 –719 Net result (continuing operations) 601 130 386 –2,018 40 –1,116 –1,977 Net result (discontinued operations) 405 Net result –1,572
53 INFORMATION ON GEOGRAPHICAL AREAS ING Group’s business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. The Netherlands is ING Group’s country of domicile. Geographical distribution of income is based on the origin of revenue. 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.
215ING Group Annual Report 2012 1 W h o w e are 2 R
Included in cash and cash equivalents: – amounts due to banks –12,147 –19,122 –12,898 – amounts due from banks 16,780 14,617 16,125
ING Insurance Eurasia 276 Mission and objectives 276 Risk governance 276 Risk appetite framework 278 Insurance risk 281 Business risk 282 Market risk 283 Real Estate 284 Credit risk 285 Liquidity risk 289 Operational risk 289 Compliance risk 290
ING Insurance US 291 Mission and objectives 291 Risk governance 291 Risk framework 294 Insurance risk 295 Business risk 296 Market risk 296 Credit risk 297 Liquidity risk 299 Operational risk 300 Compliance risk 301 Regulatory capital 301
Risk management formulates with the various management boards the risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout ING Group on risk-related issues. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate and foreign exchange risks), insurance risk, liquidity & funding risk and business risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this risk management section.
ING Group uses an integrated risk management approach for both its banking activities and for its insurance activities. With the operational separation of ING Bank and ING Insurance, the focus of ING’s risk management practices is now located in the bank and insurance companies. The remainder of this Risk paragraph discusses these practices for ING Group, ING Bank, ING Insurance Eurasia and ING Insurance US, respectively.
RISK DEVELOPMENTS IN 2012 Monitoring exposures and Eurozone developments The problems in the Eurozone have been a top priority for risk management throughout 2012, and will continue to be a top priority in 2013. ING closely monitors the exposures in debt securities, lending and credit derivatives in the involved countries, and regularly assesses whether the positions still fit with its risk appetite. This assessment is supported by internal stress tests.
Several European countries have been downgraded in 2012. But there have also been some positive developments related to the Eurozone crisis. Financial markets rallied due to amongst others the Long-term Refinancing Operations from the ECB and better than expected economic data. Credit spreads for some of the involved countries tightened significantly. On 21 February 2012 a new common understanding on key terms of a voluntary exchange of privately held Greek government bonds was reached. In March 2012 the Treaty of Stability, Coordination and Governance (‘Fiscal Treaty’) was signed by 25 EU member states. The treaty encourages greater long term fiscal responsibility on the part of the individual member states and bolsters market confidence in the Euro and European sovereign debt. In the summer of 2012 the chairman of the ECB announced that ECB would take any appropriate action that was deemed necessary to ensure the stability of the Euro. These measures helped to calm down the situation at the global financial markets and government bond rates (and consequent CDS spreads) of peripheral countries decreased to more manageable levels.
Greece, Italy, Ireland, Portugal, Spain and Cyprus In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to a few other European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures were being monitored more closely. With regard to the sovereign debt crisis, ING’s main focus is on Greece, Italy, Ireland, Portugal, Spain and Cyprus as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the ECB via government bond purchases in the secondary market. Within these countries, ING’s main focus is on exposure to Government bonds and Unsecured Financial institutions’ bonds. Further details are included in Note 4 ‘Investments’.
During 2012, ING further improved the scope and the presentation of the disclosures of exposure on Greece, Italy, Ireland, Portugal and Spain. Furthermore, certain definitions have been improved and/or aligned. Comparative figures as per 31 December 2011 have been amended. The changes mainly relate to the inclusion of Pre-settlement exposures, the presentation of trading and banking book CDS exposure, the definitions and scope of Real Estate and ABS exposure (from ‘country of residence’ to ‘country of risk’) and the classification of corporate bonds. In total these restatements did not have a material impact on ING’s exposure on Greece, Italy, Ireland, Portugal and Spain.
Footnote: Total risk exposure to companies registered in Cyprus was approximately EUR 0.9 billion as per 31 December 2012, which consisted mostly of corporate lending (EUR 0.7 billion) and Financial Markets trades (EUR 0.1 billion). Majority of the corporate lending risk exposures were either deals with country of risk outside of Cyprus, Letter of credits or Trade Commodity Finance with maturity less than 3 months. Therefore, net credit risk linked to Cyprus is not material for ING Bank. ING Insurance/IM has no credit risk linked to Cyprus.
(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 4 ‘Investments’ of the annual accounts.
(2) At the end of 2012 ING Bank holds CDS protection (notional value) on the Spanish government, Financial Institutions and covered bonds. (3) Real Estate includes Real Estate Development, Real Estate Investments and Property in Own Use; it does not include (indirect) exposure through Real Estate
(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 4 ’Investments’ of the annual accounts.
Greece On 21 July 2011 a Private Sector Involvement to support Greece was announced. This initiative involved a voluntary exchange of existing Greek government bonds together with a Buyback Facility. On 12 March 2012, the agreement under the Private Sector Initiative (‘PSI’) to exchange Greek Government bonds into new instruments was executed. Under this exchange, ING received new listed Greek Government bonds, listed European Financial Stability Facility (‘EFSF’) notes and listed short-term EFSF notes. Furthermore, ING received listed GDPlinked securities issued by Greece. In July 2012 ING Bank sold all its Greek government bonds to ING Insurance.
221ING Group Annual Report 2012 1 W h o w e are 2 R
The decrease in lending exposure was driven by a EUR 1,247 million reduction in financial institutions and corporate lending partially offset by an increase in residential mortgages and other consumer lending of EUR 504 million. The debt securities went down mainly in ABS portfolio by EUR 538 million and financial institutions bonds by EUR 241 million.
Ireland Total exposure to Ireland declined by EUR 1,657 million in 2012 mainly due to a reduction of debt securities with EUR 1,446 million. The decrease in debt securities was mainly in the ABS portfolio (EUR 1,278 million decrease) and financial institutions bonds (EUR 175 million reduction).
Spain ING’s total exposure to Spain was reduced by EUR 9,065 million in 2012 to EUR 36,944 million. The lending book declined by EUR 2,287 million to EUR 16,074 million. This decrease was driven by a EUR 1,412 million reduction in financial Institutions lending and EUR 1,359 million in corporate lending, and partly offset by a EUR 504 million increase in residential mortgages and other consumer lending. The debt securities portfolio decreased by EUR 7,375 million mainly due to a decrease in RMBS by EUR 1,285 million and covered bonds by EUR 5,055 million.
Impact ING Insurance Eurasia and US Since we are mainly a life insurance company with long-term commitments to our clients, a low(er) interest rate will result in a high(er) market value of the liabilities (MVL). The risk of low interest rates combined with other risks, such as longevity, will further increase the MVL and reduce available capital.
The ING Insurance entities have an ALM process where investments are bought such that they match with the duration profile of our liabilities. The remaining interest exposure is closed through a derivative portfolio. Long term guarantees and options are more difficult to hedge and expose ING to further risks. Further, in several countries the interest rate guarantees provided have a maturity significantly longer than asset maturities in the currency of these countries. In these cases ING runs non-hedgeable interest rate risks. These risks are well-known within ING’s risk appetite as these risks are part of doing life insurance business in these countries, and within market risk limits defined and monitored on a quarterly basis.
The exact impact of the low interest differs per entity and per products offered. However, in general lower interest rates lead to higher provisions and thus lower available capital. In addition, capital requirements will also go up; the matching quality of the assets that back the liabilities will determine the magnitude. In conclusion, lower interest rates will result in higher capital needs.
223ING Group Annual Report 2012 1 W h o w e are 2 R
RISK MANAGEMENT Taking risks is an essential part of banking business. To ensure controlled and measured risk-taking throughout the organisation, ING Bank operates through a comprehensive risk management framework. This ensures that these risks are identified, well understood, accurately measured, controlled and pro-actively managed at all levels of the organisation so that ING Bank’s financial strength is safeguarded.
RWA disclosure More aligned with the EDTF set-up, and also better linked to ING Bank’s capital position and balance sheet composition. 239
225ING Group Annual Report 2012 1 W h o w e are 2 R
As part of the integration of risk management into the annual strategic planning process, the MBB issues a Planning Letter which provides the corporate strategic direction, and addresses key risk issues. Based on the Planning Letter, the business lines and business units develop their business plans which align with the Bank’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved. As part of the process strategic limits and risk appetite levels are explicitly discussed. Based on the business plans, the Management Board Bank formulates the Strategic Plan which is submitted to the Supervisory Board for approval.
Executive Level The ING Bank Finance and Risk Committee (F&RC) is a platform for the CRO and the Chief Financial Officer (CFO), along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. The primary responsibility of the F&RC is to co-ordinate, on a high level, the finance and risk decisions that have an impact on internal and/or external reporting.
Risk Management Function The risk management function is embedded in all levels of ING Bank organisation. The Chief Risk Officer, who is a MBB member, bears primary overall responsibility for the risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING Bank’s risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
governance. It consists of the process of determining that a model is appropriate for its intended use. It is an on-going process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes are made to the model. The validation process contains a mix of developmental evidence, process verification and outcome analysis. To ensure the independence of Model Validation, this department reports directly to the CRO.