INvEStMENtS IN ASSOCIAtES Associates are all entities over which the Group has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies through situations including, but not limited to one or more of the following: Representation on the board of directors;• Participation in the policymaking process; and• Interchange of managerial personnel. •
The fair value of real estate investments is based on regular appraisals by independent qualified valuers. Each year every property is valued either by an independent valuer or internally. Indexation is used when a property is valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions, and disposals made by the Group, are monitored as part of the procedures to back test the indexation methodology. All properties are valued independently at least every five years.
PROPERty ANd EQUIPMENt Property in own use Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against the revaluation reserve directly in equity; all other decreases are charged to the profit and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in net result are recognised in the profit and loss account. Depreciation is recognised based on the fair value and the estimated useful life (in general 20–50 years). Depreciation is calculated on a straight-line basis. On disposal the related revaluation reserve is transferred to retained earnings.
Property obtained from foreclosures Property obtained from foreclosures is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property obtained from foreclosures is included in Other assets – Property held for sale.
Property under development Property developed and under development for which ING Group has the intention to sell the property after its completion is included in Other assets – Property held for sale.
disposals The difference between the proceeds on disposal and net book value is recognised in the profit and loss account.
lEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date.
the Group as the lessor When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable under Loans and advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable is unearned lease finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets under operating leases.
Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities that are identified within one year after acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. However, recognition of deferred tax assets after the acquisition date is recognised as an adjustment to goodwill, even after the first year. On disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the profit and loss account.
dEFERREd ACQUISItION COStS Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance and investment contracts that are deferred and amortised. The deferred costs, all of which vary with (and are primarily related to) the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses.
deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets and liabilities are not discounted.
FINANCIAl lIABIlItIES Financial liabilities at amortised cost Financial liabilities at amortised cost include the following sub-categories: preference shares, other borrowed funds, debt securities in issue, subordinated loans, amounts due to banks and customer deposits and other funds on deposit.
Financial guarantee contracts Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are initially recognised at fair value and subsequently measured at the higher of the discounted best estimate of the obligation under the guarantee and the amount initially recognised less cumulative amortisation to reflect revenue recognition principles.
INSURANCE, INvEStMENt ANd REINSURANCE CONtRACtS Insurance contracts Insurance policies which bear significant insurance risk and/or contain discretionary participation features are presented as insurance contracts. Provisions for liabilities under insurance contracts represent estimates of future payouts that will be required for life and non-life insurance claims, including expenses relating to such claims. For some insurance contracts the measurement reflects current market assumptions.
Provisions for life insurance for risk of policyholders The Provisions for life insurance for risk of policyholder are calculated on the same basis as the Provision for life insurance. For insurance contracts for risk of policyholders the provisions are generally shown at the balance sheet value of the associated investments.
OthER lIABIlItIES Employee benefits – pension obligations Group companies operate various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans.
Other post-employment obligations Some group companies provide post-employment healthcare and other benefits to certain employees and former employees. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans.
lease income The proceeds from leasing out assets under operating leases are recognised on a straight-line basis over the life of the lease agreement. Lease payments received in respect of finance leases when ING Group is the lessor are divided into an interest component (recognised as interest income) and a repayment component.
EARNINGS PER ORdINARy ShARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: Own shares held by group companies are deducted from the total number of ordinary shares in issue;• The computation is based on daily averages;• In case of exercised warrants, the exercise date is taken into consideration. •
Cash flows arising from foreign currency transactions are translated into the functional currency using the exchange rates at the date of the cash flows.
Loans and advances to banks 9,101 15,234 30,641 25,556 39,742 40,790 Cash advances, overdrafts and other balances 2,550 4,800 1,151 2,942 3,701 7,742
As at 31 December 2009, Amounts due from banks included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 2,458 million (2008: EUR 3,005 million) and receivables related to finance lease contracts amounting to EUR 64 million (2008: EUR 100 million).
As at 31 December 2009, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 175 million (2008: EUR 1 million) and nil (2008: nil), respectively. As at 31 December 2009, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 325 million (2008: EUR 28 million) and EUR 353 million (2008: EUR 1,904 million), respectively.
As at 31 December 2009, Trading assets included receivables of EUR 40,940 million (2008: EUR 57,968 million) with regard to reverse repurchase transactions.
Equity securities 93,268 83,208 Debt securities 8,215 7,729 Loans and receivables 3,114 4,429
The change in the fair value of the loans and receivables included in Investments for risk of policyholders attributable to changes in the credit risk of the financial assets during 2009 was nil (2008: nil) and nil (2008: nil) on a cumulative basis.
The fair value of credit derivatives included in investments for risk of policyholders and held to mitigate exposure to credit risk was nil (2008: EUR –12 million), and the change in their fair value in the period was nil (2008: EUR –5 million).
The cost of investments for risk of policyholders as at 31 December 2009 was EUR 106,904 million (2008: EUR 115,929 million).
Available-for-sale – equity securities 8,853 8,822 – debt securities 188,850 234,030 held-to-maturity – debt securities 14,409 15,440
The fair value of the securities classified as held to maturity amounts to EUR 14,809 million as at 31 December 2009 (2008: EUR 15,566 million).
Changes in the composition of the group and other –1,354 –748 –4,223 –11,670 –5,577 –12,418 Changes in unrealised revaluations 3,151 –4,621 14,994 –14,877 18,145 –19,498 Impairments and reversals –409 –1,916 –2,075 –2,904 –2,484 –4,820 Disposals and redemptions –3,052 –8,320 –186,968 –217,239 –1,675 –1,640 –191,695 –227,199
To/from loans and advances to customers/ amounts due from banks 10 –28,962 –1,594 –28,952 –1,594 To/from Investment in associates 9 154 9 154
Reclassifications to loans and advances to customers and Amounts due from banks Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS as of the third quarter of 2008. At the beginning of the first and second quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-for-sale to Loans and advances to customers and Amounts due from banks. In 2009 EUR 23,355 million (2008: EUR 1,594 million) was reclassified to Loans and advances to customers and EUR 5,608 million was reclassified to Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had an intent to hold for the foreseeable future.
Carrying value as at 31 December 6,147 20,551 1,189 Fair value as at 31 December 6,472 20,175 1,184 Unrealised fair value losses in shareholders’ equity (before tax) as at 31 December –734 –902 –67 Effect on shareholders’ equity (before tax) if reclassification had not been made 325 –376 –5 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) after the reclassification till 31 December (mainly interest income) 54 629 47 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Carrying value as at 31 December 1,592 Fair value as at 31 December 1,565 Unrealised fair value losses recognised in shareholders’ equity (before tax) during the year –971 –192 –79 Effect on shareholders’ equity (before tax) if reclassification had not been made n/a n/a –28 Effect on result (before tax) if reclassification had not been made n/a n/a nil Effect on result (before tax) after the reclassification till 31 December (mainly interest income) n/a n/a 9 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) n/a n/a nil
Unrealised fair value losses recognised in shareholders’ equity (before tax) during the year –20 Recognised impairments (before tax) nil 2.1 Consolidated annual accounts
As at 31 December 2009, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to nil (2008: EUR 182 million) and nil (2008: nil), respectively, and debt securities which were lent or sold in repurchase transactions amounting to EUR 6,853 million (2008: EUR 9,822 million) and EUR 20,900 million (2008: EUR 35,795 million), respectively.
Eliminations –4,796 –7,528 loans and advances to customers by type – banking operations Netherlands International Total
Loans to, or guaranteed by, public authorities 28,149 16,288 22,933 10,099 51,082 26,387
Loans guaranteed by credit institutions 468 295 9,761 5,606 10,229 5,901
– more than 1 year but less than 5 years 8,088 7,955 – more than 5 years 4,707 4,239
Included in Amounts due from banks 64 100 Included in Loans and advances to customers 17,096 17,251
The allowance for uncollectible finance lease receivables included in the loan loss provisions amounted to EUR 161 million as at 31 December 2009 (2008: EUR 88 million).
loan loss provisions analysed by type – banking operations Netherlands International Total
Changes in the composition of the group –3 2 –3 –4 –6 –2 Write-offs –1,217 –728 –13 –6 –1,230 –734
Increase in loan loss provisions 2,973 1,280 67 38 3,040 1,318 Exchange rate differences –47 –50 –1 –47 –51 Other changes –66 15 –66 15
ING Dutch Office Master Fund C.V. 16 201 1,527 285 –12 30
ING Dutch Office Master Fund C.V. 16 219 1,624 258 63 75
Retail Property Fund France Belgium (RPFFB) 15 79 1,602 1,075 71 57
ING Retail Property Partnership Southern Europe 21 73 1,218 879 6 67
ING Re French Residential Fund 45 50 182 69 3 4 Other investments in associates 1,131
In 2009, share of results of EUR –458 million (2008: EUR –375 million) and impairments of EUR –3 million (2008: EUR –29 million) are presented in the profit and loss account in Share of profit from associates for EUR –461 million (2008: EUR –404 million).
Real estate investments 3,638 4,300 Investments in associates 2,580 3,200 Other assets – property held for sale 2,515 3,143 Property and equipment – property in own use 1,686 1,841 Investments – available-for-sale 689 663
Furthermore, the exposure is impacted by third party interests, leverage in funds and off-balance commitments, resulting in an overall exposure of EUR 13.1 billion (2008: EUR 15.5 billion). Reference is made to the section ‘Risk management’.
The total amount of rental income recognised in the profit and loss account for the year ended 31 December 2009 was EUR 345 million (2008: EUR 361 million). The total amount of contingent rent recognised in the profit and loss account for the year ended 31 December 2009 was EUR 8 million (2008: EUR 17 million).
The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that generated rental income for the year ended 31 December 2009 was EUR 87 million (2008: EUR 71 million). The total amount of direct operating expenses (including repairs and maintenance) arising from Real estate investments that did not generate rental income for the year ended 31 December 2009 was EUR 46 million (2008: EUR 36 million).
Changes in the composition of the group –2 –150 Transfers to and from Real estate investments –58 38 Transfers to and from Other assets –24 5 Depreciation –33 –39 Revaluations –51 –5 Impairments –8 –1 Reversal of impairments 12 Disposals –37 –114 Exchange rate differences –1 –47 Other changes 1 Closing balance 1,686 1,841
Gross carrying amount as at 31 December 2,574 2,701 Accumulated depreciation as at 31 December –764 –755 Accumulated impairments as at 31 December –124 –105 Net book value 1,686 1,841
Revaluation surplus Opening balance 606 633 Revaluation in year –3 –48 Released in year –72 21 Closing balance 531 606
The cost or the purchase price amounted to EUR 2,043 million (2008: EUR 2,087 million). Cost less accumulated depreciation and impairments would have been EUR 1,155 million (2008: EUR 1,226 million).
Property in own use by year of most recent appraisal by independently qualified valuers (in percentages)
Changes in the composition of the group –9 –4 –88 10 –97 6 Disposals –13 –2 –32 –20 –45 –22 Depreciation –155 –146 –261 –263 –416 –409 Impairments –9 –9 –18 Exchange rate differences 6 –13 4 –28 10 –41 Other changes 6 –14 –19 12 –13 –2
The Group leases assets to third parties under operating leases as lessor. The future minimum lease payments to be received under non–cancellable operating leases are as follows: Future minimum lease payments by maturity
More than 1 year but less than 5 years 1,893 2,072 More than 5 years 4 4 2.1 Consolidated annual accounts
In 2008, as a result of the nationalisation of AFJP Pension in Argentina goodwill of EUR 155 million was written off.
Goodwill is tested for impairment by comparing the book value of the reporting unit (including goodwill) to the best estimate of the fair value of the reporting unit. As a first step the best estimate of the fair value is determined based on a Sum of the Parts valuation (SOP). If the outcome of the SOP indicates that there is not a significant margin between fair value and book value, a more thorough analysis of the fair value will be performed. The main assumptions in the SOP valuation include forecast results, business growth, discount rates, value of new business, market value surplus, etc. For listed companies the relevant market price is used. The more detailed analysis uses valuation models similar to those of the original valuation of an acquisition, embedded value, peer reviews, etc. The valuation models are validated and include development of the business following the acquisition, the latest management forecasts of income and expenditure and updates of future projections, review of discount rates and terminal growth rates, etc. Peer reviews include analysis of Price/Earnings and Price/Book multiples of comparable listed companies. Assumptions are generally based on past experience, management’s best estimate of future developments and, where available, relevant external information. The goodwill impairment test as at 31 December 2009, using best estimate assumptions and reasonable likely changes therein, have not resulted in impairment (2008: nil).
For flexible life insurance contracts the growth rate assumption used to calculate the amortisation of the deferred acquisition costs for 2009 is 8.2% gross and 5.6% net of investment management fees (2008: 6.4% gross and 5.6% net of investment management fees).
Cash and balances with central banks 264 80 Amounts due from banks 474 Financial assets at fair value though profit and loss 389 1,552 Available-for-sale investments 458 9,801 Loans and advances to customers 3,242 1,341 Reinsurance contracts 3 Property and equipment 37 41 Intangible assets 3 671 Deferred acquisition costs 35 1,164 Other assets 119 662 2.1 Consolidated annual accounts
Insurance and investments contracts 191 14,294 Amounts due to banks 31 Customer deposits and other funds on deposit 4,480 Financial liabilities at fair value through profit and loss 36 126 Other liabilities 152 600
Cumulative other comprehensive income includes EUR 13 million (2008: EUR 94 million) related to Assets held for sale.
Gross carrying amount as at 31 December 3,228 3,276 Accumulated impairments as at 31 December –713 –133 Net book value 2,515 3,143 2.1 Consolidated annual accounts
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Groep N.V. currently consists of 4,500 million ordinary shares; it increased in 2008 from 3,000 million shares to 4,500 million shares as a result from an amendment made to the Articles of Association on 8 October 2008. As at 31 December 2009, 3,832 million of ordinary shares were issued and fully paid.
B warrants (2007/2008) In 1998, ING Groep N.V. authorised the issue of a maximum of 17,317,132 B warrants, of which 17,220,200 were issued. On 5 January 2008 of the remaining 9,266,097 warrants, 259,484 warrants expired and 9,006,613 were exercised. Accordingly no B warrants were outstanding as at 31 December 2009 (2008: nil; 2007: 9,266,097). B warrant holders were entitled to obtain from ING Groep N.V., for a fixed price, depositary receipts for ordinary shares in the proportion of one B warrant to two depositary receipts. B warrant holders could exercise their rights at their own discretion but no later than 5 January 2008.
The closing date for exercising warrants B was 5 January 2008. The exercise price of warrants B was EUR 49.92 for two depositary receipts.
On these non-voting equity securities a coupon is payable of the higher of: EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security paid on 12 May 2009; and• 110% of the dividend paid on each ordinary share over 2009 (payable in 2010);• 120% of the dividend paid on each ordinary share over 2010 (payable in 2011);• 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).•
ING announced on 26 October 2009 that it reached an agreement with the Dutch State to alter the repayment terms of the non-voting equity securities issued in November 2008, in order to facilitate early repayment. Under the agreement, ING repurchased on 21 December 2009 EUR 5 billion of the securities, representing half of the non-voting equity securities, at the issue price (EUR 10) plus the accrued coupon and a repayment premium. The 8.5% coupon payment was EUR 259 million at the time of repayment and the repayment premium was EUR 346 million. The total payment amounted to EUR 5,605 million. The terms for the remaining non-voting equity securities, including restrictions on remuneration and corporate governance, remain unchanged. Reference is made to Note 33 ‘Related parties’.
15 dEBt SECURItIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: debt securities in issue – maturities
More than 1 year but less than 2 years 2,376 2,448 More than 2 years but less than 3 years 6,551 2,410 More than 3 years but less than 4 years 4,938 2,429 More than 4 years but less than 5 years 9,542 4,332 More than 5 years 8,151 6,290 Total fixed rate debt securities 96,552 68,903
As of 31 December 2009, ING Group had unused lines of credit available including the payment of commercial paper borrowings relating to debt securities in issue of EUR 7,029 million (2008: EUR 5,649 million).
All were issued under the Credit Guarantee Scheme of the State of the Netherlands and are part of ING Group’s regular medium-term funding operations. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme.
For insurance contracts with discretionary participation features a deferred profit sharing amount is recognised for the full amount of the unrealised revaluation on allocated investments. Upon realisation, the profit sharing on unrealised revaluation is reversed and a deferred profit sharing amount is recognised for the share of realised results on allocated investments that is expected to be shared with policyholders. The deferred profit sharing amount is reduced by the actual allocation of profit sharing to individual policyholders. The change in the deferred profit sharing amount on unrealised revaluation (net of deferred tax) is recognised in equity in the Revaluation reserve. The deferred profit sharing amount on unrealised revaluation is included in Provision for (deferred) profit sharing and rebates and amounts to EUR 313 million as at 31 December 2009 (2008: EUR –1,174 million).
Changes in the composition of the group –2,864 –15,050 –65 –25 –2,929 –15,075
– valuation changes for risk of policyholders 16,652 –32,408 16,652 –32,408 – effect of changes in discount rate assumptions –2 –1 –2 –1 – effect of changes in other assumptions 97 –32 –2 95 –32
Where discounting is used in the calculation of life insurance provisions, the rate is within the range 2.8% to 5.8% (2008: 3.1% to 6.0%) based on weighted averages.
As at 31 December 2009, the total Reinsurance exposure, including Reinsurance contracts and Receivables from reinsurers (presented in Other assets) amounted to EUR 6,049 million (2008: EUR 6,539 million) after the provision for uncollectible reinsurance of EUR 1 million (2008: nil).
Premiums earned during the year –1,704 –4,719 –68 –190 –1,772 –4,909 Exchange rate differences 58 –231 –1 58 –232
Opening balance 21,085 23,652 Changes in the composition of the group –8,208 –548
Prior year provisions – payments to contract holders –9,711 –8,472 – interest accrual 122 268 – valuation changes investments 1,089 –1,535
Exchange rate differences 981 –1,111 Other changes 371 196 Closing balance 11,302 21,085
Estimate of cumulative claims: At the end of underwriting year 1,234 1,126 1,118 1,038 1,088 1,184 1 year later 1,101 1,055 1,085 954 1,078 2 years later 947 953 996 890 3 years later 924 924 984 4 years later 924 909 5 years later 915 Estimate of cumulative claims 915 909 984 890 1,078 1,184 5,960
Liability relating to prior underwriting years 1,321 Total amount recognised in the balance sheet 3,174
ING Group Annual Report 2009140 18 AMOUNtS dUE tO BANKS Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2009, liabilities concerning securities sold in repurchase transactions amounted to EUR 17,991 million (2008: EUR 41,336 million).
Amounts due to banks by type Netherlands International Total 19 CUStOMER dEPOSItS ANd OthER FUNdS ON dEPOSIt
No funds have been entrusted to the Group by customers on terms other than those prevailing in the normal course of business. As at 31 December 2009, Customer deposits and other funds on deposit included liabilities with regard to securities sold in repurchase transactions amounting to EUR 7,326 million (2008: EUR 5,759 million).
During 2009, certain product features and internal procedures for current accounts were amended. As a result thereof, the balances on these current accounts meet the criteria under IFRS for netting of positive and negative balances per client in the balance sheet. This additional netting resulted in a decrease in Loans and advances to customers (banking operations) and a similar decrease in Customer deposits and other funds on deposit of approximately EUR 73.9 billion.
Equity securities 3,052 3,338 Debt securities 12,457 12,448 Funds on deposit 42,505 64,463
As at 31 December 2009, the Funds on deposit include amounts payable of EUR 41,876 million (2008: EUR 63,107 million) with regard to repurchase transactions.
Derivatives used in: – fair value hedges 8,866 8,912 – cash flow hedges 6,468 6,089 – hedges of net investments in foreign operations 316 370 Other non-trading derivatives 4,420 6,402 designated as at fair value through profit and loss by type
The amount that ING Group is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit and loss is EUR 11,444 million (2008: EUR 14,336 million).
Deferred tax liabilities 2,399 3,602 Income tax payable 1,225 940 Pension benefits 589 609 Post-employment benefits 175 219 Other staff-related liabilities 484 342 Other taxation and social security contributions 1,001 1,104 Deposits from reinsurers 870 909 Accrued interest 16,789 17,552 Costs payable 2,654 3,764 Amounts payable to brokers 200 89 Amounts payable to policyholders 2,182 2,231 Reorganisation provision 644 583 Other provisions 747 969 Share-based payment plan liabilities 24 11 Prepayments received under property under development 120 175 Amounts to be settled 2,930 3,753 Dividend payable 425
Financial assets and liabilities at fair value through profit and loss 28 –1 –324 –21 10 –4 –312
Deferred acquisition costs and VOBA 3,481 –568 169 –12 –174 71 2,967
The Change through net result – Other relates mainly to the tax effect on the additional Illiquid Assets Back-Up Facility payments as part of the overall agreement with the European Commission of EUR 1.3 billion and on tax losses of foreign branches carried forward.
The Change through equity relating to Investments of EUR 5,330 million (2008: EUR –5,409 million) consists of a deferred tax component of EUR 4,836 million (2008: EUR –6,832 million) relating to Unrealised revaluations and a deferred tax component of EUR 494 million (2008: EUR 1,423 million) relating to Realised gains/losses transferred to profit and loss.
ING Group Annual Report 2009 143 deferred tax in connection with unused tax losses carried forward
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current year or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 1,754 million. Recognition is based on the fact that it is probable that the entity will have taxable profits and /or can utilise tax planning opportunities before expiration of the deferred tax assets. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred tax assets.
Opening balance 583 619 Changes in the composition of the group –22
The provision for reorganisation as at 31 December 2008 includes EUR 360 million for the restructuring of the retail business of Postbank and ING Bank.
In 2009 Other provisions includes the provision for the industry-wide deposit guarantee scheme in the Netherlands due to the bankruptcy of DSB Bank.
Included in Other provisions in 2008 is a provision for a loss of EUR 292 million relating to the agreed disposal of ING Life Taiwan as disclosed in Note 30 ‘Companies acquired and companies disposed’.
Unrecognised past service costs –3 –5 –3 Unrecognised actuarial gains/(losses) –1,450 –2,072 198 –687 –1,778
Unrecognised past service costs 8 2 4 10 –6 Unrecognised actuarial gains/(losses) 11 7 8 –2 –27
Employer’s contribution 2 Participants contributions 3 7 Benefits paid –640 –601 –6 –8 Actuarial gains and losses –100 –369 –10 1 Past service cost 18 79 –27 1 Changes in the composition of the group and other changes –372 –169 –10 –18 Effect of curtailment or settlement –96 –135 Exchange rate differences 27 –183 –3 1
The actual return on the plan assets amounted to EUR 1,229 million (2008: EUR –1,761 million).
Equity securities include ING Group ordinary shares of EUR 3 million (0.02% of total plan assets) as at 31 December 2009 (2008: EUR 4 million, 0.03% of total plan assets). Other includes mainly real estate. Real estate occupied by ING Group as at 31 December 2009 which is included in Other includes nil (0.0% of total plan assets) (2008: nil, 0.0% of total plan assets).
Determination of expected return on assets An important aspect of financial reporting is the assumption used for return on assets (ROA). The ROA is updated at least annually, taking into consideration the Plans’ asset allocations, historical returns on the types of assets held in the Funds, and the current economic environment. Based on these factors, it is expected that the Funds’ assets will earn an average annual percentage in the long term. This estimate takes into account a reduction for administrative expenses and non-ING investment manager fees paid from the Funds. For estimation purposes, it is assumed that the long term asset mixes will be consistent with the current mixes. Changes in the asset mixes could have an impact on the amount of recognised pension income or expense, the funded status of the Plans, and the need for future cash contributions.
Expected rates of salary increases (excluding promotion increases) 2.80 2.70 3.10 3.20 Medical cost trend rates 6.10 6.60
The assumptions above are weighted by defined benefit obligations. The rates used for salary developments, interest discount factors and other adjustments reflect specific country conditions.
An increase of 1% in the assumed medical cost trend rate for each future year would have resulted in an additional accumulated defined benefit obligation of EUR 4 million as at 31 December 2009 (2008: EUR 4 million) and EUR 2 million increase in the charge for the year (2008: nil). A decrease of 1% in the medical cost trend rate for each future year would have resulted in lower defined benefit obligation of EUR 3 million as at 31 December 2009 (2008: EUR 4 million) and EUR 1 million decrease in the charge for the year (2008: nil).
Additional information to the consolidated balance sheet of ING Group amounts in millions of euros, unless stated otherwise 22 ASSEtS By CONtRACtUAl MAtURIty
Assets by contractual maturity less than 1 month months months years Over 5 years
(1) Investments for risk of policyholders are managed on behalf of policyholders on a fair value basis. Although individual instruments may (or may not) have a maturity depending on their nature, this does not impact the liquidity position of ING. (2) Included in remaining assets where 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.
Loans and advances to customers 145,911 16,390 30,279 111,262 314,858 1,091 619,791
23 lIABIlItIES By CONtRACtUAl MAtURIty As a result of amendments made to IFRS 7 the disclosure on the contractual maturity has been revised for 2009. The amendments affect the disclosure of financial liabilities by contractual maturity for 2009 only as the amendment to IFRS 7 do not require presentation of comparatives. The table below includes all financial liabilities by maturity based on contractual, undiscounted cash flows. Furthermore, the undiscounted future coupon interest on financial liabilities payable is included in a separate line and in the relevant maturity bucket. Derivative liabilities are included on a net basis if cash flows are settled net. For other derivative liabilities the contractual gross cash flow payable is included. Reference is made to the liquidity risk paragraph in the ‘Risk Management’ section for a description on how liquidity risk is managed.
liabilities by contractual maturity less than 1 month months months years Over 5 years
– designated as at fair value through profit and loss 573 833 2,429 5,935 4,239 14,009 Liabilities held for sale 15,020 15,020
24 dERIvAtIvES ANd hEdGE ACCOUNtING Use of derivatives and hedge accounting As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock-in the interest margin in relation to interest bearing assets and the related funding.
For the year ended 31 December 2009, ING Group recognised EUR –805 million (2008: EUR 746 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2009 was EUR 442 million (2008: EUR 1,457 million) gross and EUR 372 million (2008: EUR 1,177 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 44 years for insurance operations and 50 years for banking operations, with the largest concentrations in the range of 4 to 9 years for insurance operations and 1 to 13 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting of EUR –10 million (2008: EUR 22 million) was recognised in the profit and loss account.
As at 31 December 2009, the fair values of outstanding derivatives designated under cash flow hedge accounting was EUR –947 million (2008: EUR –318 million), presented in the balance sheet as EUR 5,521 million (2008: EUR 5,771 million) positive fair values under assets and EUR 6,468 million (2008: EUR 6,089 million) negative fair values under liabilities.
As at 31 December 2009 and 31 December 2008, there were no non-derivatives designated as hedging instruments for cash flow hedge accounting purposes.
As at 31 December 2009, the fair values of outstanding derivatives designated under net investment hedge accounting was EUR –278 million (2008: EUR 300 million), presented in the balance sheet as EUR 38 million (2008: EUR 670 million) positive fair values under assets and EUR 316 million (2008: EUR 370 million) negative fair values under liabilities.
As at 31 December 2009, the fair values of outstanding non-derivatives designated under net investment hedge accounting was EUR 555 million, presented in the balance sheet as positive fair values under assets (2008: EUR –881 million presented as negative fair value under liabilities). Non-derivatives designated as hedging instruments consist mainly of loan agreements.
Cash and balances with central banks 15,390 22,045 Amounts due from banks – loans and advances to banks 39,696 40,705 – cash advances, overdrafts and other balances 3,701 7,742 Trading assets: – debt securities 25,287 26,652 – loans and receivables 41,975 59,449
Non-trading derivatives 11,632 16,484 Designated as at fair value through profit and loss 5,517 8,277 Available-for-sale debt securities 188,850 234,030 Held-to-maturity debt securities 14,409 15,440 Loans and advances to customers: – policy loans 2,903 2,960 – public authorities 51,079 26,385 – secured by mortgages 319,174 318,917 – guaranteed by credit institutions 10,229 5,816 – unsecured loans 5,995 2,612 – other personal lending 19,270 29,615 – mortgage backed securities 22,135 9,055 – other corporate lending 147,097 222,533
Off-balance sheet credit commitments – discounted bills – Bank 1 1 – guarantees – Bank 21,545 22,391 – irrevocable letters of credit – Bank 12,352 10,458 – other – Bank 202 453 – irrevocable facilities 85,835 89,081 – commitments – Insurance 1,646 4,221 – guarantees – Insurance 3,463 2,460 Maximum credit exposure off balance sheet 125,044 129,065
26 ASSEtS NOt FREEly dISPOSABlE The assets not freely disposable consist primarily of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch central bank) and other banks and serve to secure margin accounts or are used for other purposes required by law. The assets not freely disposable are as follows: Assets not freely disposable
Banks includes Amounts due from banks and balances with central banks. ING Bank N.V. has an obligation to maintain a reserve with an average monthly balance with the Dutch central bank. In December 2009 the required monthly average was EUR 5,620 million (2008: EUR 5,810 million). As at 31 December 2009 the balance on this reserve was EUR 354 million (2008: EUR 3,529 million).
27 CONtINGENt lIABIlItIES ANd COMMItMENtS In the normal course of business the Group is a party to activities whose risks are not reflected in whole or part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Contingent liabilities and commitments less than 1 month months months years Over 5 years
Most of the unused portion of irrevocable credit facilities is secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
Non-cash investments are made by ING Group by selling credit protection in the market using credit default swaps.
Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands Parcom Capital B.V. The Netherlands ING Levensverzekering Retail N.V. The Netherlands ING Schadeverzekering Retail N.V. The Netherlands RVS Levensverzekering N.V. The Netherlands RVS Schadeverzekering N.V. The Netherlands Movir N.V. The Netherlands ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING America Insurance Holdings, Inc. United States of America ING International Insurance Holdings, Inc. United States of America ING Life Insurance and Annuity Company United States of America ING North America Insurance Corporation United States of America Lion Connecticut Holdings Inc. United States of America ReliaStar Life Insurance Company United States of America ReliaStar Life Insurance Company of New York United States of America Security Life of Denver Insurance Company United States of America ING USA Annuity and Life Insurance Company United States of America ING Life Insurance Company (Bermuda) Limited Hong Kong Security Life of Denver International Limited Bermuda ING Seguros de Vida S.A. Chile AFP Capital S.A. Chile ING Insurance Berhad Malaysia ING Afore S.A. de C.V. Mexico ING Life Insurance Company (Japan) Limited Japan ING Life Insurance Company (Korea) Limited South Korea ING Australia Holdings Limited Australia ING Re (Netherlands) N.V. The Netherlands
(2) 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. (3) The loss was recognised in 2008.
In September 2009 ING reached an agreement to sell its life insurance and wealth management venture in Australia and New Zealand to ANZ, its joint venture partner. Under the terms of the agreement, ING will sell its 51% equity stakes in ING Australia and ING New Zealand to ANZ for EUR 1,106 million cash proceeds. The transaction is part of ING’s Back to Basics strategy. The sale was complete in November 2009 and resulted in a profit for ING of EUR 337 million. The joint venture was previously included in the segment Insurance Asia/Pacific.
Acquisitions and disposals announced and occurring or expected to occur in 2010 In October 2009 ING reached an agreement to sell its Swiss Private Banking business to Julius Baer for a consideration of EUR 344 million (CHF 520 million) in cash. The transaction generates a profit for ING of approximately EUR 70 million which will be recognised upon completion in 2010. A tax benefit of EUR 83 million related to Private Banking Switzerland was recognised in 2009. At the closing date of the sale of Private Banking Switzerland, ING announced a total gain of approximately EUR 150 million. The sale was completed in January 2010. The Swiss Private Banking business is included in the segment Retail Banking.
All the above described disposals will be deconsolidated in 2010 when ING loses control. They qualify as disposal groups held for sale at 31 December 2009 as ING expects to recover the carrying amount principally through the sale transactions. They are available for sale in their immediate condition subject to terms that are usual and customary for sales of such assets and the sales are highly probable.
In January 2008, ING closed the final transaction to acquire 100% of Banco Santander’s Latin American pension and annuity businesses through the acquisition of the pension business in Chile. See Acquisitions effective in 2007 in this note for full details of the entire deal.
Loans and advances to customers 137 65 202 Financial assets at fair value through profit and loss 41 41 Miscellaneous other assets 26 1,261 1,287 liabilities Insurance and investment contracts 210 1,497 1,707 Miscellaneous other liabilities 10 274 284
disposals effective in 2008 In December 2007, ING reached an agreement with Berkshire Hathaway Group to sell its reinsurance unit NRG N.V. for EUR 272 million. The sale resulted in a net loss of EUR 144 million. A loss on disposal of EUR 129 million was reported in 2007. In 2008 EUR 15 million additional losses, predominantly relating to currency exchange rate changes were recognised.
In July 2008, ING completed the sale of part of its Mexican business, Seguros ING SA de CV and subsidiaries, to AXA as announced in February 2008, for a total consideration of EUR 950 million (USD 1.5 billion). The sale resulted in a gain of EUR 182 million.
As mentioned in Acquisitions effective in 2007 ING acquired the AFJP Pension (Origenes AFJP S.A.) company in Argentina as part of the Santander transaction. In November 2008 the Government of Argentina passed legislation to nationalise the private pension system (AFJPs). Under the law, all client balances held by the private pension system had to be transferred to the Argentina Government and AFJP’s pension business was terminated. The law became effective in December 2008 when the Argentine Social Security Administration (ANSES) took ownership over the affiliate accounts. The nationalisation impacted the pension assets only, thus leaving ING responsible for the ongoing operating costs and liabilities including severance obligations. This resulted in a loss of EUR 188 million being recognised in 2008.
Date of acquisition 31 December 2007 15 November 2007 31 July 2007 4 December 2007
Costs directly attributable to the acquisition 2 1 2 8 13
Profit since date of acquisition –1 1 8 8 Income if acquisition effected at start of year 38 15 209 262 Profit if acquisition effected at start of year (3) 80 –2 4 46 128 (1) Goodwill recognised in 2007 on immaterial acquisitions and real estate portfolios was EUR 222 million, resulting in total Goodwill recognised in 2007 of
EUR 2,040 million as disclosed in Note 9 ‘Intangible assets’. (2) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually immaterial acquisitions and real estate portfolios in addition to the cash flows presented herein. (3) Estimate of full year profit of acquired company based on local accounting principles.
In November 2007, ING acquired 100% of Sharebuilder Corporation, a Seattle-based brokerage company for EUR 152 million, to extend its retail investment products range and geographical spread in the United States. Goodwill of approximately EUR 94 million was recognised on acquisition and is mainly attributable to the operational synergies and to the future business potential resulting from the acquisition. There was no significant difference in the carrying values of the net assets acquired immediately before the acquisition and their fair values. All significant intangibles were recognised separately from goodwill and are included in Intangible assets. No significant adjustments were made in 2008 to amounts recognised provisionally in 2007.
In November and December 2007, ING acquired the Latin American pension businesses of Banco Santander in Mexico for EUR 349 million, in Columbia for EUR 88 million, in Uruguay for EUR 20 million and in Argentina for EUR 235 million. As mentioned in Acquisitions effective in 2008, the pension business in Chile was acquired in January 2008 for EUR 450 million. The total costs of the entire deal were approximately EUR 1,142 million. Goodwill of approximately EUR 786 million was recognised on acquisition and is mainly attributable to the operational synergies and to the future business potential resulting from the acquisition. The Latin American pension businesses acquired represented the acquisition of leading positions in retirement services in high growth emerging markets, giving ING a sustainable, scalable platform in Latin America. There was no significant difference in the carrying values of the net assets acquired immediately before the acquisition and their fair values. All significant intangibles were recognised separately from goodwill and are included in Intangible assets. Except for the effect of the nationalisation of the Argentinean pension business as disclosed in Disposals announced and expected to occur in 2009 above, no significant adjustments were made in 2008 to amounts recognised provisionally in 2007.
In July 2007, ING sold ING Trust to management and Foreman Capital, an independent investment company based in the Netherlands. The sale is part of ING’s strategy to focus on its investment, life insurance and retirement services.
31 lEGAl PROCEEdINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Company’s management is of the opinion that neither it nor any of its subsidiaries is aware of any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) in the 12 months preceding the date of this document which may have or have in such period had a significant effect on the financial position or profitability of the Company.
These proceedings include complaints and lawsuits concerning the performance of certain interest sensitive products that were sold by a former subsidiary of ING in Mexico. Further, purported class litigation has been filed in the United States District Court for the Southern District of New York alleging violations of the federal securities laws with respect to disclosures made in connection with the 2007 and 2008 offerings of ING’s Perpetual Hybrid Capital Securities. The challenged disclosures primarily relate to ING Group’s investments in certain residential mortgage-backed securities. Additional purported class litigation challenges the operation of the ING Americas Savings Plan and ESOP and the ING 401(k) Plan for ILIAC Agents. Litigation also includes a case involving the interest crediting methodology that is used in connection with annuity products, and disclosures about the methodology, in which a state court of appeals has determined that the case can be maintained as a nation-wide class action. A higher appellate court has been asked to review and reverse this decision. These matters are being defended vigorously; however, at this time, ING is unable to assess their final outcome.
Like many other companies in the mutual funds, brokerage, investment, and insurance industries, several of ING’s companies have received informal and formal requests for information from various governmental and self-regulatory agencies or have otherwise identified issues arising in connection with fund trading, compensation, conflicts of interest, anti-competitive practices, insurance risk transfer, suitability, contract administration and interpretation, and sales practices. ING is responding to the requests and working to resolve issues with regulators. ING believes that any issues that have been identified thus far do not represent a systemic problem in the ING businesses involved and in addition that the outcome of the investigations will not have a material effect on ING Group.
transactions with joint ventures and associates Joint ventures Associates transactions with ING Bank N.v. and ING verzekeringen N.v. ING Bank N.V. ING Verzekeringen N.V.
Receivables on 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.
(1) Comprising eight members from 1 January 2009 to 31 May 2009 and 3 members from 1 June 2009 to 31 December 2009. (2) As of 1 June 2009, excluding three members that are also members of the Executive Board of ING Groep N.V. (3) Increase in 2009 due to change in composition.
Management Boards members of ING Bank N.V. and ING Verzekeringen N.V. 244 1,342 3.6% 4.4% 933 19
The total number of stock options on ING Groep N.V. shares held by the Executive Board members of ING Group N.V. amounted to 164,689 as at 31 December 2009 (2008: 896,934) and total number of stock options on ING Groep N.V. shares held by Management Board members of ING Bank N.V. and ING Verzekeringen N.V. amounted to 2,718,765 as at 31 December 2009 (2008: 2,539,649). As at 31 December 2009, members of the Executive Board held 60,883 ING Groep N.V. shares (2008: 39,456) and members of the Management Boards of ING Bank N.V. and ING Verzekeringen N.V. held 266,239 ING Groep N.V. shares (2008: 209,131). As at 31 December 2009, members of the Supervisory Board held 140,207 ING Groep N.V. shares (2008: 8,940).
transactions with the dutch State Illiquid Assets Back-up Facility ING Group and the Dutch State reached an agreement on an Illiquid Assets Back-Up Facility (‘IABF’) on 26 January 2009. The transaction closed on 31 March 2009. The IABF covers the Alt-A portfolios of both ING Direct US and ING Insurance Americas, with a par value of approximately EUR 30 billion. Under the IABF, ING transferred 80% of the economic ownership of its Alt-A portfolio to the Dutch State. As a result, an undivided 80% interest in the risk and rewards on the portfolio was transferred to the Dutch State. ING retained 100% of the legal ownership of its Alt-A portfolio. The transaction price was 90% of the par value with respect to the 80% proportion of the portfolio of which the Dutch State has become the economic owner. The transaction price remains payable by the Dutch State to ING and will be redeemed over the remaining life. Furthermore, under the IABF ING pays a guarantee fee to the State and receives a funding fee and a management fee. As a result of the transaction ING derecognised 80% of the Alt-A portfolio from its balance sheet and recognised a receivable from the Dutch State. The transferred Alt-A portfolio was previously included in Available-for-sale debt securities. The Dutch State also acquired certain consent rights with respect to the sale or transfer of the 20% proportion of the Alt-A portfolio that is retained by ING.
Under the terms of the transaction as agreed on 26 January 2009, the overall sales proceeds amounted to EUR 22.4 billion. The amortised cost (after prior impairments) at the date of the transaction was also approximately EUR 22.4 billion. The transaction resulted in a loss in the first quarter of 2009 of EUR 109 million after tax (the difference between the sales proceeds and the amortised cost). The fair value under IFRS at the date of the transaction was EUR 15.2 billion.
In order to obtain approval from the European Commission on ING Group’s Restructuring Plan (see below), ING agreed to make additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission to the Dutch State corresponding to an adjustment of the fees for the Illiquid Assets Back-up Facility. In total, these additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission amounted to a net present value of EUR 1.3 billion pre-tax, which was
The valuation method of the 20% Alt-A securities in the IFRS balance sheet is not impacted by the IABF. The methodology used to determine the fair value for these assets in the balance sheet under IFRS-EU is disclosed in Note 34 ‘Fair value of financial assets and liabilities’.
ING Groep N.V. has the right to repurchase all or some of the non-voting equity securities at EUR 15 per security at any time, together with the pro-rata coupon, if due, accrued to such date. ING Groep N.V. and the Dutch State have agreed in October 2009 that up to EUR 5 billion of the EUR 10 billion core Tier 1 securities may be repurchased at any time until 31 January 2010 at the original issue price of EUR 10 per non-voting equity security, plus a repurchase premium and accrued interest.
ING Groep N.V. also has the right to convert all or some of the non-voting equity securities into ordinary shares on a one-for-one basis from three years after the issue date onwards, subject to certain conditions. 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.
European Commission Restructuring Plan In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. The Restructuring Plan has formally been approved by the European Commission. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows: ING will eliminate double leverage and significantly reduce its balance sheet;• ING will divest all Insurance and Investment Management activities;• that in order to receive approval from the European Commission ING needs to divest ING Direct USA by the end of 2013;• ING will create a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage • activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, will be divested; that ING has agreed not to be a price leader in any EU country for certain retail and SME banking products and will refrain from the • acquisition of financial institutions or other businesses that would delay the repayment of the non-voting equity securities. These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State; that ING has agreed with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities;• that EUR 5 billion of the non-voting equity securities issued to the Dutch State in November 2008 will be repurchased;• that additional Illiquid Assets Back-Up Facility payments as part of the overall agreement with the European Commission are to be made • to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING of EUR 1.3 billion in the fourth quarter of 2009; that ING launched a EUR 7.5 billion rights issue, in order to finance the repayment of 50% of the non-voting equity securities and to • mitigate the capital impact of the additional Illiquid Assets Back-Up Facility payment as part of the overall agreement with the European Commission to the Dutch State of EUR 1.3 billion; and ING will execute the Restructuring Plan before the end of 2013.•
In the framework of the transactions with the Dutch State disclosed in this note, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million non-voting equity securities, as long as the Illiquid Assets Back-Up Facility is in place or any of the Government Guaranteed Bonds is outstanding (whichever expires last). These arrangements entail that: the Dutch State may recommend two candidates (the ‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of • the Supervisory Board require approval of the State Supervisory Board members; ING Group will develop a sustainable remuneration policy for the Executive Board and Senior Management that is aligned to new • international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for ‘rewards for failure’. The new remuneration policy will, amongst others, include objectives relating to corporate and social responsibility; members of the Executive Board will not receive any performance-related payment - either in cash, options, shares or bearer depositary • receipts - for the years 2008, 2009 and subsequent years until the adoption of the new remuneration policy mentioned above; severance payments to Executive Board members will be limited to a maximum of one year’s fixed salary, in line with the Tabaksblat • Code; ING has undertaken to support the growth of the lending to corporates and consumers (including mortgages) for an amount of EUR • 25 billion, on market conforming terms; ING agreed to pro-actively use EUR 10 billion of the Dutch Guarantee Scheme over 2009;• ING has committed itself to maintaining the Dutch payment system PIN on its payment debit cards as long as other market participants, • representing a substantial market share, are still making use of this payment system; and appointment of the Chief Executive Officer of the Executive Board requires approval of the State Nominees.•
34 FAIR vAlUE OF FINANCIAl ASSEtS ANd lIABIlItIES The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Financial assets Cash and balances with central banks 15,390 22,045 15,390 22,045 Amounts due from banks 43,506 48,308 43,397 48,447 Financial assets at fair value through profit and loss
– designated as at fair value through profit and loss 5,517 8,277 5,517 8,277 Investments
(1) Other assets do not include (deferred) tax assets, property held for sale, pension assets and deferred charges. (2) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions, prepayments received under property under development, share-based payment plans, other provisions and other taxation and social security contributions.
Certain asset backed securities in the United States are valued using external price sources that are obtained from third party pricing services and brokers. During 2008 the markets for these assets became inactive and as a result, the dispersion between different prices for the same security became significant. Management applies additional processes to select the most appropriate external price, including an internally developed price validation matrix and a process to challenge the price source. The valuation of these portfolios could have been significantly different had different prices been selected.
In order to determine which independent price in the range of prices obtained best represents fair value under IAS 39, ING applies a discounted cash flow model to calculate an indicative fair value. The key input to this model is a discount rate derived from an internal matrix that is used to construct the discount rate per security by applying credit and liquidity spreads relevant to the characteristics of such asset class. The main assumptions in this matrix include: a base spread;• a liquidity risk premium;• an additional credit spread, based on:•
seniority in the capital structure – an adjustment is applied to each security based on its position in the capital structure;• vintage – an adjustment is applied for underwriting guidelines deteriorating from 2004 to 2007 in combination with differences • in home price developments for these vintages.
Financial assets designated at fair value through profit and loss 1,469 2,477 1,571 5,517 Available-for-sale investments 113,913 76,827 6,963 197,703 liabilities
Methods applied in determining fair values of financial assets and liabilities 2008 Level 1 Level 2 Level 3 Total
Financial assets designated at fair value through profit and loss 2,930 3,474 1,873 8,277 Available-for-sale investments 121,437 94,054 27,361 242,852 liabilities
Financial liabilities designated at fair value through profit and loss 5,591 8,354 64 14,009 Investment contracts (for contracts carried at fair value) 9,352 1,830 99 11,281
Debt Securities In previous years, certain debt securities whose fair value is determined using prices from brokers, dealers and/or pricing services (which qualifies as a quoted price under IAS 39) were classified in the category ‘Reference to published price quotations in active markets’ if the market for those securities was actively trading. Under the revised IFRS 7, these securities are only classified in Level 1 if it can be demonstrated by ING on an individual security-by-security basis that these are quoted in an active market, i.e. that the price quotes obtained are representative of actual trades in the market (e.g. through obtaining binding quotes or through corroboration to published market prices). Otherwise, these are now classified in Level 2.
Other: • Amounts in each of the levels are impacted by changes in the amount and composition of the relevant balance sheet items during the year.
Amounts recognised in profit or loss during the year –69 2 –133 –90 –1,512 –1,802 Revaluation recognised in equity during the year 7,344 7,344
Sale of assets –112 –113 94 –569 –22,204 –22,904 Maturity/settlement –41 –68 –4 –171 –3,103 –3,387 Reclassifications –43 –67 –5,994 –6,104
Transfers out of Level 3 –896 –123 –76 –3,641 –4,736 Exchange rate differences –20 5 –78 698 605 Changes in the composition of the group –92 –78 –170
Amounts recognised in profit or loss during the year –64 –87 124 2 –25
Amounts recognised in profit and loss during the year (level 3)
Sensitivities of fair values in level 3 Reasonably likely changes in the non observable assumptions used in the valuation of Level 3 assets and liabilities would not have a significant impact on equity and net result, other than explained below for investments in asset backed securities in the United States.
Generally up to four different pricing services are utilised. Management carefully reviews the prices obtained in conjunction with other information available, including, where relevant, trades in the market, quotes from brokers and internal evaluations. If the dispersion between different prices for the same securities is limited, a hierarchy exists that ensures consistent selection of the most appropriate price. If the dispersion between different prices for the same security is significant, additional processes are applied to select the most appropriate price, including an internally developed price validation matrix and a process to challenge the external price source.
These are indicators of sensitivity and not alternatives for fair value under IFRS-EU. These sensitivities mainly relate to the banking operations.
Reference is made to the ‘Risk management’ section with regard to the exposure of these asset backed securities as at 31 December 2009 and 2008 and the impact from these asset backed securities on net result in 2009 and 2008.
Furthermore, the ‘Risk management’ section provides under Impact of financial crisis a breakdown of the methods applied in determining fair values of pressurised assets.
Interest income on loans 24,983 31,174 26,390 Interest income on impaired loans 24 –24 –26 Total interest income on loans 25,007 31,150 26,364
Interest income on available-for-sale securities 3,923 7,449 7,397 Interest income on held-to-maturity securities 612 669 736 Interest income on trading portfolio 40,844 45,510 32,443 Interest income on non-trading derivatives 3,936 7,076 6,190 Other interest income 5,528 5,157 3,619 Interest income banking operations 79,850 97,011 76,749
Interest expense on deposits by banks 1,266 4,856 5,131 Interest expense on customer deposits and other funds on deposit 10,976 19,594 18,563 Interest expense on debt securities 2,657 4,109 3,648 Interest expense on subordinated loans 1,784 1,784 1,167 Interest on trading liabilities 40,023 44,093 29,383 Interest on non-trading derivatives 4,483 7,391 6,115 Other interest expense 6,286 4,142 3,766 Interest expense banking operations 67,475 85,969 67,773
In 2009, the decline in average total assets led to a decrease of the interest result amounting to EUR 929 million (in 2008 the growth in average assets led to an increase of the interest result of EUR 811 million; in 2007 the growth in average assets led to an increase of the interest result of EUR 753 million). The increase of the interest margin by 25 basis points led to an increase of the interest result with EUR 2,406 million (in 2008 the increase of the interest margin by 13 basis points led to a increase of the interest result with EUR 1,440 million; in 2007 the decrease of the interest margin by 12 basis points led to a decrease of the interest result with EUR 1,051 million).
Gross premium income from life insurance policies 28,720 38,869 40,732 Gross premium income from non-life insurance policies 1,772 4,943 6,086
Reinsurance assumed gross premiums written 26 23 24 1,299 1,382 1,562 1,325 1,405 1,586
Reinsurance ceded –70 –196 –306 –1,867 –1,802 –1,968 –1,937 –1,998 –2,274
Income from real estate investments 157 196 252 63 75 80 220 271 332
Realised gains/losses on disposal of equity securities 24 30 330 404 685 2,975 428 715 3,305 Impairments of available-for-sale equity securities –49 –331 –17 –360 –1,585 –36 –409 –1,916 –53 Realised gains/losses and impairments of equity securities –25 –301 313 44 –900 2,939 19 –1,201 3,252
Other include commission fees of EUR 18 million (2008: EUR 21 million; 2007: EUR 26 million) in respect of underwriting syndication loans.
Change in fair value of derivatives relating to – fair value hedges –1,321 –5,299 924 191 –193 –227 –1,130 –5,492 697 – cash-flow hedges (ineffective portion) –2 –4 –8 22 –5 –10 22 –9 – hedges of net investment in foreign entities
(ineffective portion) 1 –6 –14 1 –6 –14 – other non-trading derivatives –237 –28 36 –3,722 2,412 –753 –3,959 2,384 –717 Net result on non-trading derivatives –1,560 –5,327 956 –3,538 2,235 –999 –5,098 –3,092 –43
Valuation results on non-trading derivatives is mainly a result of negative fair value changes on derivatives used to hedge direct and indirect equity exposures without applying hedge accounting. Indirect equity exposures relate to certain guaranteed benefits in insurance liabilities in the US, Japan, and the Netherlands. In 2009 the fair value changes on these derivatives were negative, as stock market returns became positive. The fair value changes on the derivatives related to the indirect equity exposures are generally offset by an opposite amount in underwriting expenditure (reference is made to Note 43 ‘Underwriting expenditure’).
The Valuation results on assets and liabilities designated at fair value through profit and loss are mainly a result of changes in fair value of financial liabilities, designated at fair value through profit and loss, due to market circumstances; it includes fair value changes on issued debt securities, designated at fair value through profit and loss, including fair value changes attributable to changes in own credit risk as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’.
The portion of trading gains and losses for the year ended 31 December 2009 relating to trading securities still held as at 31 December amounted to EUR 105 million (2008: EUR –246 million; 2007: EUR –60 million).
Notes to the consolidated profit and loss account of ING Group (continued)
Income from real estate development projects 59 124 95 59 124 95
Net operating lease income comprises income of EUR 967 million (2008: EUR 961 million; 2007: EUR 803 million), depreciation of EUR 792 million (2008: EUR 766 million; 2007: EUR 724 million) and other expenses of nil (2008: nil; 2007: nil).
– effect of investment result risk of policyholders 17,742 –32,408 1,079
The investment income and valuation results regarding investment result for risk of policyholders of EUR 17,742 million (2008: EUR –32,408 million; 2007: EUR 1,079 million) have not been recognised in Investment income and valuation results on assets and liabilities designated at fair value through profit and loss but are recognised in Underwriting expenditure together with the equal amount of change in insurance provisions for risk of policyholders.
Reinsurance recoveries –1,708 –1,662 –1,749 Change in life insurance provisions for risk of company 2,692 17,407 11,979 Costs of acquiring insurance business 350 1,877 1,098 Other underwriting expenditure 460 462 457 Profit sharing and rebates 1,029 –416 424
Reinsurance recoveries –6 –92 –157 Change in provision for unearned premiums –2 28 79 Change in claims provision –23 54 13 Costs of acquiring insurance business 290 742 979 Other underwriting expenditure –4 –22 –50
Distributions on account of interest or underwriting results 682 –576 –133 Bonuses added to policies 289 131 411 Deferred profit sharing expense 58 29 146
Amortisation of intangible assets relates to intangible assets recognised as part of companies acquired. Until 2007, these were classified in Other operating expenses. The comparatives for 2007 have been amended to reflect the revised presentation. There is no impact on Total expenses.
Pension and other staff-related benefit costs 178 104 159 142 140 48 320 244 207
Share-based compensation arrangements includes EUR 65 million (2008: EUR 98 million; 2007: EUR 110 million) relating to equity-settled share-based payment arrangements and EUR 31 million (2008: EUR 26 million; 2007: EUR 17 million) relating to cash-settled share-based payment arrangements.
Past service cost 20 77 –86 –21 –1 –1 77 –87
The option rights are valid for a period of five or ten years. Option rights that are not exercised within this period lapse. Option rights granted will remain valid until the expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a certain continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.
The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period of three years from the grant date, the entitlement becomes unconditional. In 2009, no shares (2008: 211,049; 2007: 139,113) have been granted to the members of the Executive Board of ING Group, Management Boards of ING Bank and ING Insurance and 6,273,467 shares (2008: 3,380,706; 2007: 2,415,649) have been granted to senior management and other employees remaining in the service of ING Group.
The aggregate intrinsic value of options outstanding and exercisable as at 31 December 2009 was EUR 74 million and nil, respectively.
The fair value of options granted is recognised as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined by using a Monte Carlo simulation. This model takes the risk free interest rate into account (2.64% to 4.62%), as well as the expected life of the options granted (5 year to 8 years), the exercise price, the current share price (EUR 2.90 - EUR 26.05), the expected volatility of the certificates of ING Group shares (25% - 84%) and the expected dividends yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities not on historical volatilities.
As at 31 December 2009 total unrecognised compensation costs related to share awards amounted to EUR 41 million (2008: EUR 56 million; 2007: EUR 53 million). These costs are expected to be recognised over a weighted average period of 1.8 years (2008: 1.8 years; 2007: 1.7 years).
46 OthER INtERESt ExPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
Other interest expenses include nil and EUR 86 million dividends paid on preference shares and trust preferred securities (2008: EUR 1 million and EUR 94 million; 2007: EUR 7 million and EUR 92 million).
Associates exemption –135 69 –814 Other income not subject to tax –227 –210 –577 Expenses not deductible for tax purposes 47 106 93 Impact on deferred tax from change in tax rates –25 –9 Deferred tax benefit from previously unrecognised amounts –32 –64 Current tax benefit from previously unrecognised amounts –222 Write down/reversal of deferred tax assets 546 360 8 Adjustment to prior periods –117 –279 –49 Effective tax amount –472 –721 1,535
The weighted average statutory tax rate decreased in 2009 compared to 2008 mainly caused by the fact that a smaller part of the losses was incurred in high tax jurisdictions than in 2008.
The weighted average statutory tax rate increased significantly in 2008 compared to 2007 caused by the fact that most of the losses in 2008 were incurred in high tax jurisdictions.
(1) The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities. The 2008 coupon of EUR 425 million paid on the non-voting securities did not impact basic earnings.
(2) The rights issue, which was finalised on 15 December 2009 has an effect on the basic earnings per share and the diluted earnings per share, as defined in IFRS. All weighted average number of shares outstanding before the rights issue are restated with an adjustment factor of approximately 1.3 that reflects the fact that the exercise price of the rights issue was less than the fair value of the shares. The effect of dilutive securities is adjusted as well.
Diluted earnings per share data are computed as if the stock options and warrants outstanding at year-end had been exercised at the beginning of the period. It is also assumed that ING Group uses the cash received from exercised stock options and warrants or non-voting equity securities converted to buy its own shares against the average market price in the financial year. The net increase in the number of shares resulting from exercising warrants and stock options or converting non-voting equity securities is added to the average number of shares used for the calculation of diluted earnings per share. The potential conversion of the non-voting equity securities has an antidilutive effect on the earnings per share calculation in 2008 and 2009 (the diluted earnings per share becoming less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account in determining the weighted average number of shares for the calculation of diluted earnings per share for these years.
Per ordinary share (in euros) 0.00 0.74 1.48 Total amount of dividend declared (in millions of euros) 0 1,500 3,180 (1) The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, a cash dividend of EUR 0.00 per share for the year 2009.
In 2009 a coupon to the Dutch State of EUR 259 million was paid as part of the repayment of EUR 5 billion non-voting equity securities.
51 OPERAtING SEGMENtS ING Group has adopted IFRS 8 Operating Segments with effect from 1 January 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of ING Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. In contrast, the predecessor Standard (IAS 14 Segment Reporting) required an entity to identify two sets of segments (business and geographical), using a risks and rewards approach, with the entity’s system of internal financial reporting to key management personnel serving only as the starting point for the identification of such segments. The identification of ING Group’s reportable segments has not changed as a result of the adoption of IFRS 8.
ING Group’s operating segments relate to the internal segmentation by business lines. These include the business lines: Retail Banking, ING Direct, Commercial Banking, Insurance Europe, Insurance Americas and Insurance Asia/Pacific. Until 2008, the operating segment Commercial Banking was named Wholesale Banking. The content of this segment remained unchanged. Other mainly includes items not directly attributable to the business lines.
The Executive Board sets the performance targets and approves and monitors the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policies in conformity with the strategy and performance targets set by the Executive Board.
The accounting policies of the operating segments are the same as those described under Accounting policies for the consolidated balance sheet and profit and loss account. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income and/or assets of the segment.
Corporate Line Banking is a reflection of capital management activities and certain expenses that are not allocated to the banking businesses. ING Group applies a system of capital charging for its banking operations in order to create a comparable basis for the results of business units globally, irrespective of the business units’ book equity and the currency they operate in. ING Group’s policy is that equity held locally must be invested notionally at the local risk-free rate. The Corporate Line charges business units for the income they make on the book equity invested. Business units receive a benefit equivalent to the risk free euro rate on the economic capital they employ. Consequently, the results of the businesses as disclosed are the local results after Group overhead charges, while the investment returns |on equity are based on the risk free euro rate on economic capital.
The Corporate Line Insurance includes items related to capital management, capital gains on public equities (net of impairments) and run-off portfolios. All capital gains and losses on public equities net of equity impairments realised in the business units are transferred to the Corporate Line. In return, a 3% notional return on those equities is transferred back to the business units. The remainder is presented on the Corporate Line.
Commercial Banking Income from wholesale banking activities. A full range of products is offered, from cash management to corporate finance. Commercial Banking also includes ING Real Estate.
While the reserves for the segment Insurance Americas are adequate at the 50% confidence level, a net reserve inadequacy exists using a prudent (90%) confidence level. In line with Group Policy, Insurance Americas is taking measures to improve adequacy in that region. 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.
Reconciliation between IFRS and Underlying income, expenses and net result 2009 Income Expenses Net result
Special items –1,268 1,052 –1,759 IFRS as applied by ING Group 47,765 49,290 –935
Impairments on investments are presented within Investment income, which is part of Total income. In 2009, total impairments of EUR 2,485 million are included in the following segments: nil in Retail Banking, EUR 1,393 million in ING Direct, and EUR 130 million in Commercial Banking, EUR 244 million in Insurance Europe, EUR 501 million in Insurance Americas, EUR 12 million in Insurance Asia/Pacific and EUR 205 million in Other.
Reconciliation between IFRS and Underlying income, expenses and net result 2008 Income Expenses Net result
Special items 393 –328 IFRS as applied by ING Group 66,291 67,778 –729
Reconciliation between IFRS and Underlying income, expenses and net result 2007 Income Expenses Net result
Special items –44 446 –370 IFRS as applied by ING Group 76,586 65,543 9,241
Latin America Asia Australia Other Eliminations Total 2.1 Consolidated annual accounts
Treasury bills and other eligible bills included in trading assets 2,284 2,770 1,806 Treasury bills and other eligible bills included in available-for-sale investments 898 4,239 2,324
Not included in cash and cash equivalents: – amounts due to banks –71,901 –138,527 –124,818 – amounts due from banks 28,676 32,492 40,068
Included in balance sheet: – amounts due to banks –84,235 –152,265 –166,972 – amounts due from banks 43,397 48,447 48,875
Notes to the consolidated statement of cash flows of ING Group amounts in millions of euros, unless stated otherwise
Structure of Risk Management Section Risk Management in 2009 196 ING Group 200 Risk Governance 200 ING Group Financial Risk Profile 202 ING Bank 208 ING Bank Risk Profile 208 ING Bank – Credit risks 209 ING Bank – Market risks 214 ING Bank – Liquidity risk 223 ING Insurance 225 ING Insurance Risk Profile 226 ING Insurance – Market risks 227 ING Insurance – Insurance risks 229 ING Insurance – Credit risks 231 ING Group – Non-financial Risks 233 Operational risks 233 Compliance risk 236 Model Disclosures 240 2.1 Consolidated annual accounts
RISK MANAGEMENt IN 2009 Taking measured risks is part of ING Group’s business. As a financial services company active in banking, investments, life insurance and retirement services ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking ING Group has integrated risk management in its daily business activities and strategic planning. Risk Management assists with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout the Group on risk-related issues. 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 and liquidity 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.
MARKEt dEvElOPMENtS 2009 After the turmoil on the financial markets during 2008, the financial markets improved considerably during 2009, with the exception of direct and indirect Real Estate investments. The volatility levels came down sharply, with volatility levels at year end 2009 similar to the levels in the first half of 2008. Throughout the world the prices of most major asset classes recovered strongly. Equity markets went up significantly: year on year the S&P 500 increased 23% and the Dutch Amsterdam Exchange Index (AEX) increased 36%. Real Estate prices remained under pressure, however. At 31 December 2009 the S&P Case-Shiller Index, the most prominent Real Estate index in the United States, was 3% lower than at the end of 2008. In December 2009, the price index of Dutch owner-occupied residential real estate, as reported by Statistics Netherlands (CBS) and the Dutch Land Registry Office (‘Kadaster’), was 5.3% lower than in December 2008. This decline pertained to all types of residential real estate and to all Dutch provinces. Furthermore, after the credit spread widening during 2008, the credit spreads in the financial and corporate sector narrowed in 2009, both in the US and in Europe. Both in the US and Europe short term interest rates decreased further during 2009, with the exception of the 3 month T-bill which remained at a near zero level. Long term interest rates increased in the US, but in Europe they decreased slightly compared to year end 2008.
Risk mitigation Anticipating a further downturn in the markets in 2009, ING took additional actions to reduce risk across major asset classes. First, the de-risking activities that started in 2008, were continued and increased during 2009. Second, de-leveraging helped reduce risk via reduction of the bank balance sheet. Finally, the Back to Basics initiative further reduced risk through the sale of businesses in order to focus more on ING’s core activities and markets.
In ING Direct the investment portfolio was reduced and more emphasis was placed on own originated assets. Next to the fact that ING’s revaluation reserve improved significantly during 2009, ING is now also less sensitive for revaluation reserve changes. The combination of a reduced balance sheet and improved IFRS equity made the Bank asset leverage improve from 35.3 at 31 December 2008 to 27.8 at 31 December 2009.
Focus during the year was also on containment of risk weighted assets (RWA). Credit migration due to downgrades of counterparties resulted in higher risk weights for assets, leading to higher required capital. In order to mitigate the RWA increase several de-risking steps were taken. The first major step was taken at the start of the year when ING and the Dutch state entered into the Illiquid Asset Back-Up Facility (IABF) term sheet. The IABF covers ING’s Alt-A residential mortgage backed securities (RMBS) portfolio. Through this transaction the Dutch State became the economic owner of 80% of the Alt-A RMBS portfolio. This transaction was concluded at 90% of the par value per year end 2008. Par value of the portfolio was approximately EUR 30 billion at that point in time. ING remains exposed to 20% of the result of the Alt-A RMBS portfolios, as well as the legal owner of 100% of the securities. As such the transaction significantly reduced the uncertainty regarding the impact on ING of any future losses in the portfolio. In addition, as a result of the IABF, 80% of the Alt-A RMBS portfolios was derecognised from ING’s balance sheet under IFRS. Therefore, 80% of the negative revaluation reserve on the securities was reversed, resulting in an increase of EUR 4.6 billion in Shareholders’ equity. The transaction also reduced ING’s risk weighted assets by approximately EUR 13 billion.
Second, additional mitigation of the RWA migration was done by further reducing the RMBS portfolio, for example via the sale of US Prime RMBS trades during the fourth quarter. ING Direct sold 27 US prime RMBS securities with an amortised cost value of EUR 0.8 billion. The sale resulted in a pre-tax loss of EUR 83 million. The remaining US prime RMBS portfolio within ING Direct has a market value of EUR 0.9 billion and is fully investment grade rated. These and other management actions resulted in a RWA reduction during 2009 of EUR 11 billion, reducing them from EUR 343 billion at year end 2008 to EUR 332 billion at year end 2009.
During 2009, ING lowered, in its new production of Dutch mortgage loans the share of mortgages with non-standard debt capacity calculations or high Loan to Value (LTV) ratios.
ING continued to de-risk its product offering in 2009. This was accomplished through the redesign of products, and by removing products from our product range in line with the Back to Basics strategy. The re-design of products mainly relates to US and European Variable Annuity products, and was done in stages, based on lower risk and more sustainable product design. The Single Premium Variable Annuity product is no longer part of the product range in Japan.
US Subprime RMBS 1,428 335 –350 –335 1,778 –1,146 US Alt-A RMBS 2,964 7,235 –1,405 –21,713 18,847 –7,474
ING Group’s total EUR 1.4 billion exposure to US sub-prime assets relates to non originated loans acquired as investments in RMBS and • represents 0.1% of total assets. At 31 December 2009 approximately 50% of ING’s US sub-prime portfolio was rated A or higher. ING Group does not originate sub-prime mortgages. (Residential) mortgages that are not classified as sub-prime are the vast majority of the total mortgage backed securities (MBS). ING Group’s total US Alt-A RMBS exposure at 31 December 2009 was EUR 3.0 billion. About 32% of this portfolio was A rated or • higher. ING’s Available-for-Sale Alt-A investments are measured at fair value in the balance sheet. The significant reduction in exposure as indicated by ‘Other changes’ is primarily due to the Illiquid Asset Back-Up Facility. The substantial amount of the negative pre-tax revaluation reserve in equity is mainly a result of the decline of market prices in illiquid markets. Under applicable accounting standards, impairments on debt securities are triggered by credit events only. Upon impairment, the full unrealised revaluation on the impaired security (including the amount attributable to market illiquidity) is recognised in the profit and loss account. The amount of impairments recognised in the profit and loss statement is principally a reflection of an illiquid market and occurred credit events. Net investments in CDOs/CLOs at 31 December 2009 were 0.4% of total assets. The vast majority of the CDOs/CLOs has investment • grade corporate credit as underlying assets. Other changes includes purchases and sales of CDOs/CLOs, as well as foreign currency effects. The CMBS portfolio had a market value of EUR 7.7 billion at 31 December 2009. The current fair value is 81% of original purchase price. • Improvements in the portfolio were mainly visible in the super senior and AAA tranches; however, ING still had to book EUR 25 million of impairments on the CMBS portfolio during 2009.
Of the EUR 16.2 billion exposure on US Subprime RMBS, US Alt-A RMBS, CDOs/CLOs and CMBS EUR 12.6 billion is measured at fair value (with the revaluation recognised in equity, except impairments on these trades going through P&L). At 31 December 2009 the fair value of US Subprime RMBS, US Alt-A RMBS, CDOs/CLOs and CMBS was as provided in the tables below, where the following split is made: Level 1 – Quoted prices in active markets; Level 2 – Valuation technique supported by observable inputs; Level 3 – Valuation technique supported by unobservable inputs.
Fair value of US Subprime RMBS, US Alt-A RMBS, CdOs/ClOs and CMBS 2009 level 1 level 2 level 3 total
Fair value of US Subprime RMBS, US Alt-A RMBS, CdOs/ClOs and CMBS 2008 Level 1 Level 2 Level 3 Total
Impact on monolines ING has an exposure of EUR 1.1 billion to monolines at the end of 2009 (2008: EUR 2.2 billion). This position decreased during the year primarily due to sales.
Impact on Liquidity profile Due to the financial crisis liquidity became scarce and central banks around the world provided funding to prevent the interbank market drying up. Throughout the year ING’s liquidity position remained within internally set limits. ING Bank has a favourable funding profile as the majority of the funding stems from client deposits.
The following principles support this objective: Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with • internal and external rules and guidelines is monitored; ING Group’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities;• Delegated authorities are consistent with the overall Group strategy and risk appetite;• Transparent communication to internal and external stakeholders on risk management and value creation.•
RISK GOvERNANCE ING’s risk management framework is based on the ‘three lines of defence’ concept which ensures that risk is managed in line with the risk appetite as defined by the Executive Board (and ratified by the Supervisory Board) and is cascaded throughout the Group. This concept provides a clear allocation of responsibilities for the ownership and management of risk, to avoid overlaps and/or gaps in risk governance. Business line management and the regional and local managers have primary responsibility for the day-to-day management of risk and form the first line of defence. The risk management function, both at corporate and regional/local level, belongs to the second line of defence and has the primary responsibility to align risk taking with strategic planning e.g. in limit setting. Risk managers in the business lines have a functional reporting line to the Corporate Risk General Managers described below. The internal audit function provides an ongoing independent (i.e. outside of the risk organisation) and objective assessment of the effectiveness of internal controls, including financial and operational risk management and forms the third line of defence.
The risk organisation is structured independently from the business lines and is organised through five risk departments: Corporate Credit Risk Management (CCRM) is responsible for the credit risk management of ING Bank and ING Insurance.• Corporate Market Risk Management (CMRM) is responsible for the market risk and liquidity risk management of ING Bank.• Corporate Insurance Risk Management (CIRM) is responsible for the insurance, market and liquidity risk management of ING Insurance.• Corporate Operational Risk Management (CORM) is responsible for the operational risk management of ING Bank and ING Insurance.• Group Compliance Risk Management (GCRM) is responsible for (i) identifying, assessing, monitoring and reporting on the compliance • risks faced by ING, (ii) supporting and advising management on fulfilling its compliance responsibilities, and (iii) advising employees on their (personal) compliance obligations.
In addition two staff departments report to the CRO: The Risk Integration and Analytics department is responsible for inter-risk aggregation processes and for providing group-wide risk • information to the CRO and Executive Board The Model Validation department. This department carries out periodic model validations of all material risk models used by ING. • To ensure independence from the business and the other risk departments, the head of this department reports directly to the CRO.
Group Risk Committees The Group risk committees described below are also part of the second line of defence. They act within the overall risk policy and delegated authorities granted by the Executive Board and have an advisory role to the CRO. To ensure a close link between the business lines and the risk management function, the business line heads and the respective Corporate Risk General Managers are represented on each committee (except for the Operational and Residual Risk Committee where the business is not represented).
ING Group Credit Committee – Policy (GCCP): Discusses and approves policies, methodologies and procedures related to credit, • country and reputation risks within ING Group. The GCCP meets on a monthly basis ING Group Credit Committee – Transaction Approval (GCCTA): Discusses and approves transactions which entail taking credit risk • (including issuer investment risk). The GCCTA meets twice a week ING Group Investment Committee (GIC): Discusses and approves investment proposals for ING Real Estate. The GIC meets on a • monthly basis Asset and Liability Committee ING Bank (ALCO Bank): Discusses and approves the overall risk profile of all ING Bank’s market risks that • occur in its Commercial Banking, Retail Banking and ING Direct activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank. ALCO Bank meets on a monthly basis Asset and Liability Committee ING Insurance (ALCO Insurance): Discusses and approves all risks associated with ING’s Insurance activities. • This includes volatility (affecting earnings and value), exposure (required capital and market risk) and insurance risks. ALCO Insurance meets ten times a year Operational and Residual Risk Committee (ORRC): Discusses and approves issues related to Methods, Models and Parameters related • to Operational risk, Business risk in Banking, inter-risk diversification and consistency across risk types and businesses. The committee meets at least twice a year.
Committee membership is organised such that specific business know-how and expertise relating to the activities of ING and the subject matter of the committees is available. The CRO attends the meetings of the Audit Committee and the Risk Committee.
The CRO makes sure that the boards are well informed and understand ING Group’s risk position at all times. Every quarter the CRO reports to the board committees on ING’s risk appetite levels and on ING Group’s risk profile. In addition the CRO briefs the board committees on developments in internal and external risk related issues and makes sure the board committees understand specific risk concepts.
ING has integrated its risk management into the annual strategic planning process. This process aligns strategic goals, business strategies and resources throughout ING Group. The process is such that the Executive Board issues a Planning Letter which provides the organisation with the corporate strategic direction, and addresses key risk issues. Based on this Planning Letter the business lines and business units develop their business plans which align with the Group’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved in the plans. It is part of the process to explicitly discuss strategic limits and group risk appetite levels. At each level, strategies and metrics are identified to measure success in achieving objectives and to assure adherence to the strategic plan. Based on the business unit and line of business plans, the Executive Board formulates the Group Strategic Plan which is submitted to the Supervisory Board for approval.
ING Group’s risk appetite is defined by the Executive Board as part of the strategic planning process. Strict boundaries are established with regard to acceptable risk types and levels. ING’s ‘three lines of defence’ governance framework ensures that risk is managed in line with the risk appetite as defined by the Executive Board. Risk appetite is cascaded throughout the Group, thereby safeguarding controlled risk taking. The role of the business lines is to maximise the value within established risk boundaries. Each quarter, the Executive Board monitors that the financial and non-financial risks are within the boundaries of the risk appetite as set in the strategic planning process.
ING Group risk metrics in 2009 The Group’s risk appetite is captured in three different metrics which are disclosed below: Earnings at Risk: the potential reduction in IFRS earnings over the next year, during a moderate (i.e. ‘1 in 10’) stress scenario. Maintaining • a high quality of earnings helps ING to safeguard against being downgraded by the rating agencies; Capital at Risk: the potential reduction of the current net asset value (based on fair values) over the next year, during a moderate • (i.e. ‘1 in 10’) stress scenario; Economic Capital: the amount of capital that is required to absorb unexpected losses in times of a severe (i.e. ‘1 in 2000’) stress scenario • given ING Group’s ‘AA’ target rating.
ING Group’s risk metrics cover the most important aspects in terms of different severities (moderate vs. extreme stress) and performance measures where risk can materialise (value vs. earnings). The Earnings and Capital at Risk metrics are important metrics from a shareholder point of view since they provide insight in the level of risk ING takes under ‘moderate stress’ market expectations to generate return. From the debt and policy holder point of view, Economic Capital is more important since it is the buffer against extreme losses.
The main differences and similarities between the risk metrics are illustrated below; Earnings at Risk Capital at Risk Economic Capital Confidence interval 90% 90% 99.95% (based on AA target rating) Stressed metric IFRS earnings Value Value Deviation from IFRS earnings before market volatilities and risk costs (over the next year) Current net asset value based on fair values (over the next year)
Interpretation Potential IFRS earnings reduction during a ‘moderate’ stress scenario (i.e. 1 in 10)
Potential value reduction of net value during a ‘severe’ stress scenario (i.e. 1 in 2000)
The methodology for the risk metric Earnings at Risk was upgraded during 2009 to more closely align with accounting rules. In particular, the impairment risk component was improved. The methodology now also takes into account potential impairments on goodwill, and better incorporates of impairments on debt securities. The approximate impact of these changes is an increase of EUR 900 million on total EaR level.
The business risk methodology for ING Bank was revised during 2008 and the first quarter of 2009. The methodology was changed to more closely align with the methodology used for ING Insurance and to make sure that the volumes, margins and cost fluctuations were better reflected than in the previous methodology. The new business risk methodology for Bank consists of three components, (i) volume/ margin risk, (ii) expense risk, and (iii) client behaviour risk. The new methodology was implemented during the first quarter of 2009, after approval by the ORRC.
A description of the models, underlying assumptions and key principles used by ING for calculating Earnings at Risk, Capital at Risk and Economic Capital is provided in the Model Disclosure section at the end of the risk management section.
Earnings at Risk The level of Earnings at Risk (EaR) provides insight into the level of risk ING can absorb relative to its earnings capacity. The below two tables show the EaR figures per risk type, split between Bank and Insurance and combined for ING Group. The levels shown are undiversified levels for ING Bank and ING Insurance, meaning that the diversification between Bank and Insurance is not yet included in these figures. This diversification benefit is shown separately. The row ‘Bank-Insurance diversification %’ shows the benefit of combining the Bank and Insurance EaR figures. For example: the 1% for Credit and Transfer Risk indicates that the Group figure for Credit & Transfer Risk is 1% lower than the Bank and Insurance figures for Credit and Transfer Risk combined. Similarly the column ‘Inter-risk diversification %’ shows the diversification benefit derived from combining the different risk types at the Bank, Insurance or Group level respectively. This presentation format differs from the format in the 2008 annual report and as such the figures are different from those shown last year. Since this is only a different representation the final figure for ING Group has not changed.
Over 2009, the reported Earnings at Risk for ING increased. The increase is not due to additional risk taking, but due to the inclusion of risks which were not yet taken into account in the 2008 figures. Credit risk has increased because specific impairment rules for available for sale debt securities, whereby securities are written down to market value, even if expected credit losses are much smaller, are now better reflected in the dashboard. Furthermore, the business risk figures have gone up significantly due to the inclusion of a) goodwill impairment risk and b) the risk that the business volumes are lower than expected.
The below two tables show the CaR figures per risk type, split over Bank and Insurance and combined for ING Group. The levels shown are undiversified levels for ING Bank and ING Insurance, meaning that the diversification between Bank and Insurance is not yet included in these figures. This diversification benefit is shown separately. The column ‘Inter-risk diversification %’ shows the benefit of combining the CaR figures for all risk types. For example, the 39% for ING Bank indicates that the total Bank figure for all risk types is 39% lower than the sum of the individual CaR figures per risk type. Similarly the row ‘Bank-Insurance diversification %’ shows the diversification benefit derived from combining the Bank and Insurance CaR figures for each risk type into a Group CaR figure for each risk type. This presentation format differs from the format in the 2008 annual report and as such the figures are different from those shown last year. Since this is only a different representation, the final figure for ING Group has not changed.
Inter-risk diversification % total 2009 Interest Rate Equity Real Estate Fx
Inter-risk diversification % Total 2008 Interest Rate Equity Real Estate FX
The table below shows the Earnings at Risk and Capital at Risk figures per line of business. The levels shown are undiversified levels for ING Bank and ING Insurance, meaning that the diversification between Bank and Insurance is not yet included in these figures. This diversification benefit is shown separately. The row ‘Bank-Insurance diversification %’ shows the diversification benefit derived from combining the Bank and Insurance CaR figures for each risk type into a Group CaR figure for each risk type. This presentation format differs from the format in the 2008 annual report and as such the figures are different from those shown last year. Since this is only a different representation the final figure for ING Group has not changed.
ING’s Group Economic Capital is determined by applying one common aggregation approach to Bank and Insurance.
ING Bank 23.1 22.4 ING Insurance 18.1 13.7 Consolidated Benefit –6.2 –5.4 Total ING Group 35.0 30.7
The potential risk capital impact for ING Group of the ING employee pension liability is currently not included in the aggregated group risk metrics. The standalone Economic Capital impact for ING employee pension liabilities is calculated separately, and from a capital management perspective there is currently no need to reserve any additional capital for ING pension liabilities.
ING Group Economic Capital is 15% lower than the sum of the parts (bank and insurance). Three different factors contribute to this consolidation benefit: 1. Offsetting positions between bank and insurance, especially on the interest rate risk side, where the long duration assets of the bank are offset by the long duration liabilities of Insurance; 2. Diversification between bank and insurance asset classes based on observed correlations; e.g. less than full correlation between insurance equity positions and bank Real Estate positions; 3. Diversification between bank and insurance risk drivers based on expert opinion correlations; e.g. less than perfect correlation between operational risk incidents at the bank and interest rate risk in insurance.
The 15% diversification benefit used for 2009 is supported by calculations done at ING Group level (2008: 15%).
The table below shows the contribution of the different risk drivers to the consolidation benefit: Contribution to consolidated benefit
The following risk disclosures provide more insight into how the risk measures used by the risk organisation are linked to the Group risk dashboard and Group Economic Capital.
ING BANK ING Bank is engaged in selling a broad range of products. The Bank Management Board is responsible for managing risks associated with the activities of ING Bank. The financial risks that arise from selling these products are managed by the Corporate Credit and Market Risk departments. Operational risks are managed by the Corporate Operational Risk department.
Credit risk (including Transfer risk) 9,991 8,686 Market risk 8,435 10,349 Business risk 2,581 1,221 Operational risk 2,074 2,151 Total banking operations 23,081 22,407
Commercial Banking 8,662 9,849 Retail Banking 7,166 6,169 ING Direct 4,466 4,050 Corporate Line Bank (1) 2,787 2,339 Total banking operations 23,081 22,407 (1) Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by
The de-risking efforts of Commercial banking have resulted in lower capital. For Retail banking, the increase in value of the strategic equity stakes and deterioration of the retail portfolio explains an increase of economic capital. Credit migrations for securitisations are the main contributor for the higher capital in ING Direct.
Economic capital is a non accounting measure which is inherently subject to dynamic changes and updates as a result of ING’s portfolio mix and general market developments. ING is in the process of recalibrating the underlying assumptions to its economic capital models to bring closer alignment of the economic capital framework with the regulatory capital framework, and to include the effects of the extreme market influences over the last year. As of the first of January 2010, this may have a material impact on the economic capital values for credit risk going forward.
ING BANK – CREdIt RISKS Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities financing and foreign exchange trades); d) money markets and e) settlement. Corporate Credit Risk Management (CCRM) is responsible for the measurement and management of credit risk incurred by all ING Group entities, including country-related risks. CCRM is organised along the three business lines of ING Bank (e.g. Retail Banking, Commercial Banking and ING Direct) and ING Insurance. The CCRM General Manager is functionally responsible for the global network of credit risk staff, while the heads of the credit risk management functions for the business lines report directly to him.
Credit risk management is supported by dedicated credit risk information systems and internal credit risk measurement methodologies for debtors, issuers and counterparties. CCRM creates consistency throughout the credit risk organisation by providing common credit risk policies, methodologies, manuals and tools across the Group.
lending risk Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING, excluding any accrued and unpaid interest, discount/ premium amortisations or impairments.
Settlement risk Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates and receipt is not verified or expected until ING has paid or delivered its side of the trade. The risk is that ING delivers, but does not receive delivery from the counterparty. Settlement risk can most commonly be contained and reduced by entering into transactions with deliveryversus -payment (DVP) settlement methods, as is common with most clearing houses, or settlement netting agreements.
For those transactions where DVP settlement is not possible, ING establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed by the credit risk management units. Risk is further mitigated by operational procedures requiring trade confirmations to counterparties with all transaction details, and by entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING regularly participates in projects with other financial institutions to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk. Due to the very short term nature of settlement exposure (daily), settlement risks do not attract economic or regulatory capital and are excluded from risk reporting disclosures.
determination of credit risk outstandings Figures associated with Money Market and Lending activities are generally the nominal amounts, while amounts associated with Investment activities are based on the original amount invested less repayments. Off-Balance Sheet exposures include the letters of credits and guarantees, which are associated with the Lending Risk Category. Additionally, Off-Balance Sheet exposures include a portion of the unused limits, associated with the statistically expected use of the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called ‘credit risk oustandings’.
ING BANK CREdIt RISK PROFIlE ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS) are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and other assets) held by the issuer of the security. The last major area of credit risk involves pre-settlement credit exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
From restructuring (18-19) to regular (1-17) status 2,737 1,183 From recovery (20-22) to regular or restructuring status (1-19) 6,105 3,556 Total of renegotiated loans 8,842 4,739
This total is broken down by Business and Consumer clients as follows: Renegotiated business loans that would otherwise be past due or impaired (outstandings)
ING continues to take a proactive approach in working with its Business customers which are experiencing financial difficulties to restructure their loans and help return the companies to economic viability. The large increases in 2009 are a reflection of the larger part of loans eligible for restructuring as a result of the financial crisis.
Neither past due nor impaired 790,377 817,069 Past due but not impaired (1-90 days) (1) 7,404 7,224
Aging analysis (past due but not impaired): ING Bank portfolio, outstandings (1)(2)
Past due for 1-30 days 5,967 5,844 Past due for 31-60 days 1,281 1,223 Past due for 61-90 days 156 157
Repossession policy It is ING’s general policy not to take possession of assets of defaulted debtors. Rather, ING attempts to sell the assets from within the legal entity that has pledged these assets to ING, in accordance with the respective collateral or pledge agreements signed with the obligors. In those cases where ING does take possession of the collateral, ING generally attempts to sell the assets as quickly as possible to prospective buyers. Based on internal assessments to determine the highest and quickest return for ING, the sale of repossessed assets could be the sale of the obligor’s business as a whole (or at least all of its assets), or the assets could be sold piecemeal.
Provisions The credit portfolio is under constant review. A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the ING Provisioning Committee (IPC), which advises the Executive Board on specific provisioning levels. ING Bank identifies as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
Provisions: ING Bank portfolio Commercial Banking Retail Banking ING Direct Total ING Bank
Changes in the composition of the group 2 –3 –3 2 Write-offs –520 –260 –493 –399 –204 –69 –1,217 –728
Increase/(decrease) in loan loss provision 1,211 596 997 401 765 283 2,973 1,280 Exchange differences –28 –17 –12 –36 –8 3 –48 –50
Following the trend in the global economy, risk costs began to increase in 2008. The trend continued in 2009, albeit at a slower pace in the second half of 2009.
(1) Based on the total amount of credit risk in the respective column using ING’s internal credit risk measurement methodologies. (2) Economic sectors below 2% are not shown separately but grouped in Other.
ING Direct continued to increase its diversification into residential mortgages, while proportionally reducing its securitisation and bond portfolios. The increased concentration in ‘Governments’ at ING Direct was due to the Alt-A transaction with the Dutch government. The following industries fell below the 2.0% threshold during 2009: Food, Beverage and Personal Care (2008: 2.2%), General Industries (2.1%) and Builders and Contractors (2.0%).
largest economic exposures: ING Bank lending portfolio, by country (1) (2)
(1) Only covers total exposures in excess of EUR 9 billion, including intercompany exposure with ING Insurance. The selection contains the same countries as in the previous year, albeit in a different order.
ING BANK – MARKEt RISKS Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates and real estate prices, negatively impact the bank’s earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking book positions. The trading positions are held for the purpose of benefiting from short-term price movements, while the banking book positions are intended to be held in the long term (or until maturity) or for the purpose of hedging other banking book positions.
(2) Country is based on the country of residence of the obligor.
The Financial Markets Risk Committee (FMRC) is the market risk committee that, within the guidelines set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. CMRM advises both the FMRC and ALCO Bank on the market risk appetite of Commercial Banking activities.
For the trading portfolios, CMRM focuses on the management of market risks of Commercial Banking (mainly Financial Markets) as this is the only business line where significant trading activities take place. Trading activities include facilitation of client business, market making and proprietary position taking in cash and derivatives markets. CMRM is responsible for the development and implementation of trading risk policies and risk measurement methodologies, the reporting and monitoring of risk exposures against approved trading limits and the validation of pricing models. CMRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. The management of trading market risk is performed at various organisational levels, from CMRM overall down to specific business areas and trading offices.
Measurement CMRM uses the Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital. ING’s VaR model has been approved by the De Nederlandsche Bank (DNB: the Dutch Central Bank) to be used for the regulatory capital calculation of its most important trading activities.
The Basel Committee has proposed to supplement the current VaR regulatory capital framework for trading exposures with e.g. an Incremental Risk Charge (IRC) and Stressed VaR to cover for the shortcomings of the current risk framework. The IRC will ensure that Basel II capital charges will capture certain risks which are not reflected in the current 99%, 10-day VaR model for the trading book such as defaults and credit migrations. The Basel II requirements on the incremental risk charge will come into force from 2011 onwards.
Development of market risks The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon. The overnight VaR is presented for the ING Commercial Banking trading portfolio which was risk managed by CMRM Trading during 2008 and 2009. Several banking books are governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the trading risk graph and table below.
During 2009 the overnight VaR for the ING Commercial Banking trading portfolio ranged from EUR 25 million to EUR 60 million. One minor limit excess was observed in 2009. On 16 January 2009, the EUR 60 million VaR limit was exceeded by EUR 50,000.
In general, the level of the trading VaR was lower in 2009, and also showed a decreasing trend after February 2009. The interest rate market, which includes both the general interest rate and credit spread exposures, provided the largest contribution to the trading VaR.
Interest Rate (BPv (1)) Interest Rate (BPv (1)) Eurozone –1,175 Eurozone –1,272 United States –359 Mexico –289 Mexico –153 United States 241 UK –109 South Korea –111 Japan 107 Taiwan 60
Credit Spread (BPv (1)) Credit Spread (BPv (1)) United States –115 Eurozone –247 Eurozone –86 United States –187 Mexico –57 Mexico –97 Japan –17 Japan –56 Russia –13 United Kingdom –32 (1) Bpv (or basis point value) refers to profit and loss account sensitivity per 1bp increase in the interest rate or credit spread.
Market risk in banking books Organisation Within ING Bank, positions are either labelled as trading or non-trading (banking book) positions. The most important aspect in segregating the banking from the trading books is the intent of the positions held in these books. The banking book positions are intended to be held for the long-term (or until maturity) or for the purpose of hedging other banking positions emerging from commercial business, as for instance in the mortgage book.
The risk transfer principle forms the basis of ING Bank’s ALM framework. This refers to the principle whereby the outright interest rate risk resulting from the commercial business is transferred to the ALM books. The interest rate risk from the commercial business arises from the fact that own originated assets and liabilities do not reprice simultaneously with respect to interest rate characteristics. The transfer of the outright interest rate risk is to a large degree based on modelling client behaviour. Within CMRM, extensive research is being done in order to optimise this modelling. For this purpose, several methods are in place to replicate the interest rate risk, taking into account both the contractual and behavioural characteristics of demand deposits, saving accounts and mortgages. All models and assumptions are backtested regularly and results are presented to the designated ALCO.
For the determination of the interest rate sensitivity of savings accounts and current accounts, several methods depending on the focus of the risk analysis have been developed, e.g. historical simulation, Earnings Sensitivity analysis and valuation models. Pricing strategies, outstanding volumes and the level and shape of the yield curve are taken into account in these models. Based on these analyses, investment rules are determined for the various portfolios.
Within ING Direct the interest rate risk is managed and measured at the level of the local ING Direct entities. The interest rate risk that remains in the ING Direct entities also largely results from basis risk and optionality as the outright interest rate risk is to a large extent hedged.
By Business line ING Commercial Banking –44 –91 ING Retail Banking –115 –102 ING Direct –281 5 ING Bank Corporate Line 5 46 ING Bank Total –435 –142
Note: Compared to ES figures in the group risk dashboard, the above figures exclude diversification with other bank risk types and group/insurance risks.
By Currency Euro –1,811 –2,105 US dollar –39 –238 Pound sterling –53 –40 Other 68 –11 Total –1,835 –2,394
The end-of-year NPV at Risk decreased significantly by EUR 559 million to EUR –1,835 million. This change is mainly driven by ING Direct where shortening of investments at certain units changed the NPV at Risk figure from a negative to a positive value. Within Commercial Banking the structural interest rate mismatch position in the strategic ALM portfolio was reduced, leading to a reduction in NPV at Risk.
Currency Euro –15,340 –19,176 US dollar 757 337 Pound sterling –684 –582 Other 475 –373 Total –14,792 –19,794
Foreign exchange risk in banking books Foreign exchange (FX) exposures in banking books result from commercial banking business (business units doing business in other currencies than their base currency), FX translation risk on foreign currency investments (including realised results) and strategic equity stakes in foreign currencies. The policy regarding these exposures is briefly explained below.
FX Translation result ING’s strategy is to protect the bank’s Tier 1 ratio against unfavourable FX rate fluctuations (1). The protection is largely achieved by the issuance of US dollar and Pound sterling denominated hybrid debt that qualifies as Tier 1 capital (‘Tier 1 securities’) and furthermore by taking structural foreign currency positions. The goal of deliberately taking open FX positions is to make the Tier 1 capital and riskweighted assets evenly sensitive to changing FX rates. The US dollar, Pound sterling, Polish zloty, Australian dollar and Turkish lira are the main currencies in this respect.
The following tables present the currency exposures in the banking books.
The US dollar Foreign Investments declined in 2009 due to significant negative results, mainly within ING Direct US. The Australian dollar Foreign investments increased significantly for different reasons: a capital injection in ING Direct Australia, strengthening of the FX rate by 25% and positive realised results. The significantly increased Net Exposure in the category ‘Other currency’ is mainly caused by increased share prices related to strategic equity stakes. For example, the share price of Bank of Beijing increased over 100%, increasing the exposure to the Chinese renminbi.
In order to measure the remaining sensitivity of the Tier 1 ratio against FX rate fluctuations, the Tier 1 ratio at Risk (TaR) measure is used as presented in the following table. It measures the drop in the Tier 1 ratio when stressing a certain FX rate.The stress scenarios for the FX rates that are used for calculating the TaR, are presented in the last two columns. A positive stress scenario means that the foreign currency appreciates against the Euro. For the US dollar this means that at the end of 2009 the Tier 1 ratio would decrease by 0.030% in absolute terms (e.g. from 9.030% to 9.000%) if the US dollar depreciates by 15%.
(1) Recently, the strategy changed and the core Tier 1 ratio, instead of the Tier 1 ratio, will be protected against FX rate fluctuations going forward.
US dollar 0.030% 0.041% –15% –10% Pound sterling 0.002% 0.000% –15% +5% Polish zloty 0.006% 0.001% –15% +20% Australian dollar 0.010% 0.003% –20% +5% Turkish lira 0.006% 0.017% –25% –30% Total n/a n/a n/a n/a
Equity price risk in banking books Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose price reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank maintains a strategic portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in associates of EUR 1,396 million (2008: EUR 1,813 million) and equity securities held in the Available-for-Sale portfolio of EUR 3,682 million (2008: EUR 1,863 million). The value of equity securities held in the Available-for-Sale portfolio is directly linked to equity security prices with increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December 2009 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a month-end low amount of EUR 1,198 million (2008: EUR 776 million) and a high amount of EUR 2,536 million (2008: EUR 1,969 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value is therefore not directly linked to equity security prices.
Real Estate price risk in banking books Real estate price risk arises from the possibility that real estate prices will fluctuate affecting both the value of real estate assets and earnings related to real estate activities.
For the third category mentioned above real estate price shocks will have a direct impact on reported net profit. ING Bank’s real estate exposure (i.e. including leverage and committed purchases) is EUR 7.0 billion of which EUR 3.3 billion is recorded as fair value through P&L and EUR 3.7 billion is not revalued through P&L, but is either booked at cost or is revalued through equity (with impairments going through P&L). In total, Real Estate exposure decreased by EUR 1.9 billion mainly as a result of negative fair value changes (EUR 800 million), impairments (EUR 620 million), net divestments (EUR 900 million) and compensated by FX appreciation (EUR 420 million).
Real Estate Exposure banking books recorded as fair value through P&l 2009 Residential Office Retail Industrial Other total
Real Estate Exposure banking books recorded as fair value through P&l 2008 Residential Office Retail Industrial Other Total
ING Bank’s real estate exposure revalued through P&L has decreased as a result of value declines, outflow of investments in funds and sales. Europe’s real estate exposure recognised EUR 80 million of fair value changes and was not severely impacted compared to other regions. However, sales and outflow within funds of EUR 650 million decreased European real estate exposure. Exposure in the Americas was negatively impacted by fair value changes in the Summit portfolio (EUR 290 million) and other US exposures (EUR 200 million). The sale of Canadian assets (EUR 160 million), partly offset by the Canadian dollar appreciation, contributed to a further decrease in exposure. Exposure in Australia decreased slightly because of negative fair value changes (EUR 160 million) partly offset by the Australian dollar appreciation. Asia’s real estate exposure decreased mainly due to the sale of assets and outflow within funds (EUR 250 million) and negative fair value changes (EUR 70 million).
tactical liquidity risk From a tactical, short-term perspective the liquidity risk resulting from the short term cash and collateral positions is managed. ALCO Bank has delegated day-to-day liquidity management to Financial Markets Amsterdam, which is responsible for managing the overall liquidity risk position of ING Bank, while regional and local Financial Markets departments are responsible for managing liquidity in their respective regions and locations.
The liquidity risk management function is delegated to CMRM, which bears the responsibility for liquidity risk stress testing and for the identification, measurement and monitoring of the liquidity risk position. For the measurement and monitoring of the actual liquidity position the focus is on the daily cash and collateral position. For stress testing purposes the liquidity risk positions are calculated in line with the regulatory reporting requirements for liquidity risk of the Dutch Central Bank. For this purpose ING Bank’s weekly and monthly liquidity positions are stress tested under a scenario that is a mix between a market event and an ING specific event. The resulting liquidity positions are corrected for liquidity surpluses in inconvertible currencies and in locations with restrictions on capital transfer.
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following: Market Value at Risk (MVaR) limits that provide the fundamental framework to manage the market and credit risks resulting from the • Insurance operations’ asset / liability mismatch; Credit risk concentration limits;• Mortality concentration limits;• Catastrophe and mortality exposure retention limits for its insurance risk; and• Investment and derivative guidelines.•
The ING Insurance Economic Capital model is based on a 99.95% one-year Value at Risk framework. It is important to note that since industry practice relating to Economic Capital is still evolving and moreover Solvency II standards are still under discussion, ING Insurance models are expected to evolve as a result. Solvency II currently calls for a 99.5% Value at Risk standard for internal models which is a lower risk threshold than used in ING’s model.
Credit risk (including Transfer risk) 1,319 891 Market risk 11,552 8,455 Insurance risk 1,666 1,557
Insurance Americas 9,705 6,049 Insurance Asia/Pacific 2,256 2,817 Insurance Europe 3,969 2,985 Corporate Line Insurance (1) 2,175 1,831 Total insurance operations 18,105 13,682 (1) Corporate Line includes funding activities at ING Insurance level, explicit internal transactions between business unit and Corporate Line, managed by Capital
While the figures above are shown by business line, the diversification of risks across ING businesses is calculated across business units. Total diversification between ING Insurance’s business units and the Corporate Line Insurance is 32% for 2009 (39% in 2008).
Interest rate risk 4,244 2,739 Credit spread risk 1,914 880 Equity risk 1,836 1,293 Real Estate risk 239 252 Implied volatility risk 1,451 1,857 Foreign exchange risk 1,868 1,434
Interest rate risks are the largest market risks for ING Insurance. Interest rate risks are most significant in the United States. In general, the primary risk is to falling interest rates. The table shows a notable increase in the interest rate risk during 2009 mainly as a consequence of the improved modelling of interest rate guarantees in US variable annuities.
The equity risk has become more dominant due to unwinding of hedging activities, relating to both direct and indirect exposure and a higher equity value due to the market recovery in 2009. Direct exposure relates to the holding of shares and is most significant for ING in the Netherlands. Indirect exposure relates to the potential loss of fee income from unit linked, variable annuity, and pension fund business across all regions. Direct exposure represents approximately 25% of the equity risk, after taking the hedge positions into account.
The credit spread risk has become more dominant due to higher credit spread shocks applied to our assets and improved risk modelling of structured bond assets.
The MVaR limits are managed by ALCO Insurance at the relevant organisational level. The Group Insurance ALCO determines the aggregate limit and ensures that the Group stays within the limit and allocates the sub-limits to business lines, with similar roles for the business line and business unit ALCOs. Limit breaches by business lines are reported to ALCO Insurance and resolved in accordance with the policy within the next quarter.
CIRM consolidates and monitors the MVaR exposures of the business lines including diversification effects on a quarterly basis. Together with ING Capital Management, MVaR is managed within the limits.
Real Estate Exposure recorded as fair value through P&l 2009 Residential Office Retail Industrial Other total
Real Estate Exposure not revalued through P&l 2008 Residential Office Retail Industrial Other Total
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on pre-tax IFRS earnings, projected one year forward from the calculation date. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confidence level projected through to 31 December 2010.
Interest rate (1% up) –222 –67 Interest rate (1% down) 270 82 Equity (25% (US 15%) down) –814 –795 Real Estate (8% down) –434 –533 Foreign Exchange (10% worst case) –224 –224
In order to determine how much reinsurance protection is required these risk tolerance levels are compared to the estimated maximum probable loss resulting from catastrophic events with a 1 in 250 probability of occurrence which is in line with industry practice. The maximum probable loss estimates for Fire business are based on risk assessment models that are widely accepted in the industry.
Through scenario analyses, ING Insurance measures the sensitivity of pre-tax earnings of the insurance operations to an increase/decrease of the insurance risk factors over a one year period. These changes to earnings can relate to realised claims or any other profit item that would be affected by these factors. ING assumes that not all the shifts presented below will happen at the same time.
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on pre-tax IFRS earnings, projected one year forward from the calculation. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confidence level projected through to 31 December 2010.
ING INSURANCE – CREdIt RISKS The credit risks in the general accounts portfolio within ING Insurance are subject to the same principles, policies, definitions and measurement as those of the banking operations. The credit risks are measured and monitored by Corporate Credit Risk Management (CCRM) as well as local credit risk managers within the various locations where credit risk is taken within ING Insurance and ING Investment Management. Within ING Insurance, the goal is to maintain a low risk, well diversified credit risk portfolio that meets or exceeds market based benchmark returns.
The credit risk classification of issuers, debtors and counterparties within the Insurance companies’ credit risk portfolios continues its transition to the methodology used by the banking operations. Similar to ING Bank, ING Insurance uses risk classes which are calibrated to the probability of default of the underlying issuer, debtor or counterparty. These ratings are defined based upon the quality of the issuer in terms of creditworthiness, varying from investment grade to problem grade expressed in S&P equivalents.
ING Insurance risk class distribution deteriorated during 2009, mostly due to downgrades. The increase in the CCC and Problem Grade class was largely due to downgraded securitizations. This category also includes unrated private equity investments. The shift from AA to AAA at Insurance Europe is caused by an increase in outstandings to governments as a result of derisking.
(2) Economic sectors below 2% are not shown separately but grouped in Other.
The declining portfolio in the United States is primarily the result of the currency depreciation of the US dollar against the Euro, impairments and the Alt-A transaction with the Dutch government. The portfolio in the Netherlands increased due to the IABF Receivable. There were no other significant shifts in the portfolio concentration.
Enhancements of the Non-financial Risk Dashboard The Non Financial Risk Dashboard (NFRD) is a report, that is standard on the agenda for the meetings of the Management Boards Banking and Insurance and the Risk Committee. NFRD provides management at all organisational levels integrated risk information on Operational, Compliance and Legal Risks. ORM, Compliance Risk Management and Legal work closely together to prepare the NFRD, using a consistent approach and risk language. NFRD gives management an overview of key risks based on their own risk tolerance within their business and a clear description of the risks and responses enabling management to better prioritise and to manage operational, compliance and legal risks.
OPERATIONAL RISKS Operational Risk Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the related risk of reputation loss, as well as legal risk whereas strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower operational risk costs. Generic mandatory controls are described in the ORM policy house. Most of the policies have been updated in 2009 and are structured in line with the risk areas. Each policy has one or more minimum standards.
Clear and accessible policies and minimum standards are embedded in ING business processes in all business lines. An infrastructure is in place to enable management to track incidents and operational risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing operational risk. ING uses this knowledge (including lessons learned from incidents) to improve the control of key processes.
ORM uses a layered functional approach within business lines to ensure systematic and consistent implementation of the group-wide ORM framework, policies and minimum standards. The local and regional/division ORM Officer has the responsibility to assist local and regional/division management in managing operational risk. The business line ORM officer has a monitoring role in the operational risk management process and manages and supervises all functional activities of the ORM officers in the business line and region/division.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING, e.g. the structured team approach, scenario analysis, external events inventories, internal incident analysis (e.g. based on information from incident reporting), key risk indicator events and threat scans.
Based on the results of the risk assessment, response measures must be determined for the identified risks. Risk response actions balance the expected cost for implementing these measures with the expected benefits regarding the risk reduction. Risk response can be achieved through several combinations of mitigation strategies, for example reducing likelihood of occurrence, reducing impact, risk avoidance, risk acceptance or through the transfer of risk. Tracking takes place through a global Action Tracking system.
Certain operational risks can best be transferred to the insurance market if risks are high but difficult to mitigate internally. In order to protect ING against financial consequences of uncertain operational events ING has acquired insurance policies issued by third-party insurers with world-wide cover for (Computer) Crime, Professional Liability, Directors and Officers Liability, Employment Practices Liability and Fiduciary Liability. The portion of the risks that ING retains is of a similar magnitude to the risk retained for casualty business-related catastrophe exposures.
The yearly objective setting process for both business management and ORM professionals aims to keep improving the management of operational risk throughout ING to ensure that ING stays in control of its current and future operational risks. ING’s ORM Framework is further maturing towards an integrated controls framework according to pre-agreed requirements and development stages in the individual business units. This development is measured through the scorecard process. The scorecards are an integral part of ING’s operational risk capital model.
Information (Technology) risk ING has fully reviewed and updated its IT risk policy and minimum standards and aligned it with regulatory and (external) international ISO standards. All IT-related staff worldwide were informed about the changes in policy and standards and e-learning is being developed. ING’s quarterly monitoring process through NFRD was also aligned with the new policy and standards.
Continued risk mitigation efforts were made in the IT risk domain worldwide as IT is a key resource and enabler for ING businesses. Managing IT risk is amongst ING’s key management priorities. The Executive IT Risk Steering Committee is chaired by ING’s CEO.
ING developed a Risk Forecasting methodology that shows over time the effects on the risk profile of Business Units from ongoing and intended mitigating actions. In the course of 2009, forecasting has been implemented successfully for the Information (Technology) area.
Continuity risk A continuity risk forecasting model has been introduced. Through this model, Management can determine if current actions are sufficient to maintain the continuity risks at an acceptable level or if additional mitigation projects are necessary. Furthermore an overall Group value chain ranking list for critical products and services has been introduced in which management can prioritise supporting activities. Because of the worldwide influenza (H1N1) pandemic outbreak special focus has been put on business continuity planning and crisis management using a realistic scenario of a staff absence of 50%.
ING believes that fully embedded Compliance Risk Management preserves and enhances the trust of its customers, shareholders and staff. Being trusted is essential to building sustainable businesses. ING’s Business Principles set the foundation for the high ethical standards ING expects of all our business activities.
Clear and practical policies and procedures are embedded in ING business processes in all Business Lines. Systems are in place to enable management to track current and emerging Compliance Risk issues, to communicate these to internal and external stakeholders, and to drive continuous improvement. ING understands that good Compliance Risk Management involves understanding and delivering on the expectations of customers and other stakeholders, thereby strengthening the quality of key relationships.
Money laundering• Terrorist financing• Political or reputational • exposed person Client engagements or • transactions with (ultra) high risk countries
Market abuse & personal • trading Breaches of the ING Business • Principles or local code of conduct Outside positions by ING • officers Gifts or entertainment given or • received; bribery. External incident reporting•
Organisational conflicts of • interest, market abuse and insider trading. Anti-trust/competition law• New or modified products and • services (e.g. customer base, design) and governance changes Agreed sector /industry • standards.
Regulatory registration and • reporting requirements Third party intermediaries as • representatives of ING
Marketing, sales & • Marketing, sales & trading conduct Conduct of advisory business • Complaint handling• Transparency of product • offerings (e.g. costs, disclosures).
the Compliance Risk Management function The Chief Compliance Officer (CCO) reports directly to the Chief Risk Officer who is a member of the Executive Board. The CCO is responsible for developing and establishing the company-wide Compliance Risk Management Charter & Framework, establishes the Minimum Standards for managing Compliance Risks and assists and supports the Executive Board in managing ING’s Compliance Risks.
2. Advisory Compliance Officers proactively advise their CEO, Management, local boards and committees, the next higher level Compliance Officer, and employees on Compliance Risk, responsibilities, obligations and concerns.
Main developments in 2009 Building Customer Trust Group Compliance Risk Management and Corporate Operational Risk Management have worked closely together with the business lines to strengthen ING’s Product Approval and Review Process. This work demonstrates ING’s commitment to treating customers fairly and ensuring alignment with the various regulatory initiatives including the Dutch Banking Code, new FSA regulations in the UK and US President Obama’s white paper on financial regulatory reform.
Regulator relationships Group Compliance Risk Management continued to invest in pro-active relationships with regulators in the jurisdictions where ING operates, striving for an open approach and cooperation in identifying and mitigating compliance risks for ING.
Additionally over 700 Compliance Officers world-wide completed a five day face to face Compliance Officer training focused on raising technical knowledge and enhancing personal effectiveness.
To ensure that ING has clarity on the status of policy embedding and what actions are planned or in place to ensure all policies are operationally effective, all ING Business Units produce quarterly progress reports.
Communication Communication in 2009 focused on delivering clear messages and useable knowledge to the Compliance Risk Management community through vehicles such as E-Bulletins, workshops and poster campaigns. The Group Compliance Risk Management intranet site was re-designed to provide all employees with an easier more engaging tool to find reference material, policies and Compliance Risk Management news.
MOdEl dISClOSURES The risk profile of ING Group, as described in the risk management section is captured by three key risk metrics: Earning at Risk;• Capital at Risk;• Economic Capital.•
Capital at Risk The Capital at Risk (CaR) measures the potential reduction of the net asset value (based on fair values) over the next year relative to expected value. CaR is measured using a 90% confidence level (i.e. ‘1 in 10’ stress scenario).
Aggregation model risk dashboard To derive the Earnings at Risk and Capital at Risk figures at an ING Group level, the underlying risk inputs from the ING Bank and ING Insurance business units are aggregated bottom-up, using a combination of the ‘variance-covariance’ method and Monte Carlo simulation. For aggregation up to Group level, two sets of correlation assumptions are required, namely the Bank-Insurance correlations per risk type and inter-risk correlations.
A second aggregation step exists between these major risk types at an ING Group level. The Group diversified EaR and CaR figure for each major risk type are aggregated using a Monte Carlo simulation in combination with an inter-risk correlation matrix to obtain the overall EaR and CaR figures for ING Group. The outcomes of the simulation represent the potential losses arising from the major risk types, which are summed together to derive the aggregate potential losses. The diversified Group EaR or CaR is then calculated as the 90th percentile of the simulated aggregate potential losses.
ECONOMIC CAPItAl ING BANK Economic Capital is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it originates. In general Economic Capital is measured as the unexpected loss above the expected loss at a given confidence level. Specific measurement by risk type is described in greater detail in the separate risk type sections; i.e. credit and transfer and operational risk as well as market and business risk bank.
This Economic Capital definition is in line with the net market value (or surplus) definition. The process of Economic Capital modelling enables ING Bank to allocate Economic Capital to the business units and support risk-adjusted performance measurement (RAROC).
Aggregation model The main processes executed in the ING Bank Economic Capital aggregation model are depicted in the flowchart below. The white boxes show the processes performed by the model while the shaded box indicates inputs from other corporate risk departments.
Reporting Framework For each business unit and product line, the gross Economic Capital for each risk type is delivered to MISRAROC - the financial data warehouse for RAROC and Economic Capital reporting of ING Bank. The net Economic Capital figures are calculated by taking the product of the gross Economic Capital and one minus the diversification factor. Total Economic Capital is calculated as the sum of the net Economic Capital for each risk type at all reporting levels.
CREdIt ANd tRANSFER RISK Economic Capital for credit risk and for transfer risk is the portion of Economic Capital held to withstand unexpected losses inherent in the credit portfolios related to (unexpected) changes in the underlying creditworthiness of debtors or the recovery value of underlying collateral (if any). Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The same methodology is used for both the banking and the insurance operations.
With regard to methodology, the EC-MC Portfolio calculator provides a sophisticated and consistent framework to measure capital numbers for credit risk. Because of its complexity and required calculation time the EC-MC Portfolio calculator is more suited for portfolio calculation, rather than to be implemented in an environment requiring real time reporting at a transactional level for day-to-day management, pricing of new transactions and limit setting. As a result, Economic Capital figures are based on RAC figures that are derived from the EC-MC Portfolio calculator but are not fully equivalent. The main characteristics are: RAC is calculated at facility level with closed algebraic formulas rather than from a Monte Carlo Simulation. The RAC algebraic formula • includes parameters which incorporate the impact of portfolio dynamics, such as correlations and diversification effects. These parameters are derived through a regression of the outputs of the EC-MC portfolio calculator; Due to its proprietary nature the inputs in the EC-MC Portfolio calculator are subject to certain technical caps and floors (LGD/EAD is • constant and PD migration matrix is capped) which are not applicable in RAC. Also, due to the implemented mathematical routines the EC-MC portfolio calculator is subject to a minimum Probability of default (PD) and maximum tenor, which are not applicable in RAC.
Additionally the banking operations use the RAC model for determining the optimal pricing on (new) lending transactions in order to ensure that ING meets its desired RAROC returns.
Governance of Economic Capital for Credit and transfer Risk All PD, EAD and LGD models are approved by the Credit Risk Committee (CRC) after thorough review of documentation by the Model Development Steering Committee (MDSG) and MV. In addition, each model is validated on an annual basis by MV. Each model has both a credit risk and a front office co-sponsor. Both the MDSG and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation.
Measurement Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year, which represents extreme events and ING’s target rating. The Economic Capital for market risk for non trading portfolios is calculated for each risk type, while for trading portfolios it is calculated on a portfolio level. The calculations for Economic Capital market risk include Real Estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks.
Real Estate price risk includes both the market risks in the investment portfolio and the development risk of ING Real Estate. The Real Estate price risk for ING Real Estate is calculated by stressing the underlying market variables. The stress scenarios at a portfolio level take into account all diversification effects across regions and Real Estate sectors. Also, the leverage of participations in the Real Estate investment funds is taken into account.
Economic Capital for market risk for the mortgage portfolios within ING Retail Banking and ING Commercial Banking is calculated for embedded option risk (e.g. the prepayment option and offered rate option in mortgages). The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk. The Economic Capital model for market risk is based on the estimated 99% confidence adverse interest rate change.
OPERAtIONAl RISK Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the risk of reputation loss, as well as legal risk, whereas strategic risks are not included. While operational risk can be limited through management controls and insurance, operational risk incidents may have a substantial impact on the profit and loss account of financial institutions.
The capital model, an actuarial model, consists of a combination of three techniques: Loss Distribution approach (LDA), which applies statistical analysis to historical loss data;• Scorecard approach, which focuses on the quality of risk control measures within a specific business unit;• ‘Bonus/Malus’ approach, which focuses on the actual operational incidents of a specific business unit.•
Each of these components is calculated separately, and combined to one business risk figure via the variance-covariance methodology. For the calculation of EaR, CaR and EC the same methodology is used, with two differences. The first difference is the confidence interval used for EaR and CaR is 90%, while for EC this is 99.95%. The second difference is that the Volume/Margin component is used for EaR, but not used for CaR and EC.
ECONOMIC CAPItAl ING INSURANCE Economic Capital, ‘EC’, is defined by ING as the amount of assets that needs to be held in addition to the market value of liabilities to assure a non-negative surplus at a 99.95% level of confidence on a 1 year time horizon. ING measures Economic Capital by quantifying the impact on the market value surplus (MVS) as a result of adverse events that occur with a specified probability related to the AA rating. Therefore ING’s Economic Capital model is based on a ‘Surplus-at-Risk’ concept. The confidence level consistent with an AA rating has been defined as the 99.95% one-sided confidence level over a one-year horizon. The change in market value surplus (MVS) is the combined effect of changes in Market Value of Assets (MVA) minus market value of liabilities (MVL) and an adjustment for illiquidity spreads due to current dislocated asset markets. The MVS is adjusted to correct this asymmetry by applying an illiquidity spread to the insurance liability cash flows.
ING continues to adjust AFR to reflect the illiquidity in its insurance portfolios as reporting AFR with MVLs discounted at the swap rates results in an asymmetry between the assets and liabilities in terms of reflection of illiquidity premiums. In addition to valuing assets at current market values, the Euro denominated liability illiquidity risk profile has been proxied by applying a Bloomberg composite Euro AAA spread (weighed average of 44 bps over swaps). For the US illiquid liabilities the Bloomberg composite Euro AAA spread is adjusted by the Basis swap curve, which gives a further +20 bps average illiquid premium over USD swaps.
The adjustment of the MVS for the illiquidity of our insurance liabilities impacts the market risk in our Economic Capital model in the following ways: Interest Rate Risk: The illiquidity spread applied on our liability cash flows effectively reduces the duration of our liabilities and therefore • reduces the duration mismatch between our assets and liabilities resulting in a reduced interest rate risk; Credit Spread Risk: The Economic Capital model stresses both the asset spreads and the illiquidity spread on our liabilities. The netting • of asset spread risk with illiquidity liability spread risk results in a lower credit spread risk. During 2009 the modelling of the illiquidity spread has been refined and illiquidity spreads have significantly declined resulting in a lower impact on our Economic Capital compared with 2008. Discussions have also started within the industry and with regulators to achieve a consistent application of illiquidity across the industry; Foreign Exchange Risk: The adjustment of the MVS for illiquidity results in a reduced net exposure to foreign currency movements • and in particular the US dollar. This results in a lower foreign exchange risk.
The following fundamental principles have been established for the model: Economic Capital requirements are calculated to achieve a target AA rating for policyholder liabilities; • All sources of risk should be considered; • The best estimate actuarial assumptions should be as objective as possible and based on a proper analysis of economic, industry, and • company-specific statistical data. There is one set of best-estimate assumptions per product to be used for all purposes at ING; Valuation of assets and liabilities is based on fair value principles. Where complete and efficient markets exist, fair value is equal to • market value; The Economic Capital and valuation calculations should reflect the embedded options in insurance contracts;• The Economic Capital and valuation calculations are on a pre-tax basis and do not consider the effect of local regulatory accounting and • solvency requirements on capital levels. Capital is assumed to be fully transferable between legal entities; The framework does not include any franchise value of the business. It does, however, include the expense risk associated with the • possibility of reduced sales volume in the coming year.
ING quantifies the impact of the following types of risk in its Economic Capital model: Market risk for ING Insurance is the change in value based on changes in interest rates, equity prices, Real Estate prices, credit spreads, • implied volatilities (interest rate and equity), and foreign exchange rates. It occurs when there is less than perfect matching between assets and liabilities. Market risk may exist in the insurance activities as a result of selling products with guarantees or options (guaranteed crediting rates, surrender options, profit sharing, etc.) that cannot be hedged given the assets available in a certain market. Market risk may also occur when there is an intentional mismatch between asset and liability cash flows even when it is possible to match or hedge the cash flows; Credit risk is the risk of changes in the credit quality of issuers due to defaults or credit migration of securities (in the investment • portfolio), counter parties (e.g. on reinsurance contracts, derivative contracts or deposits given) and intermediaries to whom ING has an exposure. In addition to credit risk, ING includes a calculation of transfer risk for the risk of being unable to repatriate funds when required due to government restrictions; Business risk is defined as the exposure to the possibility that experience differs from expectations with respect to expenses, the runoff • of existing business (persistency) and future premium re-rating; Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems • or from external events. Operational risk capital is difficult to quantify, since it is driven by infrequent events of high severity, and can be significantly mitigated or exacerbated by the quality of internal controls and guidelines. It may be partially managed through the purchase of insurance; Life risk relates to deviations in timing and amount of the cash flows (premium payments and benefits) due to the incidence or non-• incidence of death. The risk of non-incidence of death is also referred to as longevity risk to distinguish it from the risk associated with death protection products. ING notes risks due to uncertainty of best estimate assumptions concerning level and trend of mortality rates, volatility around best estimates, and potential calamities and recognises external reinsurance; Morbidity risk is the risk of variations in claims levels and timing due to fluctuations in policyholder morbidity (sickness or disability) • recognising external reinsurance. A wide variety of policy classes are subject to morbidity risk, including disability, accidental death and disability, accelerated death benefits, workers compensation, medical insurance, and long-term care insurance; P&C risk comprises the risk of variability of size, frequency and time to payment of future claims, development of outstanding claims • and allocated loss adjustment expenses for P&C product lines recognising external reinsurance.
Economic Capital Model The ING Economic Capital calculation is calculated based on a ‘Surplus-at-Risk’ concept. ‘Surplus-at-Risk’ is calculated based on the steps: Calculate the complete balance sheet (all assets and liabilities) on a Market Value basis;• Generate Monte-Carlo shock scenarios for all of the relevant risk factors (market and non-market);• Recalculate the complete balance sheet (all assets and liabilities) on a Market Value basis for each shock scenario. For practical purposes, • the MVM is not recalculated under shock scenarios; Calculate the 99.95% worst case decrease in the Market Value Surplus over all the shock scenarios. This value will be the EC. Note that • the shock scenario resulting in the Economic Capital will differ by business unit, business line, and at an ING Insurance level.
In 2007, ING Insurance introduced ECAPS as an intranet-based Economic Capital reporting system utilising replicating portfolio techniques. The ECAPS system provides a well controlled and automated basis for Economic Capital and risk measurement. Each business unit enters the risk characteristics of its assets and liabilities into the ECAPS system on a regular basis. These risk characteristics are then translated to a uniform basis in the form of replicating portfolios of standardised financial instruments. Based on the constellation of replicating portfolios (including representations of non-market risks), the ECAPS system then is capable of calculating Economic Capitals at every level of aggregation. The following is a brief description of the model.
Capture the risk profile of the financial component of insurance • liabilities by mapping onto a small set of standard financial instruments Standard instruments contain discount bond, swaption, • callable bonds, equity forward/option and FX option Find a replicating portfolio that matches the cash flows • as closely as possible for the 500 paths
Further details on Economic Capital model Market Data and Scenario Generation ING Insurance uses ING Bank’s Global Market Database (GMDB) as a provider of market price and risk data for financial risk drivers. All market data is obtained from reputable data providers such as Reuters and Bloomberg. The GMDB operational team then validates the market data and calculates relevant risk parameters. This validated data is then automatically delivered to the ECAPS system. Since ING Insurance operates in many developing financial markets, extrapolation algorithms are in place for extending beyond observable market data when this is needed for the calculation of the Market Value Liabilities and the Economic Capital. These algorithms are based on comparable data in mature markets.
Stochastic Cash Flows and Non-Market Risk Capital The market risks in assets and liabilities are captured in and represented by stochastic cash flows in 500 scenarios. Business units are responsible for generating these cash flows, the modelling of embedded options and guarantees and a proper mapping of risk drivers in the scenario set to cash flow determinants such as policyholder behaviour and management actions restricted to dynamic hedge programs and setting of crediting rates/profit sharing. To better capture the behaviour in the tails of the distribution, the set of scenarios consist of 300 Risk Neutral scenarios and 200 ‘Risk Volatile’ scenarios with double volatilities. The average of the 300 Risk Neutral scenarios provides a check on the market value of the replicating portfolio. It should be noted that this serves only as a check, and that the actual market value of liabilities is derived directly from the replicating portfolio. The 200 Risk Volatile scenarios ensure that the replicating portfolio is calibrated against enough extreme scenarios such that it can be used safely in Economic Capital calculations.
The quality of the replicating portfolio is monitored by several statistical criteria including R-squared and benchmarked against market value sensitivities such as duration, convexity, and changes in value for larger interest rate and equity shocks. High quality replicating portfolios are important in several ways. First, they ensure a good reflection of the actual risk profile and an accurate calculation of
Economic Capital Calculation ECAPS uses Monte-Carlo simulation to determine diversification benefits for the complete ‘portfolio hierarchy’, from business unit level up to an ING Group level. All diversification calculations are done within ECAPS and are driven by the Gaussian copula of all risk drivers using the underlying distributions applicable for each risk type. For the calculation of Economic Capital ING uses a one-year time horizon. In practice, the model calculates instantaneous quarterly shocks and then annualises the resulting VaR statistic to determine an annualised EC. The quarterly shock is used to stabilise the results, to ensure the shocks are within a range that can be more credibly valued for assets and liabilities, to better capture the impact of dynamic hedge strategies, to more reasonably use weekly correlations of risk factors, and to get closer to actual risk practices and reporting cycles.
ECONOMIC CAPItAl GROUP ING’s Group Economic Capital and Bank-Insurance diversification benefit is determined by applying one common aggregation approach to the banking and insurance businesses. The starting point is the actual reported Economic Capital figures for ING Bank and ING Insurance, excluding inter-risk diversification. In addition an aligned set of best-estimate correlation assumptions is constructed by applying the weighted average of the Bank and Insurance specific inter-risk correlation assumptions for each of the five major risk types i.e. credit, market, insurance, business, and operational (See also Economic Capital model sections of Bank and Insurance).
OBJECtIvES ING Group Capital Management (Capital Management) is responsible for the sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within ING Group. ING’s Corporate Treasury is part of Capital Management. It executes the necessary capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. The rating objective for these three entities is AA. Capital Management takes into account the metrics and requirements of regulators (EU Solvency, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal models such as the economic capital and market value balance sheets approach for ING Insurance including Available Financial Resources (AFR).
ING applies three main capital definitions: Adjusted Equity (ING Group and ING Insurance) – This rating agency concept is defined as shareholders’ equity plus core Tier 1 • securities, hybrid capital, prudential filters and an adjustment for Value in Force and Deferred Acquisition Cost. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing available capital to core debt (leverage) for ING Group and ING Insurance; Core Tier 1 capital, Tier 1 capital and total BIS capital (ING Bank) – Tier 1 capital is defined as shareholders’ equity including core Tier 1 • securities plus hybrid capital less certain prudential filters and deductible items. Tier 1 and BIS capital divided by risk weighted assets equals the Tier 1 and BIS ratio respectively. Core Tier 1 capital is equal to Tier 1 capital excluding hybrid capital; AFR (ING Insurance) – This is a market value concept, defined as market value of assets (MVA) less the market value of liabilities (MVL) • on the balance sheet. The liabilities do not include perpetual hybrid capital which are included in AFR as equity. The valuation of ING Insurance includes an adjustment for portfolio illiquidity. AFR is used as the measure of available capital in comparison with EC employed. EC, or Economic Capital, is the amount of capital that is required to absorb unexpected losses in times of severe stress given the ‘AA’ target rating of ING Insurance.
dEvElOPMENtS In 2009 Capital Management’s main focus was to strengthen the capital position of ING Group, ING Bank and ING Insurance. To achieve this ING Group did not pay dividend in 2009 and launched a rights issue in November of EUR 7.5 billion. The proceeds of the rights issue were largely used to repay EUR 5 billion of the core Tier 1 securities issued in November 2008 to the Dutch State and to provide for additional pre-tax EUR 1.3 billion future payments to the Dutch State for the Illiquid Assets Back-up Facility (IABF) as agreed with the European Commission.
POlICIES The activities of Capital Management are executed on the basis of established policies, guidelines and procedures. The main documents that serve as guidelines for capital planning are the Capital Letter (comprising the approved targets and limits for capital), the Capital Planning Policy, the Dividend Policy and the Capital Request Policy. For the Corporate Treasury there are many policies and limits that guide the management of the balance sheets and the execution of capital market transactions.
Adjustments to equity: Revaluation reserve crediting to life policyholders –156 –2,235 –156 –2,235 Revaluation reserve cashflow hedge –926 –1,360 472 128 –372 –1,177 Goodwill –1,857 –1,889 –1,636 –1,636 –3,244 –3,275 Revaluation reserves fixed income & other – –605 2,787 –1,040 3,677 –1,291 6,769 Revaluation reserves excluded from Tier 1 – (3) –3,111 –1,790 Insurance hybrid capital – (4) 2,250 2,250
(1) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Insurance or ING Bank. (2) Investments in subsidiaries less equity (including core Tier 1 securities) of the Group holding company. This net debt position is provided as equity to ING
(2008: EUR –615 million) for Real Estate for own use. The Dutch banking regulator requires this deduction to be made from Tier 1 capital. This deduction is added back to Tier 2 capital.
All leverage ratios were within their targets at the end of the year. The debt/equity ratio of ING Group as at year-end 2009 was 12.35% (2008: 13.55%). The debt/equity ratio of ING Insurance as at year-end 2009 was at 9.74% (2008: 8.78%). The Basel II ING Bank Tier 1 ratio ended at 10.23%, this is a strong increase from 9.32% at year-end 2008.
Shareholders’ equity (parent) 30,222 22,889 Minority interests 960 1,198 Subordinated loans qualifying as Tier 1 capital (1) 8,057 7,085 Goodwill and intangibles deductible from Tier 1 –1,636 –1,636 Deductions Tier 1 –1,073 –1,040 Revaluation reserve (2) –2,515 3,523 Available capital – Tier 1 34,015 32,019
(1) Subordinated loans qualifying as Tier 1 capital have been placed by ING Groep N.V. with ING Bank N.V. (2) Includes revaluation debt securities, revaluation reserve cash flow hedge and revaluation reserves equity and real estate (see Capital base table, note 3). (3) Includes eligible lower Tier 2 loans and revaluation reserves equity and real estate revaluations removed from Tier 1 capital. (4) Using 80% and 90% of Basel I Risk Weighted Assets in 2009 and 2008 respectively. In case a 80% floor would have been used in 2008, the required capital would have been EUR 30,550 million and the BIS ratio based on Basel I floor 11.49%.
Under ING’s internal economic capital (EC) and market value balance sheet approach, the ratio of Available Financial Resources (AFR) to EC was 107% at the end of 2009 compared to 106% at the end of 2008.
In the following table, we show the Group’s capital adequacy on the following basis: Insurance required capital from applying European Solvency I rules to all of ING Insurance entities globally (regardless of local • capital requirements); Bank required capital based on applying Basel II with the Basel I floor. (80% and 90% in 2009 and 2008 respectively);• Group available capital using an approach similar to that used for Bank BIS capital whereby IFRS equity is adjusted for certain revaluation • reserves, minority interests are added, goodwill and certain intangibles are deducted and Group hybrids and qualifying subordinated debt of Bank and Insurance are included.
Required capital banking operations 28,709 34,369 Required capital insurance operations 7,774 8,582 Total required capital 36,484 42,951 Surplus capital 25,859 18,529 Group capital ratio 171% 143% (1) Revaluation reserves debt securities, crediting to life policyholders and cashflow hedge (see ING’s Capital base table).
Equity 3 Share capital 919 495 Share premium 16,034 9,182 Non-voting equity securities 5,000 10,000 Legal reserves (1) 1,030 –9,670 Other reserves 16,815 18,056 Unappropriated result –935 –729 liabilities
Total equity and liabilities 59,130 48,308 (1) Legal reserves includes Share of associates reserve of EUR 1,985 million (2008: EUR –8,719 million) and Currency translation reserve of EUR –955 million
Parent company balance sheet of ING Group 2.2 Parent company annual accounts
Unrealised revaluations after taxation –19,042 324 –18,718 Realised gains/losses transferred to profit and loss 2,476 2,476 Transfer to insurance liabilities/DAC 2,193 2,193 Change in cash flow hedge reserve revaluations 746 746 Unrealised revaluations from net investment hedges 388 388 Exchange rate differences –951 –1 –952 Total amount recognised directly in equity –14,190 –1 324 –13,867
Opening balance 34,698 41,864 Revaluations 10,800 –13,709 Result of the group companies 167 –569 Capital contribution 700 12,720 Dividend –350 –7,050
Changes in ING Groep N.V. shares held by group companies –9 1,442 Closing balance 46,006 34,698 2 OthER ASSEtS
The Share of associates reserve includes the following components: Reserve for non-distributable profit of associates of EUR 645 million (2008: EUR 726 million) and Revaluation reserve of associates of EUR 1,340 million (2008: EUR –9,445 million).
Notes to the parent company balance sheet of ING Group amounts in millions of euros, unless stated otherwise 2.2 Parent company annual accounts
Dividend and repayment premium includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
Result for the year –729 –729 Unrealised revaluations after taxation 324 324 324 Changes in treasury shares –2,030 –2,030 –2,030 Dividend –3,600 –3,600 Transfer to share of associates reserve 582 582 582 Transfer to retained earnings 5,641 5,641 –5,641 Employee stock option and share plans –76 –76 –76 Issuance costs incurred –20 –20 –20 Cancellation of shares 4,904 –4,860 44 44 Closing balance 23,838 –866 –4,916 18,056 –729 17,327
The total amount of non-distributable reserves is EUR 2,940 million (2008: EUR 11,121 million).
See Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’ in the consolidated annual accounts for additional information, including restrictions with respect to dividend and repayment of capital.
More than 1 year but less than 5 years 500 derivatives from group companies by remaining term
AUthORISAtION OF PARENt COMPANy ANNUAl ACCOUNtS Amsterdam, 15 March 2010 thE SUPERvISORy BOARd Peter A.F.W. Elverding, chairman Jeroen van der Veer, vice-chairman Tineke (J.) P. Bahlman Henk W. Breukink Claus Dieter Hoffmann Piet Hoogendoorn Piet C. Klaver Godfried J.A. van der Lugt Harish Manwani Aman Mehta Joan E. Spero Jackson P. Tai Karel Vuursteen Lodewijk de Waal thE ExECUtIvE BOARd Jan H.M. Hommen, CEO and chairman Patrick G. Flynn, CFO Koos (J.) V. Timmermans, CRO
REPORt ON thE ANNUAl ACCOUNtS We have audited the annual accounts 2009 of ING Groep N.V., Amsterdam (as set out on pages 90 to 264). The annual accounts consist of the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2009, the profit and loss account, statement of other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2009, the parent company profit and loss account for the year then ended and the notes.
Auditor’s responsibility Our responsibility is to express an opinion on the annual accounts based on our audit. We conducted our audit in accordance with Dutch law and the standards of the Public Company Accounting Oversight Board (United States). This law and these standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the annual accounts are free from material misstatement.
PROPOSEd APPROPRIAtION OF RESUlt The result is appropriated pursuant to Article 37 of the Articles of Association of ING Groep N.V., the relevant stipulations of which state that the Executive Board, subject to the approval of the Supervisory Board, determines what part of the result is to be appropriated to reserves and that the remaining part of the result shall be at the disposal of the General Meeting.
Proposed appropriation of result amounts in millions of euros, except for amounts per share
RISKS RElAtEd tO thE FINANCIAl SERvICES INdUStRy Because we are an integrated financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business. the ongoing turbulence and volatility of such factors have adversely affected, and may continue to adversely affect, the profitability of our insurance, banking and asset management business.
Factors such as interest rates, securities prices, credit (including liquidity) spreads, exchange rates, consumer spending, business investment, real estate and private equity valuations, government spending, inflation, the volatility and strength of the capital markets, and terrorism all impact the business and economic environment and, ultimately, the amount and profitability of business we conduct in a specific geographic region. For example, in an economic downturn, such as the one that has affected world economies since mid-2007, characterised by higher unemployment, lower family income, lower corporate earnings, higher corporate and private debt defaults, lower business investment and consumer spending, the demand for banking and insurance products is adversely affected and our reserves and provisions are likely to increase, resulting in lower earnings. Securities prices, real estate valuations and private equity valuations may be adversely impacted, and any such losses would be realised through profit and loss and shareholders’ equity. Some insurance products contain minimum return or accumulation guarantees. If returns do not meet or exceed the guarantee levels we may need to set up additional reserves to fund these future guaranteed benefits. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Similarly, a downturn in the equity markets causes a reduction in commission income we earn from managing portfolios for third parties, income generated from our own proprietary portfolios, asset-based fee income on certain insurance products, and our capital base. We also offer a number of insurance and financial products that expose us to risks associated with fluctuations in interest rates, securities prices, corporate and private default rates, the value of real estate assets, exchange rates and credit spreads. See also ‘Risks Related to the Group - Interest rate volatility may adversely affect our profitability’ below.
In case one or more of the factors mentioned above adversely affects the profitability of our business this might also result, among others, in the following: • the unlocking of deferred acquisition costs impacting earnings; and/or • reserve inadequacies which could ultimately be realised through profit and loss and shareholders’ equity; and/or • the write down of tax assets impacting net results; and/or • impairment expenses related to goodwill and other intangible assets, impacting net results.
In 2008 and 2009, shareholders’ equity and our net result were significantly impacted by the turmoil and the extreme volatility in the worldwide financial markets. Further negative developments in financial markets and/or economies may have a material adverse impact on shareholders’ equity and net result in future periods, including as a result of the potential consequences listed above. We are currently recalibrating our economic capital models to reflect the extreme market conditions experienced over recent quarters in order to align them more closely with regulatory measures. This may have a material impact on our economic capital for credit risk. See ‘Risks Related to the Group - Ongoing turbulence and volatility in the financial markets have adversely affected us, and may continue to do so’.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to raise additional capital to support business growth, or to counter-balance the consequences of losses or increased regulatory capital requirements. This could force us to (1) delay raising capital, (2) reduce, cancel or postpone payment of dividends on our shares, (3) reduce, cancel or postpone interest payments on other securities, (4) issue capital of different types or under different terms than we would otherwise, or (5) incur a higher cost of capital than in a more stable market environment. This would have the potential to decrease both our profitability and our financial flexibility. Our results of operations, financial condition, cash flows and regulatory capital position could be materially adversely affected by disruptions in the financial markets.
In addition, we have built our liquidity risk framework on the premise that our liquidity is most efficiently and effectively managed by a centralised Group function. However, we are subject to the jurisdiction of a variety of banking and insurance regulatory bodies, some of which have proposed regulatory changes that, if implemented, would hinder our ability to manage our liquidity in such a centralised manner. Furthermore, regulatory liquidity requirements in certain jurisdictions in which we operate are generally becoming more stringent, undermining our efforts to maintain this centralised management of our liquidity. These developments may cause trapped pools of liquidity, resulting in inefficiencies in the cost of managing our liquidity, and hinder our efforts to integrate our balance sheet, which is an essential element of our Back to Basics program and our Restructuring Plan.
Within the financial services industry the default of any one institution could lead to defaults by other institutions. The failure of a sufficiently large and influential institution could disrupt securities markets or clearance and settlement systems in our markets. This could cause market declines or volatility. Such a failure could lead to a chain of defaults that could adversely affect us and our contract counterparties. Concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, as was the case after the bankruptcy of Lehman Brothers, because the commercial and financial soundness of many financial institutions may be closely related as a result of their credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as ‘systemic risk’ and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom we interact on a daily basis. Systemic risk could have a material adverse effect on our ability to raise new funding and on its business, financial condition, results of operations, liquidity and/or prospects. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry.
The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and cannot always be adequately reserved for. Furthermore, we are subject to actuarial and underwriting risks such as, for instance, mortality, longevity, morbidity, and adverse home claims development which result from the pricing and acceptance of insurance contracts. In accordance with industry practices, modelling of natural catastrophes is performed and risk mitigation measures are made. In case claims occur, reserves are established based on estimates using actuarial projection techniques. The process of estimating is based on information available at the time the reserves are originally established and includes updates when more information becomes available. Although we continually review the adequacy of the established claim reserves, there can be no assurances that our actual claims experience will not exceed our estimated claim reserves. If actual claim amounts exceed the estimated claim reserves, our earnings may be reduced and our net results may be adversely affected. In addition, because unforeseeable and/or catastrophic events can lead to an abrupt interruption of activities, our banking and insurance operations may be subject to losses resulting from such disruptions. Losses can relate to property, financial assets, trading positions, insurance and pension benefits to employees and also to key personnel. If our business continuity plans are not able to be put into action or do not take such events into account, losses may further increase.
We operate in highly regulated industries. There could be an adverse change or increase in the financial services laws and/ or regulations governing our business.