The elements of the report include: • the Report of the Executive Board, with topics including trends, market developments and what stakeholders expect from us; our strategy and how we create value; as well information on our businesses and various key areas and how they developed in 2016.
• ING’s 2016 Annual Accounts. • the Non-Financial Appendix, featuring detailed information on a number of non-financial areas. • a glossary of financial, ING-specific and other terms to help readers.
This report aims to inform stakeholders about our financial and non-financial performance in 2016. This includes a look at how we create value over time and how the Think Forward strategy addresses the challenges, risks and opportunities ING faces in a fast-changing world.
• ING is working to increase the pace of innovation, developing new services and business models. As of the end of 2016, we were partnering and in some cases also investing in more than 65 fintechs in various areas, like instant lending, factoring and customer loyalty.
7 Sustainable transitions financed describes the business that we do with clients who are environmental outperformers in their sectors as well as projects that provide sustainable solutions. For a more detailed definition see the glossary on page 445.
Sustainable transitions financed and sustainable assets under management 34.3 bln Sustainable transitions financed 3.3 bln Sustainable assets under management (SAuM)
This includes CVA/DVA impacts and EUR 120 million of redundancy costs in 4Q2015. Excluding these items, the cost/income ratio improved to 53.9% in 2016 from 55.9% in 2015, in spite of higher regulatory costs.
The environmental performance of our own organisation improved as a result of an increase in renewable electricity consumption. The total extrapolated amount of carbon emissions decreased from 94 to 74 kilotonnes CO2e.
Report of the Executive Board for their banking needs again increased and has grown by around 3 million to 35.8 million since we launched the Think Forward strategy. The number of primary relationships - customers with a current account with recurring income and at least one other product - grew eight percent to 9.7 million, close to our 2017 ambition of 10 million customers. We have now updated the ambition to 14 million primary customers by 2020. We also enjoyed number one Net Promoter Scores (NPS) in 7 of our 13 retail markets, a key indicator of customer satisfaction.
Robust growth These strong relationships with customers helped to drive ING’s robust commercial and financial growth in 2016. ING Group recorded a full-year 2016 net profit of EUR 4,651 million, an increase of 16% year-on-year. Our net core lending to customers grew by almost EUR 35 billion and savings entrusted to us rose by over EUR 28 billion, both increasing by around 6% compared to 2015. Lending growth came from all regions and was particularly strong from Industry Lending and Working Capital Solutions within Wholesale Banking and from mortgages in retail Challengers & Growth Markets. Against the backdrop of this growth, operating expenses remained stable and risk costs declined further from an already low level. Our capital base strengthened, with ING Group’s CET1 ratio rising to a robust 14.2% at year-end 2016. ING Group’s IFRS-EU underlying return on equity rose to 10.1%. We are on track to meet all of our Ambition 2020 targets.
These and other initiatives reinforcing our brand and our track record as leaders in digital banking were recognised by customers. The number of customers choosing us 2016 was a successful year for ING. We made good progress implementing our strategy and achieved strong growth in customer numbers, savings and lending. But the competitive landscape for banks is changing. The pace of digitalisation is increasing, and this is changing customer expectations. We will accelerate our transformation, creating an integrated digital platform to cater to all our customers’ financial needs and provide new and relevant offers to enhance the customer experience.
This convergence will also be reflected in our brand. Since the start of the Think Forward strategy we have pursued a shared brand direction and strengthened our brand positioning across our markets. In the coming years we will increasingly move towards a single brand experience across our markets.
Sustainability embedded in our business At ING we believe that our role as a financial institution is to support and encourage economic, social and environmental progress that leads to a better quality of life. Sustainability forms an integral part of our strategy and is embedded in our business.
In the area of sustainability and inclusion, ING is a founding member of the Think Forward Initiative that brings together experts and consumer advocates to research how people make financial decisions. Many consumers struggle with money matters. The initiative aims to contribute to awareness, policies and tools to help consumers manage their finances better.
I am proud that ING is also playing an important role in creating a fairer and greener economy. We do that by financing projects that accelerate corporate clients’ transitions to becoming more sustainable and by supporting clients who develop solutions to
But we also see the pace of change rapidly increasing. Digitalisation is speeding up and it is shaping customer expectations across borders. Banking products are now commodities where customer experience is the key differentiator. New entrants to the market, like fintechs, are making it more challenging to compete. And this is happening against the backdrop of persistent low interest rates that are putting pressure on bank margins, as well as rapidly increasing regulatory costs.
The past year was one in which we made much progress and took important steps to ensure future success. I would like to express my gratitude to our customers and shareholders, without whose confidence these achievements would not have been possible. And I want to thank our employees for their hard work and commitment to ING and our customers.
Concerns about the global economy started in the first quarter, with disappointing data on the Chinese economy and a decline in oil prices. The world’s main stock market indices fell 10 to 15 percent below 2015 year-end levels and corporate credit risk rose to levels not seen during the previous two-and-a-half years. Currencies of a number of important emerging economies came under downward pressure.
Worries eventually faded, and stock markets and oil prices recovered, as the US Federal Reserve signalled it would be cautious and take the state of the global economy into account when raising interest rates and the Chinese authorities implemented measures to support the economy.
Eurozone developments Persistent low growth and declining inflation led the European Central Bank (ECB) to further loosen monetary policy in 2016. This triggered spectacular falls in market interest rates. Also because of Brexit fears, yields on German government bonds with a remaining maturity of 10 years became negative. While similar bonds issued by other eurozone governments still carried positive yields, they were at historic low levels as well and often negative for shorter maturities. However,
The world around us is constantly changing. This chapter highlights several trends that have a major impact on both our operating environment and that of our competitors. This includes the economy and current low interest rate environment, increasing regulatory scrutiny and costs, digitalisation and changing customer behaviour, and what our stakeholders expect of us.
Other new regulation also contributed to the rise in costs for 2016, such as the European Single Resolution Mechanism (SRM) mentioned above. This required banks to begin paying contributions to the Single Resolution Fund as of January 2016.
The second EU Directive on Payment Services (PSD2) was adopted in October 2015 and will be implemented in the coming years. It will create an EU-wide single market for payment initiation services and account information services. Its main objective is to promote innovation and competition in the EU payments market. ING welcomes this development and sees the PSD2 as an opportunity to develop new and innovative ways of serving our customers. At the same time, we find it important regulators take into account the changing competitive landscape and support financial services providers who embrace innovation and new ways of doing business and should ensure they can compete on a level playing field with newcomers.
• Basel 3.5 capital requirements remain unresolved and could negatively impact our role as facilitator of the economy
Banks strive to act in the interests of their customers. Safe banking requires specific knowledge of financial services, in-depth knowledge of customers, and rigorous risk-management systems. As competition from outside the banking sector continues to increase, we have to become faster, more agile and more innovative.
Fair operating practices Regulatory developments Anti-competitive behaviour prevention Corruption prevention Sustainable finance and investment policies
Innovative financial technology companies: threat or opportunity? Innovative financial technology companies (fintechs) are growing as competitors in financial services, providing a customer experience that is superior to what banks offer. Banks must adapt and evolve to survive.
The pricing of products and services assumed greater importance. This is strongly influenced by external factors such as the current low interest rate environment, reduced margins, increasing regulatory costs, and a shift towards a fee-based model.
Stimulating sector change vs anticompetitive behaviour Banks are scrutinised on whether they have robust policies when dealing with sensitive sectors such as animal husbandry and manufacturing, as well as important topics such as climate change and human rights. ING has policies that uphold our values. Our comprehensive and detailed Environmental and Social Risk (ESR) framework sets out a clear checklist when deciding which companies or activities to finance and under which conditions.
Buying a new house is exciting, but emotions can get in the way of smart financial decisions. In the Think Forward Initiative, ING teams up with businesses and experts in a public platform to research how consumers make decisions about money. The aim is to promote awareness and the development of policies and tools to help consumers manage their finances better.
Customer centricity Opportunities: Driven by changing customer needs, banks have an opportunity to make their products and services available anytime, anywhere. Advanced data analytics will help banks to understand customers’ needs and preferences, and allow banks to offer more personalised products and services.
Risks: Customer expectations are changing, enabled by technology, forcing banks to go digital. Inherent in that are risks related to privacy and data security. Banks must adhere to legal obligations and ensure customer data is handled with the utmost care in a world where cyber-attacks are on the rise, both in frequency and intensity.
Balancing our responsibilities: Innovation vs data protection in “The world around us” chapter.
We want to stand out by making banking available to our customers anytime, anywhere through our digital-first approach, complemented by advice when needed, with omnichannel contact and distribution possibilities.
Economic contribution Opportunities: Simplifying business and operating models will help banks enhance the customer experience while reducing costs and risk.
A fair price for our products and services increases accessibility for our customers and is important for our competitiveness in the marketplace.
Customer centricity (continued) F Fair communications about products and services We communicate clearly and easily to customers on products and services.
We believe banking should be about clear products, plain language, fair prices and simple processes.
Risks: Increased involvement of (local) governments in financial systems through policy making and the lack of coordination among regulators may hinder the emergence of a level playing field among the traditional banks and newcomers.
In order to identify, discuss and align our response to important regulatory developments, ING has set up two internal steering committees, one dealing with Supervision and Prudential Regulation and the other dealing with Business Conduct Regulation.
Progress on regulatory initiatives that are most relevant to us in “The world around us” chapter.
Further, for non-financial risks topics, global education and awareness in the form of e-learning modules, awareness sessions and material is provided.
Bribery and corruption are criminal offences and are clear violations of the ING Values. ING has a zero tolerance policy on bribery and corruption. We expect all our employees to always do business in accordance with the highest standards of ethical behaviour and honesty.
Environmental and Social Risk management section in the “Risk and capital management” chapter.
The ING Orange Code - a set of values and behaviours that sets out our way of working - provides a framework for a shared culture uniting all our employees around the world. We put “integrity above all”. In a survey in 2016, 79% of employees said they were aware of the code.
In 2016, the number of retail primary relationships grew by more than 8% to 9.7 million, indicating customers’ trust in us.
To keep up with these developments and remain among the leaders in digital banking, we need to offer a customer experience that’s instant, personal, frictionless and relevant - one that meets the expectations customers have from their interactions with other leaders in the online digital experience.
One of the ways ING is fulfilling its purpose to empower customers is by offering products, services and tools that make it easier for customers to manage their money and make better financial decisions. In 2016, ING in Spain introduced My Money Coach, a free digital service that uses answers customers provide on their personal situation, risk appetite and financial knowledge to design a personalised plan to help them achieve their savings, investment and retirement goals. Last year we also expanded the range of the successful online Financially
ING’s purpose is to empower people to stay a step ahead in life and in business. This is founded on our belief that the role of a financial institution is to support and promote economic, social and environmental progress at the same time as it generates healthy returns for shareholders. In this chapter we explain how our Think Forward strategy helps us fulfil that purpose, achieve financial and commercial success and create value for all our stakeholders.
We will fund this journey and respond to headwinds on the economic growth and regulatory fronts through additional cost management and income diversification.
Material topics: usability and accessibility of our products and services, fair communication about products and services
4. Lending capabilities Broadening and diversifying our lending capabilities to continue to grow our client franchises is our fourth strategic enabler. To do so, we are seeking opportunities in retail, SME and consumer lending, as well as focusing on Wholesale Banking lending growth in our Challengers & Growth Markets businesses and in our specialised Industry Lending franchise. In 2016, a number of innovative products and services that support ING’s Customer Promise were launched. Customers in Poland, Romania, Spain and Turkey can now get personal loans instantly online based on advanced analytics that enables ING to use data it already has rather than asking the customer to provide it.
Material topics: financial performance, sustainable finance and investment policies, enhancing customer financial capabilities
Market Leaders These are our businesses in mature markets in the Benelux where we have strong positions in retail and wholesale banking. Our strategy is to grow in selected segments, continue to invest in digital leadership with a digital-first model, deliver on operational excellence programmes and create greater cost efficiency in order to fund business expansion in growth markets.
Wholesale Banking We are a network bank for our clients across Europe with global reach and strong positions in a number of global franchises, including Industry Lending, Financial Markets and Transaction Services. We are investing in our business transformation programme Target Operating Model and are targeting growth in our corporate client base, Industry Lending and Transaction Services. In Challenger countries we are expanding our lending activities to build locally optimised balance sheets and sustainable franchises.
We believe that this strong profitability and growth and the important steps we are taking to accelerate the strategy position us well to continue to be successful in the future and provide a superior experience for customers.
Our people We believe that in addition to assisting customers a bank should also provide employees the means to be the best they can be. ING employees are encouraged to develop their talents and take charge of their own careers. We believe that investing in people not only generates more engaged and higher performing employees, but results in more satisfied customers and improved business performance.
Innovation The rapid pace of global technological developments is undeniable. We place a high priority on innovation within ING to keep pace with the change around us and meet changing customer needs. We are experimenting with agile working to increase the pace of innovation. We also create intellectual capital through the expertise we are developing in areas like environmental and social risk management, sustainable finance and data analytics. We aim to share knowledge via different networks and, for example, our ING Economics Department publications.
Ecosystems are developing, allowing users to access social media, online purchases, services and payments all in one app.
Technology reduced barriers to enter the financial services markets which has resulted in a wave of newcomers targeting segments underserved by traditional banks.
• The expertise, capacity and energy of over 54,000 employees • Strong belief in diversity
• ING supports UN Sustainable Development Goals, particularly SDG 8 and 12 • Developing thought leadership
• Being a good employer • Strong employee engagement scores • Impact of changing banking landscape and technology on people
• Launch of kudos, ING’s online compliment tool. • Almost 300 Performance management workshops with around 1,000 managers in 15 countries.
Financial Large and growing customer base • Well-known, strong brand with positive recognition from customers in many countries. • Over 35 million customers entrust us with payments and their deposits.
Innovation Innovation to enhance customer experience and/or move beyond traditional banking • Digital channels account for 98% of contact with retail customers; mobile interactions increased by more than 50% during 2016.
• Customers in 7 out of 13 countries rank ING as #1 bank. Making banking easier • Retail customers now can get a mortgage twice as fast as before in the Netherlands.
• Channel availability improved to 99.8%. Supporting economies of countries where we are present • Lending grew by EUR 35 billion • EUR 282 billion outstanding in mortgages • Instant lending platforms developed.
• Of our managers of managers, 29.3% were women. Performance culture • 79% of employees globally indicated they were aware of the Orange Code. • Almost 33,000 employees signed up as kudos users and more than 143,000 compliments were sent amongst employees.
programme. • ING is a founding member of the Think Forward Initiative. • 10% of Groenbank’s balance sheet for impact activities, including education and research.
• ING funds research, makes donations and shares its knowledge, with employees volunteering as guest lecturers.
Report of the Executive Board their business models. To address these challenges, banks need to cut costs, for example through increased digitalisation and efficiency. They also need to look to relevant new offers for customers that can generate new revenue streams, such as fee income.
ING’s strategic priorities unite around the goal of offering a differentiating customer experience. Underpinning that experience is ING’s Customer Promise: to be clear and easy, with an anytime, anywhere service offering that empowers customers to make smart decisions. We also promise to keep getting better.
ING uses the Net Promoter Score (NPS) to measure progress in offering a differentiating customer experience. Our aim is to achieve a number one NPS ranking, with a 10-point lead compared to our main competitors in each retail banking market. Based on a rolling average of NPS scores over 2016, ING was ranked number one in 7 of our 13 major markets. Our number one positions were in Australia, Austria, France, Germany, Poland, Romania and Spain.
Who are we? Retail Banking provides products and services to individuals, small and medium-sized enterprises (SMEs) and mid-corporates. We serve more than 35.8 million customers in a variety of markets.
Market Leaders are businesses in the Netherlands, Belgium and Luxembourg where we have strong market positions in Retail Banking and Wholesale Banking.
These cost increases have coincided with a low interest rate environment which adversely impacts banks’ interest income generating capabilities. This environment is unlikely to change in the foreseeable future. Add to that slow economic growth, a new competitive landscape and changes in customer behaviour, and it becomes apparent that all banks will need to re-think
Expanding further on the Twyp app platform, in 2016 Twyp Cash was also launched. Customers in Spain can conveniently withdraw money with their smartphone when paying for other purchases, avoiding ATM fees. This is available at more than 3,500 supermarkets and fuel stations.
In Poland, Moje ING provides a one-stop shop for managing personal finances for customers. Launched in early 2016, and reusing some of Spain’s digital banking platform Genoma, Moje ING offers customers a simple overview of their finances and access to an easy-to-use financial planning tool.
The Think Forward Initiative is an open-source initiative by ING, CEPR (Centre for Economic Policy Research), EMC, Microsoft, Dimension Data and Deloitte. Its goal is to empower people to make financial decisions that are better for them and ultimately better for society. It does this by gaining a deeper understanding of how people make financial decisions.
Earning the primary relationship ING wants to build primary relationships with customers, earning their loyalty so that they consider us the first bank with which they conduct their financial business. As a result, ING understands customers better and is equipped to offer them the right solutions at the right time. We know that primary customers are eight times more loyal compared to non-primary customers because there is more interaction with the customer which in turn deepens the relationship. Primary relations are better for the customer and also for the bank.
ING is striving to earn 14 million primary retail customers by 2020. It is well on track. By the end of 2016, we had 9.7 million primary customers, an 8.1% increase on the previous year.
More information on the measurement of these numbers can be found in the Non-financial data reporting protocol at www.ing.com/16ar1 (PDF - 876 kb).
Model Bank will use a central and shared IT service centre, and high levels of standardisation. The move is designed to keep costs low across all markets and increase the pace of innovation.
ING Invoice Solutions, an online platform for SMEs to manage their sales invoices from start to finish is another Belgian initiative.
With standardised steps and automated tasks, clients can use it to gain greater control over their company’s finances.
Sustainable assets under management in EUR million at year-end 2016 1 2015 2014
Sustainable structured products 140 143 15 Sustainable investment funds (incl. CS ING SRI Index Fund) 570 419 92
In 2016, ING Groenbank made a strategic shift in its lending portfolio by increasing the volume of loans to SME and mid-corporate clients. New channels were opened to offer lending services to clients in commercial real estate as well as structured finance transactions for clients operating small to medium-sized renewable energy generation projects.
Due to a more favourable overall economic climate, ING Groenbank profited from increases in investment volumes throughout the aforementioned sectors.
• ING earned top prizes at The Banker’s 2016 Best Bank Awards in London, winning the Global Bank of the Year and best bank awards in the Netherlands, Belgium and Western Europe.
• ING in Poland customer service has been recognised with the Bank taking home the main award in Poland’s Golden Banker competition. The bank was also ranked first in the “Best Bank in Social Media” category.
Compared with 2015, underlying income increased 4.7 percent to EUR 11,791 million. This was mainly due to higher income in the Other Challengers & Growth Markets, while the increase in the Benelux and Germany was limited. Income growth was supported by a EUR 200 million gain on the sale of Visa shares and higher revenues from Bank Treasury, while 2015 included a EUR 127 million non-recurring charge related to the Italian and Belgium mortgage portfolios. Interest results
The net production of customer lending (excluding Bank Treasury, currency impacts and transfers of WestlandUtrecht Bank mortgages to NN Group) was EUR 10.3 billion in 2016. Net core lending, also excluding the run-off in the WestlandUtrecht Bank portfolio, increased by EUR 12.2 billion, driven by growth outside of the Netherlands. Net customer deposits (excluding Bank Treasury and currency impacts) grew by EUR 25.4 billion in 2016.
Risk costs declined 30.3 percent to EUR 606 million, mainly visible in the Netherlands and Germany. By contrast, risk costs in Turkey increased.
Underlying income rose 0.7 percent to EUR 4,436 million. The interest result slightly declined, mainly caused by a decline in lending volumes and margin pressure on current accounts, partly offset by higher margins on savings and lending. The lower lending volumes were partly caused by the continued transfer of WestlandUtrecht Bank (WUB) mortgages to NN Group and the run-off in the WUB portfolio. Net core lending (excluding the WUB portfolio, Bank Treasury products and movements in the mortgage hedge) declined by EUR 4.2 billion. The decline was both in mortgages and other lending; the latter reflecting subdued demand in business lending. Net customer deposits (excluding Bank Treasury) grew by EUR 7.1 billion. Commission income rose by EUR 31 million, or six percent, and investment and other income was up EUR 32 million, in part due to a gain on the sale of Visa shares.
Underlying operating expenses increased 3.4 percent on 2015, mainly due to higher regulatory costs and an additional provision for Dutch SME clients with interestrate derivatives, while 2015 included some smaller restructuring provisions. These factors were partly offset by the benefits from ongoing cost-savings initiatives. From the existing cost-savings programmes announced since 2011, which aim to realise EUR 657 million of annual cost savings by the end of 2017, EUR 562 million has already been realised.
Risk costs declined to EUR 171 million, or 32 basis points of average risk-weighted assets, from EUR 433 million in 2015. The decline was both in business lending and residential mortgages, reflecting improvements in the Dutch economy and housing market.
Risk costs turned to a net release of EUR 18 million from a net addition of EUR 57 million in 2015, reflecting a benign credit environment in the German market and model updates for mortgages.
The addition to the provision for loan losses was EUR 278 million, or 57 basis points of average risk-weighted assets, up from EUR 210 million, or 45 basis points of average risk-weighted assets. The increase was mainly attributable to higher risk costs in Turkey.
Conclusion Collectively, ING’s Retail Banking units again performed well in 2016. By lending money and providing customers with the tools to help make smart financial decisions, we continued to empower people in life and in business.
Retail Banking continued to pursue a digital-first operating model with a clear and easy, anytime and anywhere experience for customers. It also made progress in earning an increased number of primary relationships.
In 2016, the bank announced an intention to converge our various banking models into one to create an integrated digital platform that can cater to all our customers’ financial needs and provide new and relevant offers to enhance the customer experience. Such a transformation should put our business on a solid footing for the future.
We continued with our transformation programme, Wholesale Target Operating Model (Wholesale TOM), further driving simplification, business growth and innovation across the network.
In 2016, we took additional steps to improve the client experience and to deliver on our Customer Promise to be clear and easy, anytime and anywhere, empower people and keep getting better. InsideBusiness, our digital, cross-border banking platform, offers clients real-time insights and a single point of access to manage all their financial transactions on any device. After rolling out the platform in the Netherlands and Belgium in 2015, we have extended it to clients in 15 more countries. In 2017, we will include countries in Asia and the Americas. In 2016, we also increased our InsideBusiness offering with more products and services available online, including a mobile app, support for intercompany loan administration, confirmations and reporting for financial markets transactions, and a self-service administration function.
We aim to establish ourselves in the market as a thought leader on blockchain. We have successfully trialled fixed-income trading between 40 of the world’s largest banks via the international R3 consortium. In 2016, ING won the Global Finance Innovation Award for Top Innovators in Transaction Services in the Process Innovation category in recognition of our efforts to transform our documentation processes for payments and cash management. Transaction Services simplified the requirements for accounts and payments services,
Our global business has received recognition and awards from leading publications in the financial industry, showcasing our success as a client-focused bank. Overall, league table positions in EMEA and Western Europe continued their upward trend, supported by continued strong performance in industry lending.
In 2016, WB introduced an ambition to increase the amount of STF to EUR 35 billion by 2020. At year-end 2016, our STF amounted to EUR 34.3 billion. This is an increase of more than EUR 10 billion compared to year-end 2015, driven partly by new transactions and partly by continous improvement of our processes for identifying sustainable transactions and clients. (See graph “sustainable transitions financed” for a breakdown of STF growth.) To drive growth, we train and encourage employees to engage with our clients in finding strategic financing solutions for their sustainability ambitions.
• The Banker: Best Global Bank • The Banker: Best Bank Western Europe • The Banker: Best Bank the Netherlands • The Banker: Best Bank Belgium • Global Finance: Best Bank in Western Europe • Euromoney: Best Digital Bank Western Europe • Treasury Management International (TMI): Best Bank Payments & Collections CEE • Treasury Management International (TMI): Best Cash Management Solution in Technology & Innovations (TMI)
• Global Finance: Best Bank for Working Capital Optimisation in Western Europe and the same award for CEE
Netherlands. In line with Dutch tax authority guidelines the amount of green loans on the Groenbank balance sheet is over 70 percent. For more details on ING Groenbank, please see the “Retail Banking” chapter.
4 Sustainable real estate grew by EUR 6.2 billion in 2016. This is largely due to an improved data collection process which allowed us to identify existing loans that qualify as sustainable. The development of innovative tools and green products for clients, staff training and setting ambitious targets helped drive new sustainable business.
5 Includes projects involving energy efficiency, greenhouse gas reduction, climate change mitigation, waste management, water efficiency, public transport and social welfare.
In Europe, the Utility, Power and Renewable platform closed a project financing for the Beatrice Offshore Windfarm. ING acted as one of the six bookrunners and mandated lead arrangers in this landmark GBP 1.96 billion transaction.
Whether as an underwriter, issuer, or member of the ICMA Green Bond Principles, ING has been at the forefront of the development of the sustainable bond market. When we issued our first green bond in November 2015, we promised to disclose how the proceeds would be used, as well as the projects’ positive impact on the environment in terms of emissions avoided.
In 2016, ING launched a number of strategic programmes and initiatives to accelerate change and to stay a step ahead. At the ING Investor Day in October, ING announced its intention to begin converging to one digital banking platform. This addresses the trend that in an increasingly virtual world, customer needs and expectations are converging. This makes it all the more important for ING to operate as one integrated company across borders.
Wholesale TOM Transformation programme The ING of the future will be one digital platform, with one brand, and with the same differentiating experience for all our customers, wherever they are in the world. WB is leading the way within ING, having already standardised products, processes and client experience as part of the Wholesale TOM transformation.
Real Estate Finance (REF) primarily lends to investors in income-producing real estate backed by first mortgages. In Europe and selected premier global property markets we are one of the leading bookrunners in syndicated real estate finance loans. The year was characterised by market caution, primarily because of concerns over political instability in Europe. However, there was abundant liquidity, partly driven by interest from Asian investors. We saw strong activity in France, Germany and the Netherlands.
Bank Mendes Gans (BMG) is a specialist bank providing global liquidity management services, including multi-currency, multi-bank cash-pooling and netting solutions to multinational corporations. BMG selectively onboarded new clients in 2016.
Financial Markets Financial Markets (FM) is a well-diversified business targeting developed markets and emerging economies. It focuses on interest rates, currencies and credit products. It aims to serve ING’s institutional, corporate and retail clients with relevant financial markets products.
General Lending and Transaction Services General Lending General Lending is offered to corporate clients as the anchor product in a broader relationship typically involving flow products in FM or Transaction Services. It is typically less complex than Industry Lending with more standardised transactions. Client teams focus on crosssell opportunities with other bank products.
ING acted as sole lender and sole arranger in the EUR 90 million financing of supermarket chain Lidl’s two distribution centres which are considered the most sustainable in the Netherlands with their efficiency, state-of-the-art logistics and equipment. They hold the highest levels of the BREEAM certification.
ING is an important player in the issuing (corporate cards) and the retail payment markets. Both product lines generate fee-based income. ING achieved yearon -year growth of over 35 percent with our corporate card offering. These solutions, including the innovative virtual card, help our clients to reduce the cost of administrative procurement and provide short-term working capital. Our European POS and e-commerce payment proposition is a key element in building the primary relationship for retailers in Europe.
In early 2016, oil prices recovered. However, the historic low oil prices that preceded that did not have a significant effect on ING’s financing to the oil and gas related business thanks to the relatively limited direct exposure to oil prices and the high quality of our lending book. Furthermore, many of our long-term facilities are protected against risks, for example through offtake agreements, fixed price contracts, and/or guarantees provided by export credit agencies. Lending credit outstanding to the oil and gas industry was EUR 36.3 billion at the end of 2016.
The underlying result before tax was EUR 2,668 million, up 5.3 percent from 2015. Credit and debt valuation adjustments (CVA/DVA) were EUR -71 million in 2016, compared with EUR 181 million in 2015. Excluding CVA/ DVA impacts, the increase in pre-tax result was 16.4 percent.
Underlying operating expenses increased 0.5 percent to EUR 2,572 million, mainly due to higher regulatory costs and an increase in FTEs to support business growth. This increase was largely offset by benefits from cost saving initiatives, and lower IT change costs. The previously announced restructuring programmes are on track to realise EUR 340 million of annual cost savings by the end of 2017. At the end of 2016, EUR 305 million of annual cost savings had already been realised.
In 2016, we further increased the digital service offering to clients, empowering them to do their business anytime, anywhere. We also succeeded in increasing the number of primary relationships.
We believe our role is to facilitate and finance the transition to a sustainable society. Our financing of sustainable projects and clients that are environmental outperformers compared to industry peers rose to EUR 34.3 billion at year-end, illustrating our support for a greener economy. We closed several notable deals and we launched a number of initiatives to encourage businesses to become more sustainable.
Earlier this year, Isabel Fernandez was appointed to ING’s Management Board Banking (MBB) as head of Wholesale Banking, the first-ever woman appointed to the board.
Overcoming unconscious bias ING has encouraged managers from a variety of business units to attend workshops that help them understand their unconscious biases, promoting more objective people decisions. We all have these biases. By being aware of them we can learn to be more objective.
• Lioness – a network to help women realise their ambitions. • Gala – a community focusing on LGBT inclusion. • Ring – a networking community for young employees up to 36 years of age.
Who we are Our more than 54,000 employees are drawn from a wide variety of backgrounds and are active in over 40 countries. We aim to have a workforce that reflects the diversity of our customer base and to foster an inclusive culture. It is important that our people feel comfortable being themselves irrespective of who they are, what they believe or where they come from.
Different diversity challenges exist in each of our locations and business units. In several markets, such as the Benelux, we need to do more to make gender balance more representative.
June saw the launch of kudos, ING’s online compliment tool. Employees can send compliments to colleagues for displaying Orange Code behaviours. ING believes that compliments can shape people’s behaviour and lead to better performance. Regular compliments lead to more positive emotions, stimulate behaviour directly linked to the Orange Code and ultimately foster a more productive culture.
An Ethics Centre of Expertise (ECE) and a Banker’s Oath Committee were also established to support employees in dilemma management. The ECE provides training and a methodology (a so-called “seven-step approach”) which is used in dilemma discussions and to support balanced decision making in dilemmas experienced by employees and management.
ING continued to run its distinctive banking training platform for senior leaders, the Think Forward Simulation. The training simulates operations at a bank and is fully aligned with the priorities of the Think Forward strategy. Over 100 leaders from 15 countries attended this training in 2016.
We also introduced a new Think Forward Leadership Programme specifically designed to develop the leadership behaviours needed to achieve our strategy. The Think Forward Leadership programme was piloted in the fourth quarter of 2016 and will be introduced from January 2017. Designed for the Management Board and two hierarchical levels below, it has been tailormade for the bank and is based on results from ING’s 2015 Organisational Health Index survey. Eventually the programme will be broadened and made available globally to around 6,800 managers.
Early career talent development The ING International Talent Programme (IITP) is designed to ensure the bank has the right talent in the right place to help meet future leadership needs. The programme selects and develops top graduates who are ambitious, international and have high growth potential.
Employer branding In 2016, ING introduced a new global Employee Value Proposition (EVP). The EVP provides a consistent point of reference for all of the bank’s employer branding activities. It sets out the qualities ING looks for in its people and what the company offers.
The EVP will be used to guide the employee experience underpinning HR processes, as well as being central to our employer brand positioning.
Employee engagement We believe there is a direct link between employee engagement and business performance and our ability to serve customers. ING regularly measures employee engagement and is committed to taking the actions identified.
Austria, Germany (including Interhyp), Luxembourg and Spain were all recognised by the US-based Great Place to Work Institute in 2016. The institute analyses feedback from more than 10 million employees in 50 countries representing some 6,000 organisations. To obtain recognition as a Great Place to Work, employees from each ING country are surveyed and their responses collated to provide an overall ranking.
As part of the rollout, almost 300 workshops involving more than 1,000 managers were held in 2016 in 15 countries. The process was also introduced to all employees in Spain, managers in Belgium and around 200 senior leaders globally. The implementation is ongoing and will be introduced to all employees from 2017 onwards.
The Human Capital Return on Investment indicator shows ING’s profitability in relation to total employee costs. This ratio helps ING to identify the influence of HR contributions, such as performance management, training and development, automation and organisational structures, on the bank’s profitability. We are improving in this area. In 2016, the indicator was 2.59 compared to 2.48 in 2015 and 2.30 in 2014.
More than 72 percent of learning is carried out via online channels. Globally, much of this training is offered online through the ING Learning Centre. Here, a variety of educational and business reading, inspirational videos and e-learning courses are made available. This includes the compulsory Promoting Integrity Programme, online training for all employees designed to strengthen our risk culture.
Online learning includes a global e-learning programme, Get Orange, which supports ING’s local onboarding programmes in welcoming new employees to the company. The programme introduces them to ING’s strategy, culture and way of working. Get Orange is available in almost all ING countries. All new joiners are invited to participate.
Employees are required to take personal responsibility for becoming the very best they can be. ING’s approach to performance management supports this. In 2016, 99 percent of employees took part in a formal performance management process.
This could mean that some activities could be transferred to our existing shared service centres, for example in Bratislava or Bucharest, or outsourced to external providers as part of our strategy to converge towards one digital banking platform. This is not new for ING. We have already standardised and streamlined some of our Wholesale Banking and IT operations and have centres of excellence in several locations.
Collective bargaining and employee consultation Human rights are fundamental and universal. ING upholds the rights proclaimed in the Universal Declaration of Human Rights and aims to respect human rights in all global operations. Where countries have weaker labour laws, ING abides by its own human rights policy, developed in accordance with the International Labour Organisation convention.
In October 2016, ING announced its intention in many countries and business units to start a path of convergence towards one digital banking platform. The various measures and intentions announced are expected to have a significant impact on many colleagues. It means some functions will change significantly in nature. It may require changes in the location of some functions. Certain positions may no longer be there in the future. While not all plans are finalised, we anticipate that over the coming five years around 7,000 jobs will be impacted, including 950 positions held by external suppliers.
In the Netherlands, HR Mobility provided assistance to redundant colleagues in multiple locations. To prepare colleagues for a future outside ING, we closely monitor the external job market. Redundant colleagues are supported during the period preceding any redundancy and are helped with interview preparation – internally and externally. Activities included: • Job link events were held in Amsterdam, Arnhem and Leeuwarden. Around 935 colleagues attended these events which included around 1,000 speed dates, helping every participant to walk away with at least four new networking contacts.
• Ninety IT colleagues met with external companies and IT specialist job organisations as part of our External Job Matches project with 68 percent of participants finding a new job within four months after leaving ING.
Report of the Executive Board management, modular architecture, a cloud-based infrastructure and operational efficiency through bankwide shared services.
To ensure customers everywhere have the same experience and level of service we are standardising processes and re-using best practices across the business to standardise our systems and platforms. In Germany, we are developing the Welcome banking platform, which will be open to non-ING customers and third parties; the Model Bank to be rolled out in Austria, the Czech Republic, France, Italy, Poland and Spain, will be a standardised platform for six million users; and through the Wholesale TOM (target operating model) we are creating a superior client experience for Wholesale Banking customers around the globe, based on simplified systems and uniform products and services. In the Netherlands and Belgium we also intend to move to an integrated banking platform with a harmonised business model and shared operating model as part of our Orange Bridge programme.
The ING private cloud is another enabler. It went live in 2016, starting in the Netherlands, and provides a single global platform on which we can standardise and automate our infrastructure. Migrating business applications onto the private cloud further simplifies our IT landscape and optimises the use of our IT infrastructure to speed up the pace of innovation and improve the customer experience.
In a world that is increasingly digital and where financial products and services are increasingly commoditised, we strive for a differentiating customer experience that will set us apart.
Data privacy and security Earning and keeping the trust of our customers is of paramount importance. Customers trust us to keep their – and our own – data safe and to offer reliable products and services. We comply with our legal obligations to protect customer data, which can differ from country to country.
We are transparent about what we do with the personal data of customers, suppliers and business partners and only process personal data for specific business purposes. Our approach can be summarised as: the right people use the right data for the right purpose. We consider the wishes of our customers and corporate clients, which is critical whenever data is processed for services and offers. In cases where we rely on consent the customer can withdraw this consent at any time.
Data management Another area we are standardising is global data management. As a bank we collect and store vast amounts of data, such as customer profiles, payment transactions, complaints and more. This information can give us meaningful insights to better understand our customers and provide them with more personalised products or services. At the same time, it gives customers a complete personal financial picture that empowers them to predict the financial impact of their decisions. It also improves the accuracy of our internal and external reporting.
We are also working closely with 12 start-ups at Fintech Village in Belgium and the ING Innovation Studio in Amsterdam. These are our incubators where we link startups with internal teams globally to develop ideas into viable products and services. Products that emerged from the Innovation Studio include Whydonate, an internal portal for employees to donate to charitable causes and CheckMetrix, a 3600 dashboard for SMEs that gives retailers insight into their customers’ buying behaviour.
We use a structured process called PACE to accelerate innovation within ING. In 2016, more than 2,000 employees were trained in the PACE methodology (a combination of the Lean Startup, Agile Scrum and Design thinking methods). We also launched the PACE Accelerator, an intensive 18-week programme that speeds up the time to market by testing ideas for new products and services through experimentation and customer validation. The programme is running in six businesses across the bank.
For more information on risk appetite and risk metrics, please refer to the risk appetite framework section of the “Risk Management” chapter, part of the consolidated annual accounts of this Annual Report.
Managing risks Taking risks is an integral part of doing business. ING faces both financial and non-financial risks. Financial risks arise when we extend loans to customers, take their deposits, provide them with hedging solutions and when we play our role as intermediary in financial markets. Non-financial risks are those associated with failures in our processes, and with failure to comply with rules, regulations, laws, and the ethical norms that are generally considered to apply to our people and activities.
Against this backdrop, ING’s balance sheet demonstrated its resilience. We experienced healthy lending growth and declining risk costs resulting from active management of non-performing loans. ING Bank’s nonperforming loans (NPLs) expressed as a percentage of lending credit outstandings further improved. The NPL ratio decreased at the end of 2016 to 2.1% from 2.5% at the end of 2015. This decrease was caused by a EUR 1.7 billion reduction in NPLs, mainly in residential mortgages in the Netherlands and Real Estate Finance, combined with an increase in total credit outstandings. For the oil and gas portfolio, the NPL ratio increased to 2.1% from 1.8% at the end of 2015, mainly caused by higher NPL amounts, as market conditions remained challenging.
Impact of changing customer expectations ING operates in a rapidly changing world. To remain relevant, we need to look closely at the quality of the services we provide to our customers. Customer expectations are changing drastically. Most retail customers prefer to use digital channels; this is the main interface for ING’s communication. Although we face competition from other banks, fintechs are challenging the entire banking sector. These new entrants rely on technology to deliver innovative financial services.
To address non-financial risk, global education and awareness in the form of e-learning modules, awareness sessions and other materials were provided on topics such as fraud and security, conflicts of interest, financial economic crime (FEC) and an onboarding e-learning for staff new to Operational Risk Management (ORM) worldwide. We continue to develop e-learning modules and campaigns to increase knowledge and awareness around topics like market abuse, anti-bribery, corruption and other financial/economic crimes. ING addresses personal conduct-related integrity risks by committing to conduct business in an honest and ethical manner and taking a zero tolerance approach to bribery and corruption in all of its relationships and business dealings, wherever it operates.
Environmental and Social Risk Management ING Bank makes a positive contribution to global economic growth by promoting responsible lending and investment practices. Transparency, openness and regaining trust are material topics, both for ourselves and our stakeholders. ING’s Environmental and Social Risk (ESR) policy framework underpins the choices we make in a consistent and transparent manner on how, where and with whom we do business.
Despite our efforts to comply with applicable laws and regulations, there are a number of risks in areas where applicable regulations are unclear, subject to multiple interpretations or under development, are in conflict with each other, or where regulators revise their guidance or courts overturn previous rulings. Meeting all these requirements within the strict timelines that have been set poses a significant operational challenge for banks. Implementing the necessary processes and procedures to effectively comply has significant implications for IT systems and data, while people who have the necessary knowledge and skills are scarce.
The ESR policy framework follows mainstream approval processes and it is applied by well-trained and empowered people. In 2016, 545 risk, front office and compliance colleagues participated in ESR-dedicated training globally via webinars. Training also included classroom sessions in ING Amsterdam, Bratislava, Brussels, Paris, Frankfurt, Luxembourg, Geneva, Moscow and Istanbul.
A client’s ESR risk profile is just the starting point when assessing how the ESR policy framework will apply in each specific business engagement. One of the most important determinants of ING’s ability to assess and manage environmental, social and human rights-related risks with a client is our proximity to the potential impact. The type of financial product or service offered to the client determines this proximity upfront and thus the appropriate level of due diligence and mitigation measures. The sector, operating context and geography will also provide an initial indication of the degree of ESR due diligence that is needed.
For example, the graph above highlights the risk profile of ING’s mining and metals portfolio. One of the clients identified as high risk is Endeavour Mining, whose relationship is managed by ING’s Mining & Metals (M&M) Structured Finance Team. The risk profile is high as Endeavour’s gold mines and projects are located in high-risk countries including Mali, Burkina Faso, and Ivory Coast. As part of ING’s site visits in 2013, 2015 and 2016 the M&M Team discussed with Endeavour’s senior management the effective implementation of their Health, Safety and Environment policies across all their operations. The client provided information to ING on local employment, sanitation, clean drinking water, and the client’s contribution to local development. As part of monitoring, the client provides regular reports on compliance with international standards and best practices. This example illustrates how ING focuses on and establishes meaningful and informed
• ING and climate change: In 2015, ING decided to cease financing new coal-fired power plants and coal mines and to continue to reduce our coal portfolio. ING declined approximately 10 coal-related projects or transactions in 2016 as a result of this policy.
• ING and Human rights: In October 2016, ING became an adhering bank to the Dutch banking sector agreement on international responsible business conduct regarding human rights. The Agreement aims to set the standard on how Dutch banks should organise themselves in order to avoid human rights impacts through the businesses they finance. One of the challenges pointed out by ING during our human rights presentation in the UN Forum on Business and Human Rights was the need for alignment and policy coherence on state and industry level in order to ensure that those seeking to do “the right thing” are not pushed out of competitive markets. ING is increasing its efforts to engage with other financial institutions in the Netherlands and globally to promote a common level playing field in business and human rights. This is done through our ongoing participation in the Thun Group of banks, which promote dialogue on human rights among banks, and through our formal advisory role to the OECD on responsible business conduct in the financial sector.
Since 2012, ING has worked diligently with the different resolution authorities to determine a resolution strategy and to identify potential impediments to resolution. Following an intensive discussion throughout 2016, with the Single Resolution Board (SRB) and the national resolution authority, De Nederlandsche Bank (DNB), we concluded that ING Group should be our designated resolution entity. In November 2016, we concluded that ING Group should be our designated resolution entity. At the end of January 2017, the Single Resolution Board (SRB) informed us that it supports the designation of ING Group as the point of entry. Henceforth, ING Group will be the issuing entity for all TLAC/MREL eligible debt consisting of Additional Tier 1, Tier 2 and senior unsecured debt.
A consistent approach to capital management ING Group’s overall approach to capital management is to make sure capital is adequate to cover the economic risk at all levels and to ensure compliance with regulations. ING Group reassesses these levels constantly to ensure optimal capital use. The continued strength of ING’s capital position, the adequacy of our financial position and our risk management effectiveness allow us to empower people and businesses to realise their goals. They make it possible to increase our lending capabilities, pay dividend on common shares to shareholders and invest in new technologies and best practices. In this way, ING delivers shareholder returns while at the same time investing in further innovation of products and services.
In November 2016, ING issued USD 1,000 million contingent convertible Securities which qualify as Additional Tier 1 capital under CRD IV/CRR to strengthen ING’s capital base. The perpetual bond, that can be called by ING Group five years after issuance, has a coupon of 6.875%.
ING’s Capital Management strategy is driven by its strategic aims and its risk appetite. Our policy is to retain sufficient financial flexibility to implement ING’s strategy in all market conditions. ING’s risk appetite statements form the basis of the capital plan. The capital plan sets targets above the minimum regulatory requirements. The risk appetite statements and targets are developed and communicated to the different businesses in line with capital allocation. Policies for recovery planning and resolution are a natural extension of ING’s capital management policies and are fully aligned with ING’s risk management framework.
The results of the EBA stress test reaffirmed the resilience of our business model and the strength of ING’s capital base. Our commitment to maintain a robust, fully-loaded Group CET1 ratio in excess of prevailing requirements remains. Under the hypothetical baseline scenario and EBA’s methodological instructions, ING Group would have a fully loaded common equity Tier 1 capital ratio (CET1) of 12.5% in 2018. Whereas, under the hypothetical adverse scenario and EBA’s methodological instructions, ING Group would have a fully loaded CET1 ratio of 9.0% in 2018.
Capital development at ING Bank ING Bank’s capital position is primarily managed through its published common equity Tier 1 ratio and leverage ratio. These elements are the most widely used variables for assessing bank capitalisation. ING Bank also takes other constraints into account, including: • Additional regulatory capital requirements, including the amount of Tier 1 capital, total capital and the Basel I floor.
The sale of 2.5% of Kotak Mahindra Bank shares, which was settled in October 2016, had no material impact on ING’s capital ratios. The fully-loaded and phased-in Tier 1 ratios respectively increased from 13.9% to 14.7% and 13.4% to 14.4%, primarily reflecting developments in ING Bank’s common equity Tier 1 ratio. This was partly offset by the redemption of the USD 800 million 7.05% grandfathered Perpetual Debt Securities in September. The total capital ratio (including grandfathered securities) increased to 17.8%.
ING also demonstrated in 2016 the ability to generate capital consistently through strong profitability. ING currently has a strong capital position, meeting all regulatory requirements and capable of withstanding market challenges and new regulations. The strength of the balance sheet provides a firm base to execute further lending capabilities, serving customer needs, as well as paying dividends.
R.A.J.G. (Ralph) Hamers (50) CEO and chairman of the Executive Board ING Group and chairman of the Management Board Banking Ralph Hamers was appointed a member of the Executive Board of ING Group as of 13 May 2013. He was appointed chief executive officer (CEO) and chairman of the Executive Board and of the Management Board Banking on 1 October 2013. He is, among others, responsible for Innovation, Legal, Corporate Strategy, Corporate HR, Corporate Communications, and Corporate Audit Services.
W.F. (Wilfred) Nagel (60) CRO on the Executive Board ING Group and CRO on the Management Board Banking Wilfred Nagel was appointed a member and chief risk officer (CRO) of the Executive Board of ING Group as of 14 May 2012. Wilfred Nagel became a member and CRO of the Management Board Banking as of 5 October 2011. He is responsible for all of ING’s risk management departments.
United States United Kingdom France Germany Switzerland Netherlands Rest of Europe Rest of World 1 These figures are based on year-end 2016 estimates of institutional share ownership provided by IPREO.
Key developments On 25 April 2016, the annual general meeting of ING Groep N.V. decided to abolish the Dutch depositary receipt structure. Consequently, on 26 July 2016 depositary receipts for shares in ING Groep N.V. were converted into ordinary shares of ING Groep N.V.. As a result, holders of depositary receipts for shares in ING Groep N.V. became ordinary shareholders of ING Groep N.V. and the depositary receipts for shares ceased to exist. In addition, ING’s ADRs became automatically linked to the underlying ordinary shares.
ING Euro Stoxx Banks (SX7E) Stoxx Europe 600 Banks (SX7P) Stoxx 50 (SX5E)
FTSE4 Good Index Series Position: Included Position: Included Position: Included Position: Included Transparantie Benchmark (NL) Score: Position: 20 (out of 512)
Payment date interim dividend 2017 (NYSE) 21 August 2017 ² Publication results 3Q2017 2 November 2017 1 All dates are provisional. 2 Only if any dividend is paid.
Credit ratings ING’s short- and long-term credit ratings are shown in the table below. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgement, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings.
More information on the non-financial data, the scope and data collection process of the different performance indicators can be found in detail in the non-financial data reporting protocol at www.ing.com/16ar5.
How we defined content for this report and materiality In drawing up content for this report we have taken into account the topics that can have a material impact on our business and society as well as risks and opportunities, applicable regulation and trends.
Key assurance matters Key assurance matters are those matters that, in our professional judgement, were of most significance in our review of the Non-financial Information. We have communicated the key assurance matters to the Executive Board and the Supervisory Board. The key assurance matters are not a comprehensive reflection of all matters discussed. These matters were addressed in the context of our review of the Non-financial Information within the scope of our engagement as a whole and in forming our conclusion thereon, and we do not provide a separate conclusion on these matters.
Description: GRI requires that the Non-financial Information provides a balanced picture of ING Group’s (non-financial) performance to its stakeholders. For a balanced assessment of the overall performance of ING Group the Non-financial Information has to reflect both positive and negative aspects of the organization’s performance as applicable. This area was significant to our review as the assessment of the right balance is inherently subject to a qualitative evaluation of the information gathered and judgment about the extent to which specific information needs to be included.
Our response: Our assurance procedures included, among other things, obtaining an understanding of the principles and governance structure that ING Group applied to collect and document information used in preparing the Non-financial Information. We interviewed several staff members responsible for the information gathering and its qualitative evaluation as well as preparing and reviewing the Non-financial Information of ING Group and evaluated whether the Non-financial Information reflects their insights. Finally, we performed an overall assessment on the Non-financial Information based on our knowledge of the company and all evidence obtained to evaluate whether the Non-financial
Our observation: We observed that the definitions and criteria for sustainable transitions as described in the internally developed reporting criteria are sufficiently applied and that the assumptions and limitations are adequatly explained in the Non-financial Information.
We apply the ‘Nadere voorschriften accountantskantoren ter zake van assurance opdrachten (RA)’ (Regulations for Audit Firms Regarding Assurance Engagements) and accordingly maintain a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
Misstatements can arise from fraud or errors and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions of users taken on the basis of the information in scope. The materiality affects the nature, timing and extent of our review procedures and the evaluation of the effect of identified misstatements on our conclusion.
We have exercised professional judgement and have maintained professional skepticism throughout the review, in accordance with the Dutch Standard 3000, ethical requirements and independence requirements.
This year the Supervisory Board spent considerable time studying technological developments in banking and the growing impact of fintechs on the industry. The biggest challenge ING is facing is to move fast in a changing world. IT plays a key role in this. It will be a cornerstone in our future. The Supervisory Board strongly supports partnerships such as those with fintechs to speed up innovation and bring new and better services to ING’s customers. At the same time, adapting IT so we can move ahead quickly is complex and not always achievable in the timelines we have set for ourselves. Also cybercrime adds to the complexity. These developments remain a key area of attention for the Supervisory Board.
In our Supervisory Board meetings we also expressed our concerns about the image of banks and financial institutions in society. Public trust is still an issue. And sometimes it feels that we are an easy target for politicians. This makes it all the more important to strike a balance between the interests of all the stakeholders and to maintain an open dialogue. In defining our role and where we will focus, the Supervisory Board looks more broadly than just to the interests of shareholders. We seek to take the interests of all stakeholders into
Uncertain external environment 2016 was a year of many uncertainties and unexpected developments. The global economy showed weak performance, growth in the US lost momentum and the eurozone recovery was slow. Britain’s decision to leave the European Union and the outcome of the US presidential elections added to the uncertainty. Financial market volatility increased and the geo-political situation became more complex. All of this contributed to an overall feeling of instability and uncertainty for ING and others.
A focused strategy Operating in an environment of uncertainty requires a focused strategy, disciplined management and the agility to respond to unexpected events. ING has these elements in place.
ING’s strong performance since launching the Think Forward strategy in 2014 proves that we are on the right track. But given the challenging macro-economic environment, the fast-moving changes in our industry and the fact that technology and digitalisation are moving faster than expected, we need to accelerate change.
To do this, the Supervisory Board in 2016 approved the intention to converge to a single digital banking platform. This plan provides clarity on ING’s direction and on how ING can successfully grow its business in a rapidly changing environment. The role of banks is evolving. With the decision to invest in a scalable platform, ING aims to ensure that it is properly prepared for a fast-changing future.
Diversity is defined in many ways, including in terms of gender and ethnicity. An emerging concept is diversity of thought. People with different cultural and other backgrounds contribute different views to the discussion. Diversity of thought helps to discover new ways of doing things.
I am pleased with the progress we are making to fulfil our purpose of empowering customers to stay ahead in life and in business. And I am confident the important steps we are taking to continue to do so in the future will be successful.
Jeroen van der Veer Chairman of the Supervisory Board of ING Group account. It is my view that this is the best way to ensure our shareholders benefit in the long term.
Our role as Supervisory Board members has changed markedly in recent years and now requires significantly more time and effort to understand the business so that we can properly fulfil our supervisory role. In 2016, we participated in workshops and educational sessions, we visited ING businesses and had sessions with senior management representatives reporting directly to the Executive Board and the Management Board Banking.
The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption at the 2017 Annual General Meeting as part of the Annual Report.
Permanent education The key theme in 2016 of the annual Supervisory Board Knowledge Day was an in-depth update on the status of the implementation of ING’s Think Forward strategy and anticipated developments. On the agenda were sessions related to accelerating the Think Forward strategy, an innovation and IT update, IT security and cybercrime, the organisational health index, and updates from the business lines and the COO domain. The Supervisory Board was also updated on ING’s annual talent review achievements and developments including a trend analysis summary.
Corporate strategy In January 2016, the Supervisory Board held its meeting on ING’s strategy as well as the Medium-Term Plan (MTP) 2016–2018. The MTP addresses the plans and the financial and non-financial targets for the Group as a whole and for the banking business specifically. The Supervisory Board considered that positive results would not take away the need to anticipate on potential challenges that include economic and regulatory uncertainty. Given the nature of challenges ahead and the level of ambition of the MTP that included significant growth projections, the Supervisory Board concurred with the proposed acceleration of the Think Forward strategy. The year 2016 therefore was a year of transition, supported by the implementation of transformation management, with the creation and execution of a transformation roadmap per country. In addition, dynamic forecasting was introduced, to allow for a regular balance sheet evaluation in terms of funding, liquidity and capital requirements.
A global transformation programme was developed to realise the acceleration of the Think Forward strategy. The basic starting point of the programme was ING’s value proposition, captured in multiple work streams.
In August 2016, the Supervisory Board discussed this. This strategy includes a number of initiatives to further improve the customer experience, further grow primary customers and lending, and increase efficiency. Around the end of September 2016 further aspects of the programme were discussed and approved. Important drivers of the programme were addressed such as the future of banking, the journey of convergence, maintaining commercial momentum, how to fund and drive the transformation, as well as risk management. The importance was acknowledged of taking into account the duty of care towards the Bank’s stakeholders that may be impacted by the transition. Accelerating Think Forward was announced on 3 October 2016, during the ING Investor Day.
In connection with accelerating Think Forward, the MTP 2017-2019 was discussed and approved by November 2016, an acceleration compared to previous years.
The Supervisory Board approved the annual review of the risk appetite framework that was updated to reflect recent regulatory changes. Throughout the year, the Supervisory Board was informed in detail on the potential risks for ING, including those relating to the Panama Papers, Brexit and the political and economic developments in various countries and regions.
Throughout the year the Supervisory Board was updated on and discussed regulatory risk including the associated operational and anticipated financial impact. Since the start of ECB supervision the increase in regulatory reporting has been significant. Reporting timelines also shortened and requested data granularity has increased, in addition to local requirements to be met. ING aims to safeguard that all reporting processes and data quality continue to be up to standards. The aggregate impact of upcoming new regulatory reporting requirements is expected to be substantial, also as a consequence of additional capital requirements.
Report of the Supervisory Board - continued improving the performance of the Supervisory Board over the coming year, such as increasing the focus on business issues, having more in-depth discussion time, and addressing the delegation of matters to be dealt with between the Supervisory Board and its committees. Additional key priorities identified were continued close monitoring and assessment of the developments in the regulatory and external supervision landscape as well as in the areas of non-financial risk, compliance and internal control. Attention will also continue to be paid to the challenging role and countervailing power of the Supervisory Board towards the Executive and Management Board.
In addition a wide range of other topics were discussed, such as IT risk, capital requirements, Customer Due Diligence / Know Your Customer, expected loss and loss given default limits, and Brexit. Also, other future risks and various stress test scenarios were looked into, ranging from regulatory uncertainty to continued low interest rates.
Other important topics on the agenda related to risk modelling and model validation, the regulatory risk aspect, ensuring compliance with the CRD IV / CRR requirements and the results of the continuous dialogue between ING and the external supervisors related to risk management.
As a standard practice, the annual risk appetite statements, now also including one for profitability risk, were reviewed and supported.
Report of the Supervisory Board - continued positions, including that of a candidate qualifying as financial expert, as defined by the SEC in its final rule implementing section 407 of the Sarbanes-Oxley Act of 2002, thereby taking into account ING’s diversity policy. This resulted in short lists of potential candidates to be appointed to the Supervisory Board.
At the start of 2016 the Chairman of the Supervisory Board informed the Remuneration Committee of the results of the meetings he had with various Dutch politicians and labour unions to discuss remuneration of Dutch companies in general. Also the proposed amendments to the existing remuneration for the members of the management board were on the agenda as was the renewal of the Supervisory Board’s remuneration policy. These were approved in the 2016 Annual General Meeting.
The ING Bank remunerations framework was updated to align with the renewed EBA guidelines that took effect per 1 January 2017. Throughout the year the Remuneration Committee approved Identified Staff related remuneration matters, based on ING’s accompanying governance framework. The framework itself was also reviewed with regard to the boards’ approval and notification requirements.
During the year the Committee also discussed the draft proposal for the new Dutch Corporate Governance Code that was published on 11 February 2016. The final version of the revised Code was published on 8 December 2016. The new Code will take effect as per the reporting year 2017 assuming it will be embedded in Dutch law. The implications for ING are being assessed and will be embedded in ING’s governance to the extent needed and applicable.
Additional information “Corporate governance” chapter, pages 77 to 89 and the “Remuneration report” chapter, pages 97 to 106 for more information, which are deemed to be incorporated by reference here.
This chapter, including the parts of this Annual Report incorporated by reference, with the separate publication “ING’s implementation of the Dutch Corporate Governance Code” dated April 2010, (see www.ing.com), together comprise the “corporate governance statement“ as specified in section 2a of the Decree with respect to the contents of the annual report (“Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag”)1.
The outcome of the review was submitted to the 2016 Annual General Meeting, in the form of a proposal to amend ING Group’s articles of association, in particular the provisions concerning the appointment, suspension and dismissal of the members of the Executive Board and of the Supervisory Board (see pages 83 and 85).
The application of the Corporate Governance Code by ING is described in the 2010 publication “ING’s implementation of the Dutch Corporate Governance Code”, which is available on the website of ING Group (www.ing.com). This is to be read in conjunction with this section and is deemed to be incorporated into this section. In case there is a difference between the content of ING’s publication and this section, this section will prevail.
Dutch Banking Code The Dutch Banking Code (“Banking Code”), a revised version of which was adopted by the Dutch Banking Association in 2014, is applicable only to ING Bank N.V. and not to ING Group. The Banking Code can be downloaded from the website of the Dutch Banking Association (www.nvb.nl). Its application to ING Bank is described in the “Application of the Dutch Banking Code by ING Bank N.V.”, available on the ING Group website (www.ing.com). This is to be read in conjunction with the Annual Report of ING Bank N.V. ING Group voluntarily applies the principles of the Banking Code regarding remuneration to the members of its Executive Board and considers these principles as a reference for its own corporate governance. ING Group’s remuneration policy for the Executive Board and senior management is compliant with these principles.
Differences between Dutch and US corporate governance practices In accordance with the requirements of the US Securities and Exchange Commission, ING Group, as a foreign private issuer whose securities are listed on the New York Stock Exchange (“NYSE”), must disclose in its Annual Report on Form 20-F any significant differences between its corporate governance practices and those applicable to US domestic companies under NYSE listing standards.
ING Group’s authorised capital is the maximum amount of capital allowed to be issued under the terms of the Articles of Association. New shares in excess of this amount can only be issued if the Articles of Association are amended. For reasons of flexibility and to meet the requirement as set forth in the Bank Resolution and Recovery Directive (“BRRD”) that the amount of authorised share capital should at all times be sufficient to permit the issuance of as many ordinary shares as required for a potential future bail-in, ING Group seeks to set the authorised capital in the Articles of Association at the highest level permitted by law, which is five times the actually issued share capital.
The share issue authorisation which will be proposed to the 2017 Annual General Meeting will be along the same lines. Its first element will enable the Executive Board to issue up to 40 percent of the issued share capital by means of a rights issue. This entails that the shares to be issued will be offered to all shareholders in proportion to their existing holdings of ordinary shares as nearly as may be practical. However, the Executive Board and Supervisory Board may exclude certain shareholders from such a share offering for practical or legal reasons such as record dates, fractional entitlements, treasury shares, applicable legal restrictions on share offerings or in the context of a syndicated rights issue.
2 Qualified investors in EU member states; 3 Retail investors in EU member states where ING has a significant retail investor base, provided that it is feasible to meet local requirements (in ING’s 2009 rights offering, shares were offered to existing shareholders in Belgium, France, Germany, Luxemburg, Spain and the UK, where ING believed the vast majority of retail investors were located at that time); and 4 Qualified or institutional investors in Canada and Australia.
ING Group may decide not to accommodate or accept any requests or invitations to enter into a dialogue with potential investors, or to accommodate or accept such request or invitation under specific conditions. ING does not initiate bilateral contacts during the period immediately prior to publication of regular quarterly results.
The geographical distribution of ING Group’s investor base is diverse: an estimated 33% of our shares are held in the United States, 21% in the United Kingdom, 10% in France, 9% in Germany, 4% in Switzerland, 4% in the Netherlands, 11% in rest of Europe and 8% in the rest of the world.
These figures are based on the year-end 2016 estimates of institutional share ownership provided by IPREO.
Record date Pursuant to Dutch law, the record date for attending a general meeting and voting on the proposals at that general meeting is the 28th day before the day of the general meeting. Only those who hold shares at the record date are entitled to attend the general meeting and to exercise other rights related to the general meeting in question on the basis of their holding at the record date, notwithstanding any subsequent sale or purchase of shares. The record date is published in the notice for the general meeting. If the shortened convocation of 10 days is applicable (see above, paragraph: “Frequency, notice and agenda of General Meetings”), the record date is two days after the convocation date.
Function of the Executive Board The Executive Board is charged with the management of ING Group. This includes responsibility for setting and achieving ING Group’s strategy, objectives and policies, as well as the ensuing delivery of results. It also includes the day-to-day management of ING Group. The Executive Board is accountable for the performance of these duties to the Supervisory Board and the General Meeting. The responsibility for the management of ING Group is vested in the Executive Board collectively. The organisation, powers and modus operandi of the Executive Board are detailed in the Executive Board Charter, which was approved by the Supervisory Board.
The Executive Board Charter is available on the website of ING Group (www.ing.com).
Details of the remuneration of members of the Executive Board, including shares granted to them, together with additional information, are provided in the “Remuneration report”.
Information on members of the Executive Board R.A.J.G. (Ralph) Hamers, Chief Executive Officer (“CEO”) (Born 1966, Dutch nationality, male; appointed in 2013, term expires in 2017) Ralph Hamers has been a member of the Executive Board of ING Group since 13 May 2013 and was appointed CEO and Chairman of the Executive Board and the Managing Board Banking on 1 October 2013. He is responsible for the proper functioning of the Exective Board and the Management Board Banking and its committees, formulating and implementing ING’s strategy, acting as main contact for the Supervisory Board and also responsible for the following departments: innovation, Legal, Corporate Strategy, Corporate Human Resources, Corporate Communications and Corporate Audit Services. He joined ING in 1991 and has held various positions including Global Head Wholesale Banking Network from 2007 to 2010, Head of Network Management for Retail Banking Direct & International from 2010 to 2011, and CEO of ING Belgium and Luxembourg from 2011 to 2013. He holds a Master of Science degree in Business Econometrics/Operations Research from Tilburg University, the Netherlands.
Relevant positions pursuant to CRD IV: Member and CRO of the Executive Board of ING Groep N.V. and Member and CRO of the Management Board of ING Bank N.V.; Non-Executive Board Member of Nidera Capital B.V.
In line with Dutch company law, the Articles of Association, the Corporate Governance Code as well as the Supervisory Board Charter, all members of the Supervisory Board are required to: • act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all stakeholders of ING Group; • perform their duties without mandate and independent of any interest in the business of ING Group; and
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and
After a former member of the Executive Board has been appointed to the Supervisory Board, this member may also be appointed to one of the Supervisory Board’s committees. However, appointment to the Audit committee is only possible if the individual in question resigned from the Executive Board at least four years prior to such appointment.
The Nomination Committee assesses the composition of the Supervisory Board at least annually. In the context of this assessment, ING Group aims to have a gender balance by having at least 30% men and at least 30% women amongst its Supervisory Board members. After the appointment of Ann Sherry at the Annual General Meeting in April 2016, the composition of the Supervisory Board met the above-mentioned gender balance (more than 33% women). Other diversity related aspects are taken into consideration as well in light of the overall SB composition (read more on page 75 in the “Report of the Supervisory Board” chapter).
Term of appointment of members of the Supervisory Board A member of the Supervisory Board retires no later than at the end of the first General Meeting held four years after his or her last appointment or reappointment. In accordance with the Corporate Governance Code, members of the Supervisory Board may, as a general rule, be reappointed for two additional four-year terms. Under special circumstances however, the Supervisory Board may deviate from this general rule, for instance in order to maintain a balanced composition of the Supervisory Board and/or to preserve valuable expertise and experience. As a general rule, members of the Supervisory Board shall also resign at the end of an Annual General Meeting in the year in which they attain the age of 70 and shall not be reappointed. However, the Supervisory Board may, at its discretion, decide to deviate from this age limit. The schedule for resignation by rotation is available on the website of ING Group (www.ing.com).
The organisation, powers and conduct of the Supervisory Board are detailed in the Supervisory Board Charter which can be found on www.ing.com.
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING as a whole as well as the structure and operation of the internal risk management and control systems. On 31 December 2016, the members of the Risk Committee were: Robert Reibestein (chairman), Eric Boyer de la Giroday, Mariana Gheorghe, Hermann-Josef Lamberti and Jeroen van der Veer.
The Remuneration Committee’s tasks include advising the Supervisory Board on the terms and conditions of employment (including remuneration) of the members of the Executive Board and on the policies and general principles on which the terms and conditions of employment of the members of the Executive Board and of senior managers of ING Group and its subsidiaries are based. On 31 December 2016, the members of the Remuneration Committee were: Henk Breukink (chairman), Robert Reibestein and Jeroen van der Veer.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and reporting on this in the Annual Report and to the General Meeting. It also advises the Supervisory Board on improvements. On 31 December 2016, the members of the Corporate Governance Committee were: Henk Breukink (chairman) and Jeroen van der Veer.
Other relevant ancillary positions: Member of the Supervisory Board of Het Concertgebouw N.V. and Chairman of the Supervisory Council of the Technical University of Delft.
Relevant positions pursuant to CRD IV: Vice-chairman of the Supervisory Board of ING Groep N.V./ING Bank N.V., Non-Executive Member of the Board of Directors of Airbus Group N.V., (formerly European Aeronautic Defense and Space Company N.V.), Chairman of the Supervisory Board of Addiko Bank (Austria), member of the Supervisory Board of Lefdal Mine Data Centre SA and member of the Supervisory Board of Stonebranch. The number of positions held by Hermann-Josef Lamberti currently exceeds the maximum allowed under CRD IV. Steps are being taken to reduce the number of positions as required by CRD IV in the near future.
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V. and Chairman of the Board of Directors of ING Belgium S.A./N.V.
H.W. (Henk) Breukink (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2019)
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V., Chairman of the Supervisory Board of NSI N.V.
Other relevant ancillary positions: Member of the Advisory Board of NEINVER S.A. and Member of the Advisory Committee of GED Capital.
M. (Mariana) Gheorghe (Born 1956, Romanian nationality, female, appointed in 2015, term expires in 2019) Current Chief Executive Officer OMV Petrom S.A.
A.C. (Ann) Sherry (Born 1954, Australian nationality, female, appointed in 2016, term expires in 2020) Former Chief Executive Officer Carnival Australia
Changes in the composition In April 2016, the General Meeting appointed Ann Sherry to the Supervisory Board, while Joost Kuiper resigned for health reasons from the Supervisory Board.
Change of control clauses in material agreements ING Group is not a party to any material agreement that becomes effective or is required to be amended or terminated, in case of a change of control of ING Group following a public bid as defined in section 5:70 of the Dutch Financial Supervision Act.
Amendment of the Articles of Association The General Meeting may resolve to amend the Articles of Association of ING Group, provided that the resolution is adopted based on a proposal of the Executive Board, which has been approved by the Supervisory Board. An amendment of the Articles of Association must be passed by notarial deed.
The holder of a depositary receipt was entitled to receive from ING Trust Office payment of dividends and other distributions corresponding to the dividends and other distributions received by ING Trust Office on an ordinary share.
On 26 July 2016 the depositary receipts were exchanged for ordinary shares and ING Trust Office no longer holds any Shares in ING Group. As of this date, the depositary receipt holders of ING Group automatically became shareholders of ING Group and the depositary receipt structure was abolished as approved by the Annual General Meeting of 25 April 2016. The ADRs, representing bearer depositary receipts issued by ING Trust Office, which are listed at the New York Stock Exchange, represent ordinary shares in ING Group as of 26 July 2016.
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 90 to 92.
Voting on the ordinary shares by ING Trust Office ING Trust Office had discretion to vote in respect of shares for which it had not issued voting proxies to holders of depositary receipts and had not received any voting instructions.
ING Trust Office promoted the solicitation of specific proxies or voting instructions by holders of depositary receipts. ING Trust Office encouraged the greatest possible participation of holders of depositary receipts and promoted the execution of voting rights in a transparent way. At the same time it prevented a minority of shareholders and holders of depositary receipts from using a chance majority of votes to the disadvantage of the shareholders and holders of depositary receipts neither present nor represented at a General Meeting of ING Group.
The following report is issued in compliance with the provisions of article 14 of the trust conditions for registered shares in the share capital of ING Groep N.V. (“ING Group”) and best-practice provision IV.2.6 of the Dutch Corporate Governance Code.
Annual General Meeting ING Group 2016, votes cast and voting behaviour ING Trust Office attended the AGM 2016 and during this meeting ING Trust Office gave an explanation of voting with respect to agenda item (5A) Corporate governance/ amendment of the Articles of Association and agenda item (9) Authorisation to issue ordinary shares. The explanation of voting is included in the adopted minutes of the AGM 2016, available on the website of ING Group (www.ing.com).
At the request of ING Group, ING Trust Office advised ING Group that it would cooperate in abolishing the depositary receipt structure if the AGM of 25 April 2016 adopted the proposed amendments of the Articles of Association. The AGM approved the proposed amendments of the Articles of Association of ING Group, which implied the abolition of the depositary receipt structure.
The American depositary receipts, representing bearer depositary receipts issued by ING Trust Office, which are listed on the New York Stock Exchange, will be continued to represent ordinary shares ING Group as of the Conversion Date.
Contact details The contact details of ING Trust Office are: Jet Rutgers Telephone + 31 20 576 1226 Email: jet.rutgers@ing.nl Website: www.ingtrustoffice.com
As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge: • the ING Groep N.V. 2016 Annual Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of ING Groep N.V. and the enterprises included in the consolidation taken as a whole; and
Changes in Internal Controls over Financial Reporting In the assessment of the internal control over financial reporting for the year ended December 31, 2015, ING Group disclosed a material weakness related to the determination of specific accounting policies for certain aspects of the “anchor investment transaction” undertaken in connection with the July 2014 IPO of NN Group. ING remediated this material weakness by revising and clarifying its accounting policy controls related to complex divestiture transactions. With regards to transactions with a high degree of accounting complexity, ING enhanced the identification, evaluation and documentation of alternative accounting considerations and policy judgements, including the communication and dialogue throughout the chain of management and with the Audit Committee. Furthermore, based upon self-assessment of in-house accounting skills against transactions, management has applied additional technical skills and resources to such transactions, as appropriate.
Because if its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of ING Groep N.V. as of December 31, 2016, and the related consolidated statements of profit and loss, comprehensive income, cash flows and changes in equity for the year ended December 31, 2016, and our report dated March 13, 2017 expressed an unqualified opinion on those consolidated financial statements.
ING is a global financial institution with a strong European base. Its more than 54,000 employees offer retail and wholesale banking services to customers in more than 40 countries. More than 70% of ING’s employees work outside of the Netherlands, approximately 70% of total income is earned outside of the Netherlands and more than 95% of the investor base is non-Dutch.
Total direct compensation ING aims to provide total direct compensation levels which, on average, are at the median of the markets in which we operate, benchmarked against relevant peer groups.
Variable remuneration, where applicable, is primarily focused on long-term value creation and based on individual, business line and bank-wide performance criteria.
For Identified Staff (i.e. staff that are considered to have a material impact on the risk profile of ING, as selected on the basis of the Regulatory Technical Standards developed by the European Banking Authority,) a maximum of 60% of total variable remuneration is awarded upfront. The remaining part of the total variable remuneration (a minimum of 40%) is deferred. It is subject to a tiered vesting schedule over a period of three years. Both the upfront part and the deferred part are delivered at a maximum of 50% in cash and a minimum of 50% in shares (or other equity-linked instruments).
The pre-award risk assessment process aims to consider the full range of any current and potential future risks. As part of this process, ING takes into account both company, business line and individual performance. In addition, it applies a solvency test and a RoE test. Risk requirements are set for all Identified Staff holding risk taker roles, setting the minimum standard to be reached during the performance year. Deviation from this may lead to full or partial reduction of variable remuneration via a so called risk modifier.
Remuneration policy for the Executive Board The Executive Board remuneration policy is in line with the remuneration principles that apply to all staff, consisting of a combination of fixed and variable remuneration (together “total direct compensation”), including pension arrangements and benefits as described below.
Supervisory Board discretion to review the policy and the remuneration paid Within the Executive Board remuneration policy as adopted by the AGM and as described here, the Supervisory Board annually determines the actual remuneration for the Executive Board members based on the advice given by the Supervisory Board Remuneration Committee.
• Enhanced overall organisation of the Finance and Risk functions in part through progress on the target operating model projects for risk and finance and through leadership planning combined with management delayering.
• Moje ING in Poland for managing personal finances: in 2016 the number of users increased fourfold compared to 2015.
• Improved ING’s innovation capabilities through partnering with more than 65 fintechs and ongoing internal efforts such as training more than 2,000 professionals in ING’s own innovation methodology called PACE.
Sustainability • Sustainable transitions financed increased to EUR 34.3 billion (2020 ambition: EUR 35 billion of sustainable transitions).
• Increased CET1 ratio of ING Group and ING Bank to 14.2% and 12.6% respectively. • Underlying operating expenses (excluding regulatory costs) were stable at
The table below shows the remuneration awarded to the individual members of the Executive Board with respect to the performance years 2016, 2015 and 2014.
Total direct compensation of the individual members of the Executive Board amounts in thousands of euros amount number of shares amount number of shares amount number of shares Ralph Hamers
The other emoluments amounted in 2016, 2015 and 2014 to the following costs:
Long-term incentives awarded in previous years In 2016, no long-term incentives (other than the shares disclosed in the first table on page 102), were awarded to the Executive Board members.
Shares Granting date Vesting date Nr. of shares granted Nr. of shares vested Vesting price
Executive Board. 2 Upfront or deferred share units of Ralph Hamers are cash settled instruments, the ultimate value of which will be based on ING Group’s share price at the vesting date.
Shares Deferred shares are shares conditionally granted, with the final shares awarded in three years (tiered), of which the ultimate value of each deferred share will be based on ING’s share price on the vesting date.
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2016, 2015 and 2014.
2016 Remuneration Supervisory Board The table below shows the remuneration, including attendance per Supervisory Board member.
Compensation of former members of the Supervisory Board who are not included in the table above amounted to nil in 2016, 62,000 in 2015 and EUR 309,000 in 2014.
Edward Boeijenga W. (Wim) van den Brink G.F. (Gerard) Dekkers P.E. (Egon) Gijsbers Michiel van Lagen Arie Noomen M.A. (Margriet) Pel Wouter Rietveld Michel Rutte Marinus Stoffers Erik Timmerman
Consolidated annual accounts Consolidated statement of financial position 111 Consolidated statement of profit or loss 112 Consolidated statement of comprehensive income 114 Consolidated statement of changes in equity 115 Consolidated statement of cash flows 118 Notes to the consolidated annual accounts 121 Notes to the accounting policies Reporting entity 121 Authorisation of the Consolidated annual accounts 121 Basis of preparation of the Consolidated annual accounts 121 1 Accounting policies 121 Notes to the Consolidated statement of financial position 2 Cash and balances with central banks 140 3 Loans and advances to banks 140 4 Financial assets at fair value through profit or loss 140 5 Investments 142 6 Loans and advances to customers 145 7 Investments in associates and joint ventures 147 8 Property and equipment 149 9 Intangible assets 150 10 Other assets 152 11 Assets held for sale 153 12 Deposits from banks 154 13 Customer deposits 154 14 Financial liabilities at fair value through profit or loss 155 15 Provisions 156 16 Other liabilities 157 17 Debt securities in issue 158 18 Subordinated loans 158 19 Equity 160 Notes to the Consolidated statement of profit or loss 20 Net interest income 168 21 Net commission income 169 22 Valuation results and net trading income 169 23 Investment income 171 24 Result on disposal of group companies 171 25 Other income 172 26 Staff expenses 172 27 Other operating expenses 175 28 Discontinued operations 177 29 Earnings per ordinary share 180 30 Dividend per ordinary share 181
Additional information Risk factors 345 Additional Pillar 3 information 366 Non-financial appendix 426 Non-GAAP measures 444 Glossary 445 General information 456
− designated as at fair value through profit or loss 12,266 12,616 13,551
Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies in 2016.
ING Group Annual Report 2016 114 in EUR million 2016 2015 2014 Net result (before non-controlling interests) 4,726 4,413 1,440
Items that may subsequently be reclassified to the statement of profit or loss: Unrealised revaluations available-for-sale investments and other revaluations 61 –414 6,981
Realised gains/losses transferred to the statement of profit or loss –146 –92 –139
Coupon on Undated subordinated notes issued by NN Group –19 –19 –15 –34
Dividends –44 –44 Impact of issuance Undated subordinated notes issued by NN Group 986 986
Changes in: – loans and advances to banks, not available on demand –1,162 6,766 3,360
Net cash flow from/(used in) operating activities 8,553 10,577 12,019 Net cash flow from/(used in) investing activities 31 6,134 4,196 –7,419
Cash and cash equivalents at end of year 32 16,164 20,379 17,113 1 Result before tax includes results from continuing operations of EUR 5,903 million (2015: EUR 6,172 million; 2014: EUR 3,707 million) as well as results from discontinued operations of EUR 439 million (2015: EUR 21 million; 2014: EUR –1,025 million). 2 Changes in cash flows of Loans and advances to customers and Customer deposits are not impacted by the change in accounting policies, as described in Note 1
4 Disposals and redemptions – associates and joint ventures includes EUR 1,016 million proceeds on the further sale of NN Group shares in January 2016 resulting in loss of significant influence over NN Group (2015: EUR 995 million proceeds on the further sale of NN Group shares in September 2015; 2014: EUR 1,940 million proceeds from the sale of Voya shares in September and November 2014).
Comparative amounts in the Consolidated statements of financial position are impacted in the line items Loans and advances to customers, Total assets, Customer deposits and Total liabilities. These line items increase by EUR 163,464 million and EUR 185,801 million as at 31 December 2015 and 31 December 2014 respectively.
• The Consolidated statement of profit or loss is changed as follows: • The order of line items presented is changed to present the components of ‘Total income’ more in line with the core business of ING; • Valuation results on non-trading derivatives and Net trading income have been combined into one line; • Interest income on trading portfolio has been split into two lines: ‘Interest income on trading derivatives’ and ‘Interest income on other trading portfolio’; and • Interest expense on trading liabilities has been split into two lines: ‘Interest expense on trading derivatives’ and ‘Interest expense on other trading portfolio’. • The Consolidated Statement of Cash Flows
• The defined contribution payment for pension plans was previously presented in ‘Adjusted for: other’ and is now presented in ‘provisions and other liabilities’. Comparatives have been adjusted accordingly.
c) Changes in IFRS effective in 2016 ING Group has applied a number of interpretations and amendments to standards for the first time for the annual periods beginning on or after 1 January 2016. Apart from the accounting policy change described above, the implementation of these changes had an insignificant impact on the consolidated financial position, net result, other comprehensive income and related disclosures of ING Group. ING Group has not early adopted any other standard, interpretation or amendment which has been issued, but is not yet effective.
IFRS 9 ‘Financial Instruments’ IFRS 9 ‘Financial Instruments’ was issued by the IASB in July 2014 and endorsed by the EU in November 2016. IFRS 9 will replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets, and hedge accounting. The new requirements become effective as of 1 January 2018. ING Group has decided to apply the classification, measurement, and impairment requirements retrospectively by adjusting the opening balance sheet and opening equity at 1 January 2018, with no restatement of comparative periods. ING has also chosen not to early adopt changes introduced by IFRS 9 for financial liabilities where movements in own credit for financial liabilities designated at fair value through profit or loss will be presented in other comprehensive income.
Two criteria are used to determine how financial assets should be classified and measured at Amortised Cost, Fair Value through Other Comprehensive Income (FVOCI) or Fair Value through Profit and Loss (FVPL): 1. The Business Model assessment is performed to determine how a portfolio of financial instruments as a whole is managed in order to classify it as Hold to Collect, Hold to Collect & Sell, or Other Business Model; and 2. Contractual cash flow characteristics test is performed to determine whether the financial instruments give rise to cash flows that are Solely Payments of Principal and Interest (SPPI).
Hedge Accounting The IFRS 9 hedge accounting requirements aim to simplify general hedge accounting requirements. Furthermore, IFRS 9 aims to align hedge accounting more closely with risk management. All micro hedge accounting strategies as well as the macro cash flow hedge accounting are in scope of IFRS 9. Macro fair value hedging is not in scope of IFRS 9.
ING Group performed an assessment of the impact of the new hedge accounting requirements. Based on the outcome of this assessment, ING Group has made a decision to continue applying IAS 39 for hedge accounting including the application of the EU carve out as explicitly permitted by IFRS 9. ING Group will implement the revised hedge accounting disclosures as required by IFRS 7 ‘Financial Instruments: Disclosures’ as per 1 January 2018.
e) Critical accounting policies ING Group has identified the accounting policies that are most critical to its business operations and to the understanding of its results. These critical accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to loan loss provisions, goodwill impairments, provisions, and the determination of the fair values of financial assets and liabilities. In each case, the determination of these items is fundamental to the financial condition and results of operations, and requires management to make complex judgements based on information and financial data that may change in future periods. As a result, determinations regarding these items involve the use of assumptions and subjective judgements as to future events and are subject to change, as the use of different assumptions or data could produce significantly different results. For a further discussion of the application of these accounting policies, reference is made to the applicable notes to the consolidated financial statements and the information in section f) ‘Principles of valuation and determination of results’.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment, are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Current observable data may include changes in unemployment rates, property prices, and commodity prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
Exchange rate differences in the statement of profit or loss are generally included in ‘Valuation results and net trading income’. Reference is made to Note 22 ‘Valuation results and net trading income’, which discloses the amounts included in the statement of profit or loss. Exchange rate differences relating to the disposal of available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned below, in Group companies relating to the disposals of group companies, any exchange rate difference deferred in equity is recognised in the statement of profit or loss in ‘Result on disposal of group companies’. Reference is also made to Note 19 ‘Equity’, which discloses the amounts included in the statement of profit or loss.
Recognition of financial liabilities Financial liabilities are recognised on the date that the entity becomes a party to the contractual provisions of the instrument. Such contracts generally are not recognised unless one of the parties has performed or the contract is a derivative contract not exempted from the scope of IAS 39.
Transaction costs on initial recognition are expensed as incurred. Interest income and expense from financial instruments is classified at fair value through profit or loss is recognised in Interest income and Valuation results and net trading income in the statement of profit or loss, using the effective interest method.
Dividend income from equity instruments classified at fair value through profit or loss is generally recognised in Investment income in the statement of profit or loss when the dividend has been declared. For derivatives reference is made to the ‘Derivatives and hedge accounting’ section.
Credit risk management classification Credit risk management disclosures are provided in the section ‘Risk management – Credit risk’ paragraph ‘Credit risk categories’. The relationship between credit risk classifications in that section and the consolidated statement of financial position classifications above is explained below: • Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING Group has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk classification mainly relates to the statement of financial position classification Financial assets at fair value through profit or loss (trading assets and non-trading derivatives) and to securities financing; • Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity and among others relates to the statement of financial position classifications Loans and advances to banks and Loans and advances to customers; • Lending risk arises when ING Group grants a loan to a customer, or issues guarantees on behalf of a customer and mainly relates to the statement of financial position classification Loans and advances to customers and off-balance sheet items e.g. obligations under financial guarantees and letters of credit; • Investment risk comprises the credit default and migration risk that is associated with ING Group’s investment portfolio and mainly relates to the statement of financial position classification Investments (available-for-sale and held-to-maturity); and
Maximum credit risk exposure The maximum credit risk exposure for items in the statement of financial position is generally the carrying value for the relevant financial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Reference is made to Note 44 ‘Contingent liabilities and commitments’ for these off-balance sheet items. Collateral received is not taken into account when determining the maximum credit risk exposure.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU carve-out to its retail operations. The net exposures of retail funding (savings and current accounts) and retail lending (mortgages) are hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages. Changes in the fair value of the derivatives are recognised in the statement of profit or loss, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
Non-trading derivatives that do not qualify for hedge accounting Derivative instruments that are used by the Group as part of its risk management strategies, but which do not qualify for hedge accounting under ING Group’s accounting policies, are presented as non-trading derivatives. Non-trading derivatives are measured at fair value with changes in the fair value taken to the statement of profit or loss.
In certain circumstances ING grants borrowers postponement and/or reduction of loan principal and/or interest payments for a temporary period of time to maximise collection opportunities, and if possible, avoid default, foreclosure, or repossession. When such postponement and/or reduction of loan principal and/or interest payments is executed based on credit concerns it is also referred to as forbearance. In general, forbearance represents an impairment trigger under IFRS. In such cases, the net present value of the postponement and/or reduction of loan and/or interest payments is taken into account in the determination of the appropriate level of Loan loss provisioning as described below. If the forbearance results in a substantial modification of the terms of the loan, the original loan is derecognised and a new loan is recognised at its fair value at the modification date. The Group determines whether there has been a substantial modification using both quantitative and qualitative factors.
When a loan is uncollectable, it is written off against the related loan loss provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised in the statement of profit or loss.
Deferred tax related to fair value remeasurement of available-for-sale investments and cash flow hedges, which are recognised directly in equity, is also recognised directly in equity and is subsequently recognised in the statement of profit or loss together with the deferred gain or loss.
Other assets Investment property Investment properties are recognised at fair value at the balance sheet date. Changes in the carrying amount resulting from revaluations are recognised in the statement of profit or loss. On disposal, the difference between the sale proceeds and carrying value is recognised in the statement of profit or loss.
Property developed and under development for which ING Group has the intention to sell the property under development after its completion and where there is not yet a specifically negotiated contract is measured at direct construction cost incurred up to the balance sheet date, including borrowing costs incurred during construction and ING Group’s own directly attributable development and supervision expenses less any impairment losses. Profit is recognised using the completed contract method (on sale date of the property). Impairment is recognised if the estimated selling price, less applicable variable selling expenses is lower than carrying value.
When a group of assets that is classified as held for sale represents a major line of business or geographical area the disposal group classifies as discontinued operations. Upon classification of a business as held for sale and discontinued operations the individual income and expenses are classified to Total net result from discontinued operations instead of being presented in the usual line items in the Consolidated statement of profit or loss. All comparative years in the Consolidated statement of profit or loss are restated and presented as discontinued operations for all periods presented. Furthermore, the individual assets and liabilities are presented in the Consolidated statement of financial position as Assets and liabilities held for sale and are no longer included in the usual line items in the Consolidated statement of financial position. Changes in assets and liabilities as a result of classification as held for sale are included in the notes in the line Changes in composition of the group and other changes.
Changes in plan assets that effect Shareholders’ equity and/or Net result, include mainly: • return on plan assets using a high quality corporate bond rate at the start of the reporting period which are recognised as staff costs in the statement of profit or loss; and • remeasurements which are recognised in Other comprehensive income (equity).
All interest income and expenses from trading positions and non-trading derivatives are classified as interest income and interest expenses in the statement of profit or loss. Changes in the ‘clean fair value’ are included in Valuation results and net trading income.
Statement of cash flows The statement of cash flows is prepared in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the result before tax is adjusted for those items in the statement of profit or loss and changes in items per the statement of financial position, which do not result in actual cash flows during the year.
In 2016, the decrease in Cash and balances with central banks is mainly as a result of the lowering of excess liquidity.
As at 31 December 2016, Loans include receivables related to securities in reverse repurchase transactions amounting to EUR 2,992 million (2015: EUR 1,092 million) and receivables related to finance lease contracts amounting to EUR 88 million (2015: EUR 114 million). Reference is made to Note 42 ‘Transfer of financial assets’ for information on securities lending as well as sale and repurchase transactions. Reference is made to Note 6 ‘Loans and advances to customers’ for information on finance lease receivables.
ING Group’s total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 96,062 million (2015: EUR 101,874 million) is specified as follows by type of exposure: Available-for-sale investments Held-to-maturity investments Loans and advances to customers Loans and advances to banks Total 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Government bonds 41,985 46,104 6,688 5,500 858 874 49,531 52,478 Sub-sovereign, Supranationals and Agencies 20,484 20,337 1,613 1,619 267 297 22,364 22,253
Exchange rate differences –72 27 –16 469 –19 –11 –107 485 Changes in the composition of the group and other changes 6 –6 –15 –15
Netherlands1,2 International2 Total 2016 2015 2016 2015 2016 2015 Loans to, or guaranteed by, public authorities1 27,746 30,912 18,634 18,214 46,380 49,126
Loan loss provisions –2,349 –2,900 –2,829 –2,872 –5,178 –5,772 1 The comparative amounts, as at 31 December 2015, are adjusted. Total Loans and advances to customers, as at 31 December 2015, increased by EUR 163.5 billion from EUR 537.3 billion to EUR 700.8 billion mostly as a result of an increase in Corporate loans by EUR 146.1 billion from EUR 170.2 billion to EUR 316.2 billion. Reference is made to Note 1 ‘Accounting policies’ – Change in accounting policies and Changes in presentation in 2016.
Netherlands International Total 2016 2015 2016 2015 2016 2015 Loans to, or guaranteed by, public authorities 7 2 7 2
The Increase in loan loss provisions is presented as Addition to loan loss provisions in the Consolidated statement of profit or loss.
Disposals In 2016, Disposals of EUR 54 million is mainly attributable to the sale of Enterprise Center of EUR 40 million and capital repayment CBRE Asia Value Fund of EUR 10 million.
Reclassifications - Transfers to and from Investment properties 8 1 - Transfers to and from Other assets 4
Net carrying value as at 31 December 323 263 692 708 1,015 971 9 Intangible assets
Net carrying value as at 31 December 903 985 571 567 10 15 1,484 1,567
Goodwill Goodwill is allocated to groups of CGUs as follows: Method used for recoverable amount Discount rate Long term growth rate Goodwill Goodwill
As of 2016, the amortisation period for capitalised software is changed from three to five years. The change is applied prospectively. The change results in a lower charge to the statement of profit or loss for the year. The change has no significant impact on the statement of profit or loss for the year ended 31 December 2016 and is not expected to have a significant impact on the statement of profit or loss of ING Group in future years. Amortisation of software and other intangible assets is included in the statement of profit or loss in other operating expenses. Reference is made to Note 27 ‘Other operating expenses’.
During 2016, ING Group sold its remaining shares in NN Group resulting in a net profit of EUR 448 million which is recognised in the statement of profit or loss in the line ‘Net result from disposal of discontinued operations’.
Reference is made to Note 28 ‘Discontinued operations’ and Note 51 ‘Other events’.
Liabilities 12 Deposits from banks Deposits from banks include non-subordinated debt from banks, except for amounts in the form of debt securities.
ING Group Annual Report 2016 155 14 Financial liabilities at fair value through profit or loss
Non-trading derivatives 2016 2015 Derivatives used in: − fair value hedges 1,888 2,411
For additional information, reference is made to the Parent company annual accounts, Note 5 ‘Subordinated loans’.
In July 2014, a first tranche of EUR 450 million of the mandatorily exchangeable subordinated notes was exchanged into NN Group shares. In June 2015, a second tranche of EUR 337.5 million of the mandatorily exchangeable subordinated notes was exchanged into 13.6 million NN Group ordinary shares and comprised a non-cash transaction. In February 2016, the remaining tranche, of EUR 337.5 million, was mandatorily exchanged. For further information, reference is made to Note 51 ‘Other events’.
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. Ordinary shares are listed on various stock exchanges. The par value of ordinary shares is EUR 0.01 as of 26 July 2016, the date of amendment of the Articles of Association of ING Groep N.V. (2015 and 2014: EUR 0.24). The authorised ordinary share capital of ING Groep N.V. currently consists of 14,729 million ordinary shares. As at 31 December 2016, 3,878 million ordinary shares were issued and fully paid.
The conversion of ING Groep N.V. depositary receipts for shares into ING Groep N.V. ordinary shares took place on 26 July 2016. On the same date, the related changes to the Articles of Association, including the reduction of the nominal value of the shares from EUR 0.24 to EUR 0.01, were implemented.
The holder of a depositary receipt was entitled to receive from ING Trust Office payment of dividends and distributions corresponding to the dividends and distributions received by ING Trust Office on an ordinary share.
Ordinary shares held by ING Group (Treasury shares) As at 31 December 2016, 0.0 million ordinary shares (2015: 1.5 million and 2014: 4.3 million - depositary receipts for ordinary shares) of ING Groep N.V. with a par value of EUR 0.01 (2015 and 2014: EUR 0.24) are held by ING Groep N.V. or its subsidiaries. The obligations with regard to the existing stock option plan and the share plans will be funded either by cash or by newly issued shares at the discretion of ING Group.
Realised gains/losses transferred to the statement of profit or loss –146 –94 –133
Reference is made to Note 51 ‘Other events’, for further information on NN Group divestment transactions.
As at 31 December 2016, an amount of EUR 1,325 million (2015: EUR 1,201 million; 2014: EUR 1,070 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN is included.
Furthermore there are restrictions to the ability of subsidiaries, associates and joint ventures to distribute reserves to ING Groep N.V. as a result of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate.
Notes to the Consolidated statement of profit or loss 20 Net interest income
In 2014, the decrease in total average assets, combined with an improvement in the net interest margin lead to an increase of EUR 603 million in net interest income. The decrease in total average assets (with the cash pool balances still calculated on a net basis) was partly attributable to the deconsolidation of ING Vysya and the additional transfers of assets of WestlandUtrecht Bank to NN Group.
In 2016, total interest income and total interest expense for non-trading derivatives used in hedge accounting and items not valued at fair value through profit or loss amounts to EUR 26,652 million and EUR 13,498 million respectively (2015: EUR 27,682 million and EUR 15,207 million; 2014: EUR 28,270 million and EUR 16,569 million).
Included in Other, are commission fees of EUR 202 million (2015: EUR 171 million; 2014: EUR 163 million) in respect of bank guarantees, commission fees of EUR 44 million (2015: EUR 30 million; 2014: EUR 23 million) in respect of underwriting syndication loans, structured finance fees of EUR 110 million (2015: EUR 87 million; 2014: EUR 89 million), and collective instruments distributed but not managed by ING of EUR 145 million (2015: EUR 145 million; 2014: EUR 19 million).
Change in fair value of assets and liabilities (hedged items) –167 –1,229 536
In 2016, Valuation results and net trading income includes EUR 33 million related to warrants on the shares of Voya and NN Group (2015: EUR –19 million on Voya and NN Group; 2014: EUR 180 million on Voya). Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’.
In 2016, 2015, and 2014 the result on divestments of NN Group and the divestment of Voya was not included above but included in Net result from disposal of discontinued operations. Reference is made to Note 28 'Discontinued operations', Note 46 ‘Consolidated companies and businesses acquired and divested’ and Note 51 ‘Other events’.
Continuing operations - average number of employees at full time equivalent basis 13,660 14,586 15,209 38,283 38,134 40,736 51,943 52,720 55,945
Stock option and share plans ING Groep N.V. has granted option rights on ING Groep N.V. shares and conditional rights on shares to a number of senior executives (members of the Executive Board, general managers and other officers nominated by the Executive Board), and to a considerable number of employees of ING Group. The purpose of the option and share schemes, apart from promoting a lasting growth of ING Group, is to attract, retain and motivate senior executives and staff.
In 2016, 61,532 share awards (2015: nil; 2014: nil) were granted to the members of the Executive Board of ING Groep N.V., 170,749 share awards (2015: 106,013; 2014: 206,650 including NN Group) were granted to the Management Board of ING Bank. To senior management and other employees 6,590,039 share awards (2015: 6,088,240; 2014: 6,814,308 including NN Group) were granted. In 2014, all outstanding ING Groep N.V. share awards held by the Management Board, senior management and other employees of NN Group N.V. were converted into awards on NN Group N.V. shares. The conversion was performed at an exchange factor such that the fair value of the outstanding awards was unchanged. The outstanding option awards on ING Groep N.V. shares which are fully vested, remained unchanged. As of 2014, new awards to the Management Board, senior management and other employees of NN Group are all based on NN Group N.V. shares.
Cash received from stock option exercises for the year ended 31 December 2016 is EUR 7 million (2015: EUR 16 million; 2014: EUR 24 million).
ING Group Annual Report 2016 176 1 Total Group's auditors fees for 2015, including charges related to NN Group until deconsolidation at the end of May 2015, amounted to EUR 24 million (2014: EUR
Addition/(unused amounts reversed) of provision for reorganisations and relocations Included in Addition/(unused amounts reversed) of provision for reorganisations and relocations in 2016, is an amount of EUR 1,032 million comprising a pre-tax redundancy provision for the intended workforce reductions related to the intended digital transformation programmes as announced on ING’s Investor Day on 3 October 2016. For further information on Addition/(unused amounts reversed) of provision for reorganisations and relocations, reference is made to the disclosure on the reorganisation provision in Note 15 ‘Provisions’.
Other Included in Other operating expenses – Other in 2016, is a net charge amounting to EUR 114 million ( 2015: EUR 76 million) for the provision recognised in relation to floating interest rate derivatives that were sold in the Netherlands. Also included in this line, is a charge related to the provision recognised for medical insurance plan damages for retired employees of ING Belgium. Reference is made to Note 15 ‘Provisions’ and Note 45 ‘Legal proceedings’.
Total net result from discontinued operations (before non-controlling interests) 441 –122 –1,296 1 The tax effect on the result on disposal of discontinued operations in 2016 is EUR 2 million (2015: nil; 2014: EUR 114 million).
In 2015, the statement of profit or loss of ING Group included, in the line Net result from discontinued operations, the net result of NN Group until deconsolidation at the end of May 2015 and a dividend of EUR 59 million received from NN Group.
Net result from discontinued operations - 793 746 1 NN Group. 2 NN Group and Voya.
Financing cash flow 526 3,834 1 NN Group. 2 NN Group and Voya.
In 2015 and 2014, Total income and Total expenses of NN Group, to which the non-controlling interest in NN Group related, were all presented in the Consolidated statement of profit or loss in the line ‘Net result from discontinued operations’.
Notes to the consolidated statement of cash flows 31 Net cash flow from investing activities Information on the impact of companies acquired or disposed is presented in Note 46 ‘Consolidated companies and businesses acquired and divested’.
As of 1 January 2016, Czech Republic, previously fully reported within Wholesale Banking is now segmented to both Retail and
Underlying result before taxation 7,095 –67 7,028 7,028 Taxation 1,993 –17 1,977 1,977
Net result IFRS (continuing operations) 4,227 –50 4,177 33 4,210 Total net result from discontinued operations NN Group 441 441
Net result IFRS (continuing operations) 2,744 –138 2,606 52 2,657 Total net result from discontinued operations NN Group 65 65
Net result IFRS attributable to equity holder of the parent 2,744 –138 2,606 –1,354 1,251 1 Comprised for the most part the funding charges of ING Groep N.V. (Holding). 2 Divestments in 2014 reflected the result on the deconsolidation of ING Vysya following changes to the governance structure. 3 Special items in 2014 included the impact (after tax) of the charges for making the Dutch Defined Benefit pension fund financially independent, the bank tax related to the SNS Reaal nationalisation and additional charges related to the restructuring programmes in Retail Netherlands announced before 2013. 4 Insurance Other comprised mainly the net result relating to warrants on the shares of Voya Financial and the net result on the sale of SulAmérica S.A.
IFRS (continuing operations) 15,560 11,853 971 79 2,657 Total net result from discontinued operations –1,406
– Total investment and other income 205 195 104 195 1,070 –127 1,642
– Additions to loan loss provision 310 215 –13 120 240 103 974
Underlying result before taxation 2,235 1,215 1,367 607 700 1,101 –197 7,028 Taxation 555 353 426 173 125 335 10 1,977
– Additions to loan loss provision 654 166 77 99 176 175 1,347
Underlying result before taxation 1,744 1,108 1,152 511 506 1,388 –451 5,959 Taxation 469 315 382 174 79 367 –117 1,668
IFRS statements of financial position by segment are not reported internally to, and not managed by, the chief operating decision maker.
Netherlands Netherlands ING Bank N.V. Wholesale banking/Retail banking 13,660 5,767 295,120 1,341 343
UK Branch of ING Bank N.V. Wholesale banking 599 504 29,830 290 154
Hungary Branch of ING Bank N.V. Wholesale banking 152 37 1,358 –1 3
Slovakia Branch of ING Bank N.V. Wholesale banking 400 14 715 3 1
Ireland Branch of ING Bank N.V. Wholesale banking 42 53 1,910 54 7
Japan Branch of ING Bank N.V. Wholesale banking 33 36 3,702 22 9
Singapore Branch of ING Bank N.V. Wholesale banking 502 194 25,780 22 5
Philippines Branch of ING Bank N.V. Wholesale banking 423 17 402 4 –2
Taiwan Branch of ING Bank N.V. Wholesale banking 32 15 2,484 3 1
Malaysia Branch of ING Bank N.V. Wholesale banking 5 – 3 – –
Netherlands Netherlands2,3 ING Bank N.V. Wholesale banking/Retail banking 14,586 5,185 471,510 818 365
Belgium Belgium ING België N.V. Wholesale banking/Retail banking 9,645 3,123 130,916 1,142 341
Rest of Europe Poland ING Bank Slaski S.A. Wholesale banking/Retail banking 8,713 903 25,666 317 60
1 Public subsidies received, as defined in article 89 of the CRD IV, amounted to EUR 3 million in 2015.( 2014: EUR 2 million). 2 Included in Total assets – Netherlands, is EUR 2,153 million related to the Investment in associate held for sale, NN Group. 3 Total assets, as at 31 December 2015, is adjusted as a result of a change in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies in 2016.
Changes in the present value of the defined benefit obligation and other post-employment benefits for the period were as follows: Defined benefit obligation Other post-employment
Remeasurements: Actuarial gains and losses arising from changes in financial assumptions 498 218
The change in the remeasurement of the net defined benefit asset/liability in 2015 is mainly as a result of deconsolidation of NN Group and an increase in discount rates.
The accumulated amount of remeasurements recognised directly in Other comprehensive income (equity) is EUR –483 million (EUR – 371 million after tax) as at 31 December 2016 (2015: EUR –507 million, EUR –306 million after tax).
As at 31 December 2016 the various defined benefit plans did not hold any direct investments in ING Groep N.V. (2015: nil).
Net defined benefit asset/liability Other post-employment benefits Other Total 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014
Defined benefit plans In 2014, a charge of EUR 871 million was recognised in Effect of curtailment or settlement related to the Dutch defined benefit plan settlement which resulted in the ING Pension Fund being financially independent from ING.
Defined contribution plans Most group companies sponsor defined contribution pension plans. The assets of all ING Group’s defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of remuneration. For the defined contribution scheme in the Netherlands, the premium paid is also dependant on the interest rate developments and DNB’s methodology for determining the ultimate forward rate. These plans do not give rise to provisions in the statement of financial position, other than relating to short-term timing differences included in other assets/liabilities.
Unused tax losses carried forward recognised as a deferred tax asset 319 591
As at 31 December 2016 and 31 December 2015, ING Group N.V. had no significant temporary differences associated with the parent company’s investments in subsidiaries as any economic benefit from those investments will not be taxable at parent company level.
The weighted average statutory tax rate in 2016 does not significantly differ compared to 2015.
Tax Contingency The contingent liability in connection with taxation in the Netherlands refers to a possible obligation arising from the deduction from Dutch taxable profit of losses incurred by ING Bank in the United Kingdom in previous years. The existence of this obligation will be confirmed only by the occurrence of future profits in the United Kingdom.
When a group of financial assets and financial liabilities are managed on the basis of their net risk exposures, it measures the fair value of a group of financial assets and liabilities on net portfolio basis.
Valuation Adjustments Valuation adjustments are integral part of the fair value. They are included as part of the fair value to provide better estimation of market exit value on measurement date. ING applies various valuation adjustments including Bid-Offer adjustments, Credit Valuation Adjustments (CVA), Debt Valuation Adjustments (DVA), Model Risk Valuation Adjustments, Collateral Valuation Adjustment (CollVA) and Funding Valuation Adjustment (FVA). The combination of Credit Valuation adjustments is called Bilateral Valuation Adjustment (BVA).
• Model risk occurs in a valuation model when the model does not produce the correct valuation due to mis-specification, misapplication, or incorrect implemention of the model. Potential adjustments are determined during new product approval or model review process.
Loans and advances to banks The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates including appropriate spreads offered for receivables with similar characteristics, similar to Loans and advances to customers described below.
Financial assets at fair value through profit or loss and Investments Derivatives Derivatives contracts can either be exchange-traded or over the counter (OTC). The fair value of exchange-traded derivatives is determined using quoted market prices in an active market and those derivatives are classified in Level 1 of the fair value hierarchy. For those instruments not actively traded, fair values are estimated based on valuation techniques. OTC derivatives and derivatives trading in an inactive market are valued using valuation techniques because quoted market prices in an active market are not available for such instruments. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instruments. The principal techniques used to value these instruments are based on discounted cash flows, Black-Scholes option models and Monte Carlo simulation. These valuation models calculate the present value of expected future cash flows, based on ‘noarbitrage ’ principles. These models are commonly used in the financial industry. Inputs to valuation models are determined from observable market data where possible. Certain inputs may not be observable in the market directly, but can be determined from observable prices via valuation model calibration procedures. The inputs used include prices available from exchanges, dealers, brokers or providers of pricing, yield curves, credit spreads, default rates, recovery rates, dividend rates, volatility of underlying interest rates, equity prices, and foreign currency exchange rates. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus data, where available.
Debt securities Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an exchange, dealer, broker, industry group, pricing service, or regulatory service. The quoted prices from non-exchange sources are assessed to determine if they are tradable prices or consensus prices derived from in-house models utilising a variety of inputs. This distinction determines where it falls in the fair value hierarchy.
Debt securities in issue The fair value of debt securities in issue is generally based on quoted market prices, or if not available, on estimated prices by discounting expected future cash flows using a current market interest rate and credit spreads applicable to the yield, credit quality and maturity.
Subordinated loans The fair value of publicly traded subordinated loans are based on quoted market prices when available. Where no quoted market prices are available, fair value of the subordinated loans is estimated using discounted cash flows based on interest rates and credit spreads that apply to similar instruments.
In 2016, financial liabilities were transferred out of Level 3 mainly due to the valuation not being significantly impacted by unobservable inputs.
Financial liabilities designated as at fair value through profit or loss –83 –83
Unrealised gains and losses that relate to Available-for-sale investments recognised in Other comprehensive income are included in the Revaluation reserve – Available-for-sale reserve and other.
Of the total amount of financial assets classified as Level 3 as at 31 December 2016 of EUR 2.5 billion (31 December 2015: EUR 2.3 billion), an amount of EUR 1.0 billion (42%) (31 December 2015: EUR 0.9 billion, being 39%) is based on unadjusted quoted prices in inactive markets. As ING does not generally adjust quoted prices using its own inputs, there is no significant sensitivity to ING’s own unobservable inputs.
Furthermore, Level 3 financial assets includes approximately EUR 0.5 billion (31 December 2015: EUR 0.3 billion) which relates to financial assets that are part of structures that are designed to be fully neutral in terms of market risk. Such structures include various financial assets and liabilities for which the overall sensitivity to market risk is insignificant. Whereas the fair value of individual components of these structures may be determined using different techniques and the fair value of each of the components of these structures may be sensitive to unobservable inputs, the overall sensitivity is by design not significant.
Of the total amount of financial liabilities classified as Level 3 as at 31 December 2016 of EUR 1.5 billion (31 December 2015: EUR 1.4 billion), an amount of EUR 0.9 billion (59%) (31 December 2015: EUR 0.7 billion, being 50%) is based on unadjusted quoted prices in inactive markets. As ING does not generally adjust quoted prices using its own inputs, there is no significant sensitivity to ING’s own unobservable inputs.
– Rates 480 602 Option pricing model Interest rate volatility (bps) 21 93
Volatility Volatility is a measure for variation of the price of a financial instrument or other valuation input over time. Volatility is one of the key inputs in option pricing models. Typically, the higher the volatility, the higher value of the option. Volatility varies by the underlying reference (equity, commodity, foreign currency and interest rates), by strike, and maturity of the option. The minimum level of volatility is 0% and there is no theoretical maximum.
Investments in associates and joint ventures are accounted for using the equity method. For further information, reference is made to Note 7 ’Investments in associates and joint ventures’.
Amounts recognised in the statement of profit or loss relating to unrealised gains and losses during the year that relate to Level 3 assets and liabilities are included in the statement of profit or loss as follows: • Impairments on Property in own use are included in Other operating expenses - Intangible amortisation and (reversals) of impairments; and • Changes in the fair value of Investment properties are included in Investment income.
Unrealised gains and losses on Property in own use are included in the Revaluation reserve – Property in own use reserve.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies under the IFRS hedge accounting rules. Derivatives that qualify for hedge accounting under IFRS are classified and accounted for in accordance with the nature of the instrument hedged and the type of IFRS hedge model that is applicable. The three models applicable under IFRS are: fair value hedge accounting, cash flow hedge accounting, and net investment hedge accounting. These are described under the relevant headings below. The company’s detailed accounting policies for these three hedge models are set out in Note 1 ‘Accounting policies’ in the section ‘Principles of valuation and determination of results’.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU carve out of IFRS. The EU ‘carve-out’ for macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the EU carve-out, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. ING Group applies the EU carve-out to its retail operations in which the net exposure of retail funding (savings and current accounts) and retail lending (mortgages) is hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages, using the IFRS provisions.
Statement of financial position – Financial assets and liabilities at fair value through profit or loss
Gains and losses on the effective portions of derivatives designated under net investment hedge accounting are recognised in Shareholders’ equity. The balance in equity is recognised in the statement of profit or loss when the related foreign subsidiary is disposed. The gains and losses on ineffective portions are recognised immediately in the statement of profit or loss.
Remaining assets (for which maturities are not applicable)3 3,143 3,143 1 Includes assets on demand. 2 Includes Other assets and Current and Deferred tax assets as presented in the Consolidated statement of financial position. 3 Included in remaining assets for which maturities are not applicable are property and equipment, and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
– designated as at fair value through profit or loss 256 963 1,112 540 363 3,234
Non-financial liabilities are included based on a breakdown of the amounts per the statement of financial position, by expected maturity. Reference is made to the liquidity risk paragraph in the section ‘Risk Management – Funding and liquidity risk’ for a description on how liquidity risk is managed.
– designated at fair value through profit or loss 381 505 1,627 4,485 5,170 98 12,266
ING Group Annual Report 2016 224 month1 1–3 months 3–12 months 1–5 years Over 5 years
4 Includes Other liabilities, Current and deferred tax liabilities and Provisions as presented in the Consolidated statement of financial position.
In some jurisdictions ING Bank N.V. has an obligation to maintain a reserve with central banks. As at 31 December 2016, the minimum mandatory reserve deposits with various central banks amount to EUR 9,055 million (2015: EUR 8,929 million).
Loans and advances to customers that have been pledged as collateral for Debt securities in issue and for liquidity purposes, amount in the Netherlands to EUR 49 billion (2015: EUR 53 billion), in Germany to EUR 12 billion (2015: EUR 13 billion), in Belgium EUR 5 billion (2015: EUR 5 billion), in Australia to EUR 2 billion (2015: EUR 3 billion) and in the United States to EUR 1 billion (2015: nil).
The tables above do not include assets transferred to consolidated securitisation entities as the related assets remain recognised in the consolidated statement of financial position.
43 Offsetting financial assets and liabilities The following tables include information about rights to offset and the related arrangements. The amounts included consist of all recognised financial instruments that are presented net in the statement of financial position under the IFRS offsetting requirements (legal right to offset and intention to net settle) and amounts presented gross in the statement of financial position but subject to enforceable master netting arrangements or similar arrangement.
Gross amounts of recognised financial liabilities offset in the statement of financial position
Deposits from banks Repurchase, securities lending and similar agreements 102 –95 7 7
Customer deposits 1 Repurchase, securities lending and similar agreements 301 301 74 227
Because of the geographic spread of its business, ING may be subject to tax audits, investigations and procedures in numerous jurisdictions at any point in time. Although ING believes that it has adequately provided for all its tax positions, the ultimate resolution of these audits, investigations and procedures may result in liabilities which are different from the amounts recognised. ING has also recently identified issues in connection with its US tax information reporting and withholding obligations in respect of prior periods. A review of such issues is ongoing, and at this time it is not possible to estimate any financial or other consequences thereof.
ING Bank Turkey has received various claims from (former) customers of legal predecessors of ING Bank Turkey. The claims are based on offshore accounts held with these banks, which banks were seized by the Savings Deposit Insurance Fund (SDIF) prior to the acquisition of ING Bank Turkey in 2007 from Oyak. SDIF has also filed various lawsuits against ING Bank Turkey to claim compensation from ING Bank Turkey, with respect to amounts paid out to offshore account holders so far. ING Bank N.V. has initiated an arbitration procedure against OYAK in which ING Bank seeks to be held harmless for these claims. At this moment it is not possible to assess the outcome of these procedures nor to provide an estimate of the (potential) financial effect of these claims.
In January 2011, the Dutch Association of Stockholders (Vereniging van Effectenbezitters, ‘VEB’) issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank N.V., and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB stated that the impact and the risks of the sub-prime crisis for Fortis and Fortis’ liquidity position were reflected incorrectly in the prospectus. The VEB requested a declaratory decision stating that the summoned parties acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. In March 2016, Ageas, VEB and certain other claimants announced that the claim in relation to Fortis has been settled. Ageas has agreed to pay €1.2 billion to investors as compensation, provided that the Amsterdam Court of Appeal declares the settlement to be binding. According to the settlement documentation, as filed by Ageas with the Court of Appeal in May 2016, the settlement agreement contains a third-party clause by which the banks will also be released from the claims made by VEB and certain other claimants, if the settlement becomes unconditional.
A number of retired employees of ING Belgium have initiated legal proceedings against ASCEL (a non-profit organisation established by ING Belgium that provided medical insurance coverage to current and retired employees till the beginning of 2015 via a subdivision of ASCEL: FMC) and ING Belgium following the decision to externalise this medical insurance coverage which resulted in an increase of premium. Following a summary proceedings in which the initial claim of the retired employees was rejected, proceedings at the Court of first instance have been initiated aiming to either uphold the former insurance coverage or reimburse the increase of premium. In a decision of September 2016, the Court has considered that FMC has validly been closed but that, as the medical coverage qualifies as an insurance contract not linked with the professional activity of the claimants, ING could not unilaterally terminate the agreement between FMC and the pensioners. The Court has yet to determine the amount of damages. The Court decision is subject to appeal. A provision has been taken.
Other For information on transactions related to ING Group’s shareholding in NN Group, reference is made to Note 11 ‘Assets held for sale’, Note 28 ‘Discontinued operations’, Note 49 ‘Related parties’ and Note 51 ‘Other events’.
Divestments effective in 2015 NN Group A number of divestment transactions resulted in a further decrease in the ownership of ING Group in NN Group to 25.75% from 68.14% at 31 December 2014. NN Group was deconsolidated and accounted for as an Investment in associate held for sale. Reference is made to Note 28 ‘Discontinued operations and Note 51 ‘Other events’.
NN Group Following the IPO of NN Group in July 2014, ING Group’s stake reduced to 68.14% . As from 30 September 2014, NN Group was presented as Assets and liabilities held for sale and discontinued operations. Reference is made to Note 51 ‘Other events’.
ING Group Annual Report 2016 236 1. Consolidated ING originated Liquidity management securitisation programmes (Lions) ING Group enters into liquidity management securitisation programmes in order to obtain funding and improve liquidity. Within the programme ING Group sells ING originated assets to a structured entity. The underlying exposures include residential mortgages in the Netherlands, Germany, Belgium, Spain, Italy, and Australia.
ING Bank originated various securitisations with, at 31 December 2016, approximately EUR 77.0 billion (2015: EUR 78.5 billion) of AAA rated notes and subordinated notes, of which approximately EUR 7.2 billion (2015: EUR 7.4 billion) are held by third parties. The underlying exposures are residential mortgages and SME loans. Apart from the third party funding, these securitisations did not impact ING Bank’s consolidated statement of financial position and profit or loss.
In 2015, a number of divestment transactions reduced ING Group’s interest in NN Group, resulting in ING Group losing control over NN Group. NN Group was deconsolidated at the end of May 2015 and accounted for as an Investment in associate held for sale. For further information on transactions with NN Group, reference is made to Associates and joint ventures below and Note 51 ‘Other events’.
Key management personnel compensation Transactions with key management personnel (Executive Board, Management Board and Supervisory Board) and post-employment benefit plans are transactions with related parties. These transactions are disclosed in more detail as required by Part 9 Book 2 of the Dutch Civil Code in the remuneration report included in the annual report. The relevant sections of the remuneration report therefore form part of the annual accounts. For post-employment benefit plans, reference is made to Note 35 ‘Pension and other postemployment benefits’.
Variable compensation 1 Includes their compensation earned in the capacity as Board members. 2 Excluding members that are also members of the Executive Board of ING Groep N.V. 3 In 2016, one new member joined and one member retired 4 The collective fixed allowances consist of two savings allowances applicable to employees in the Netherlands; an individual savings allowance of 3.5% and a collective savings allowance to compensate for loss of pension benefits with respect to salary in excess of EUR 101,519.
Relationship agreement and other agreements NN Group N.V. In 2014, in connection with the initial public offering of NN Group N.V., ING Groep N.V. and NN Group N.V. entered into a Relationship Agreement. The Relationship Agreement contains certain arrangements regarding the continuing relationship between ING Groep N.V. and NN Group N.V. In addition, ING Groep N.V. entered into several other agreements with NN Group N.V. such as a transitional intellectual property license agreement, a joinder agreement, an equity administration agreement, an indemnification and allocation agreement and a Risk Management Programme (RMP) indemnity agreement. In addition, ING Groep N.V. and ING Bank N.V. entered into a Settlement Agreement and an Outsourcing Agreement with NN Re (Netherlands) N.V., a subsidiary of NN Group N.V.
On the banking front, ING Direct USA was sold in 2012, meeting a key requirement of the EC Restructuring Plan.
In September 2014, NN Group was classified as held for sale and discontinued operations. Upon classification, the carrying amount of the disposal group (or group of assets) was compared to NN Group’s fair value less cost to sell. The fair value less cost to sell was lower than the carrying value of the disposal group and as a result goodwill and certain other non-current non-financial assets totalling EUR 470 million were written-off in 2014 and recognised in the statement of profit or loss in the line Net result from classification as discontinued operations. As at 31 December 2014, the subsidiary NN Group was presented as Assets and liabilities held for sale and discontinued operations.
May 2015 – Deconsolidation of NN Group On 26 May 2015, ING Group announced a further sale of 45 million ordinary shares of NN Group. As part of the transaction, NN Group repurchased 5.9 million ordinary shares. The gross proceeds to ING Group from the offering, including the repurchase by NN Group, amounted to EUR 1.1 billion. This transaction reduced the ownership of ING in NN Group to 42.43%, resulting in ING Group losing control over NN Group. The share sale and deconsolidation of NN Group resulted in an after tax loss of EUR 1,224 million in 2015 and was recognised in the statement of profit or loss in the line Net result from disposal of discontinued operations. The transaction had a negative impact of EUR 6,569 million, including the aforementioned loss, on the shareholder’s equity of ING Group. The statement of profit or loss of ING Group included, in the line ‘Net result from discontinued operations’, the result of NN Group until deconsolidation at the end of May 2015.
In 2016, the combined profit related to the sale of NN Group shares amounted to EUR 448 million.
In March 2015, ING Group sold 45.6 million ordinary shares of Voya. ING Group sold 32 million Voya shares in the public offering and in addition to this, ING Group sold 13.6 million shares to Voya. The gross proceeds to ING Group from the public offering and the concurrent repurchase by Voya amounted to EUR 1.8 billion (USD 2.0 billion).
Risk management supports the Executive Board in formulating the risk appetite, strategies, policies, limits and provides a review, oversight and support function throughout ING Group on risk-related items. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, credit spread, and foreign exchange risks), funding & liquidity risk and business risk. Furthermore, ING Group is also 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. The ‘Risk management’ section in the Integrated Annual Report is an integral part of the audited consolidated annual accounts.
Business risk is the exposure to value loss due to fluctuations in volumes, margins and costs, as well as customers' behaviour risk.
The second line of defence consists of oversight functions with a major role for the risk management organisation headed by the Chief Risk Officer (CRO), the ultimate responsible officer. Risk Management at corporate level is responsible for (i) the development of overall policies and guidance, (ii) objectively challenge the execution, management and control processes and (iii) coordinate the reporting of risks and controls by the first line of defence. It also has an escalation/veto power in relation to business activities that are judged to present unacceptable risks to ING Bank.
As part of the integration of risk management into the annual strategic planning process, the MBB annually issues a Planning Letter which provides the corporate strategic direction and addresses key risk issues. Based on the Planning Letter, the business lines and business units develop their business plans which align with the Bank’s strategic direction. The process includes a qualitative and quantitative assessment of the risks involved. As part of the process, strategic limits and risk appetite levels are explicitly discussed. Based on the business plans, the MBB formulates the Strategic Plan which is submitted to the SB for approval.
The local (regional and BU) CRO is responsible for the analysis, control and management of risks across the whole value chain (from front to back office), based on which a robust control structure is maintained. The regional and business unit CROs report both to the ING Bank’s CRO and to the head of their regional area and business unit. This dual reporting system aims to ensure that the local risk management function is independent from the operating functions and that it is aligned with the corporate risk policies and goals.
An independent MV department is one of the cornerstones of ING Bank’s risk model governance. It consists of the process of determining that a model is appropriate for its intended use. It is an on-going process whereby the reliability of the model is verified at different stages during its lifecycle: at conception, before approval, periodically after implementation, and when significant changes to the model are made. The validation process contains a mix of developmental evidence, process verification and outcome analysis.
Risk profile As a global financial institution with a strong European base offering banking services, ING Bank is exposed, to varying degrees of a variety of risks. The main financial risks ING Bank is exposed to can be divided into credit risk (including transfer risk), market risk (including interest rate, equity, real estate, credit spread, and foreign exchange risks), funding & liquidity risk and business risk. Furthermore, ING Bank is exposed to non-financial risks, e.g. operational and compliance risks.
Key risk categories The table below presents the key risk categories (financial as well as non-financial risks) that are associated with ING Bank’s business activities.
Non-financial risks: • Operational risk: the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes reputational risk, as well as legal risk; • Compliance risk: the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with applicable laws, regulations, ING Bank policies and minimum standards and the ING Values as part of the Orange Code.
The recurrence is twofold. One: identification, assessment and review, and update of mitigating measures are done periodically. Two: the periodical monitoring exercise may indicate that new risks are arising, known risks are changing, assessed risk levels are changing, or control measures are not effective enough. Further analyses of these findings may result in renewed and more frequent risk identification, and/or assessment, and/or change of mitigating measures.
Risks can be controlled by mitigating measures that either lower the likelihood the risk occurs, or measures that lower the impact when they occur. The ultimate measure to lower risk is to stop the activity or service that causes the risk (risk avoidance). Risk controlling/mitigating measures are defined and maintained at both Bank wide and local level.
This annual Risk Assessment serves as input when defining the global risk appetite which – in line with its business model and risk ambition – is currently formulated as follows: ING Bank has the ambition to be and remain a strong bank, able to address possible adverse events on its own strengths and resources.
In order to achieve this risk ambition, ING has the following targets: • Have a rating ambition which is in line with the strongest among its peer group; • Be able to restore the capital and liquidity position following a stress situation on its own strength; • Be in a position to meet current and forthcoming regulatory requirements and targets; and • Have a risk profile that compares favourably to its main banking peers.
Non-financial risk For non-financial risks, levels are set according to what ING is willing to tolerate in pursuit of the strategic objectives of the bank, to ensure that the organisation’s actual risk exposure is commensurate with its strategic objectives and that exposure moving beyond the tolerance risk levels is timely identified and acted upon.
Step 4. Monitor and manage underlying risk limits In order to verify that it remains within the risk appetite framework as it is executing its budget, ING reports its risk positions vis-à-vis its limits on a regular basis towards senior management committees. The Risk and Capital Management Report reflecting the exposure of ING against the risk appetite targets is submitted quarterly to the MBB and to the (Risk Committee of the) SB.
Step 2. Scenario parameter setting After determination of the high level scenarios, further elaboration of them is necessary. Scope, assumptions and input parameters such as GDP growth, unemployment rates, interest rates and real estate price changes are defined for the countries involved in the exercise. The parameters are discussed and endorsed in the STSC and subsequently in the BF&RC.
Step 4. Execution of mitigating actions After the MBB has approved the mitigating actions, they need to be executed. Mitigating actions may include, but are not limited to, sales or transfers of assets, reductions of risk limits, intensification of our contacts with regulators or other authorities.
Basel III revisions, CRR/CRD IV and upcoming regulations On 23 November 2016, the European Commission published legislative proposals to amend and supplement certain provisions of the Capital Requirements Directive (CRD), the Capital Requirements Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (the SRM Regulation). The proposals are wide-ranging and may have significant effects on ING, including with regard to the total loss absorbing capacity (TLAC) or the minimum requirement own funds and eligible liabilities (MREL) it must maintain. It is uncertain when the proposals will come into effect, and if so, whether that will be in their current form.
Principles for Effective Risk Data Aggregation and Risk Reporting In January 2013, the Basel Committee published Principles for Effective Risk Data Aggregation and Risk Reporting (also known as BCBS239). BCBS239 consists of fourteen principles to strengthen a bank’s risk data aggregation and risk reporting practices. Collectively implementing these principles will enhance risk management and decision-making processes at banks. Banks indicated as G-SIBs – including ING Bank – were required to implement the principles by 2016.
Top and emerging risks The risks listed below are defined as material existing and emerging risks that may have a potentially significant impact on our financial position or our business model. They may have a material impact on the reputation of the company, introduce volatility in future results of operations or impact ING’s middle and long-term strategy including the ability to pay dividends, maintain appropriate levels of capital or meet capital and leverage ratio targets. An emerging risk is defined as a risk that has the potential to have a significant negative effect on our performance, but currently difficult to quantify the impact on the organisation than for other risk factors that are not identified as emerging risks.
The sustained low interest rate environment in Europe, where central banks held their rates at very low and even negative levels in some countries, negatively impacted short-term as well as long-term market rates. The typical interest rate position at ING Bank is that the duration of the assets is slightly higher than the duration of the liabilities. Given this mismatch, decreasing interest rates are under normal circumstances favourable for the interest income of ING Bank: liabilities reprice more quickly than assets, and therefore the average interest rates paid on liabilities should adapt more quickly to lower market interest rates.
Finally, we also participate in a number of climate change initiatives. For instance, we currently participate within the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD), which is developing voluntary, consistent climaterelated financial risk disclosures for use by companies in providing information to stakeholders.
The following committees are in place to review and approve transactions and policies from a credit risk point of view: • The Global Credit Committee for Transaction Approval (GCC(TA)) is mandated to approve transactions with credit risks. • The Global Credit & Trading Committee Policy (GCTP) which is authorised to approve policies, methodologies and procedures related to credit, trading, country and reputation risks on a high level for ING Bank. GTCP consists of MBB members. • The Credit & Trading Risk Committee (CTRC) is authorised to approve policies, methodologies and procedures related to credit & trading risk on more detailed and operational level (with the exception of issues which are mandated to GCTP) within ING Bank. CTRC consists of MT members of C&TR, Risk Services and Wholesale Banking Lending Services.
• The Models Development Committee (MDC) serves as a technical advisor to CTRC and is a planning body for future model development. The MDC has a delegated mandate to approve credit risk models which cover smaller portfolios.
Credit Risk Appetite and Concentration Risk Framework The credit risk appetite and concentration risk framework enables ING to prevent undesired high levels of credit risk and credit concentrations within various levels of the ING portfolio. Concentration risk is measured based on the credit risk exposure amount. Credit risk exposure is the total amount of outstanding plus the unused portion of commitments. It can be measured on various levels, such as customer, legal or economic one obligor group, product, portfolio, customer type, industry, and country. Where applicable a level is broken down from the consolidated ING Bank level to a local branch/unit level.
Credit risk appetite statements boundaries and concentration limits are set and reviewed on an annual basis. The bank-wide credit risk boundaries and concentration limits are approved by the Risk Committee of the Supervisory Board and GCTP, respectively.
Credit risk appetite statements are defined top-down across the credit risk categories (pre-settlement, money market, lending, investment), and connected to ING Bank high-level risk appetite across all risk types (solvency, credit, liquidity and funding, market, and non-financial risk). They consist of a set of high-level credit risk metrics: expected loss, economic capital, risk-weighted assets (RWA) and exposure at default. For each credit risk metric a boundary is set that is cascaded down and monitored on a monthly basis. The adherence to the boundaries and the pro-active approach to manage the portfolio within the risk appetite boundaries are part of the key performance indicators of the business line managers.
For every country where ING has exposure, a country limit is set. Country limits are reviewed monthly and updated when needed. The country limit is a function of various factors including ING’s risk appetite for the country, amount of capital consumption, GDP of the country, internal rating, and amount of funds entrusted generated. In case the limit utilisation is above 90%, the respective credit risk manager is expected to take action to bring the utilisation below 90% or to submit to the relevant approval mandate holders a country limit review requesting a higher limit to accommodate the increasing exposure. In case of countries with elevated levels of geo-political or severe economic cycle risk the monitoring is performed on a more frequent basis with strict pipeline and exposure management to protect ING Bank from adverse impacts.
Next to the periodical pre-determined stress test related to CRWA-at-Risk, credit risk performs ad-hoc stress tests based on severe but plausible scenarios. These stress tests can be for internal purposes or at the request of the regulators and are input for future Credit Risk Appetite setting. Stress testing is used as an additional safety net within credit risk. In addition to the Pillar I and Pillar II capital calculations, based on the results of various stress tests, ING Bank ensures that adequate levels of capital (and liquidity) are available to sustain such severe but plausible scenarios.
Risk programs Within ING Bank, risk programs are detailed analyses of defined products and/or industries that identify the major risk drivers and mitigants, the internal business mandate, and propose the minimum risk (including business) parameters – and potentially the maximum product and/or portfolio limit - to undertake that business. A risk program is always prepared by the front office responsible for the internal business mandate and requires an approval from an approval authority. Risk programs may carry various names and/or may have geographical and/or business limitations (e.g. local vs global).
Credit approval process The credit approval process ensures that individual transactions are assessed on a name-by-name basis. For each type of counterparty (corporates, banks/financial institutions, structured products clients) there is a dedicated process with credit risk managers specialised along the business lines of ING Bank. The credit approval process is supported by a risk rating system and exposure monitoring system. Ratings are used to indicate a counterparty’s creditworthiness translated into a probability of default and is used as input to determine the maximum risk appetite that ING Bank has for a given type of counterparty (reference benchmark). The determination of the delegated authority (the amount that can be approved at various levels of the organisation) is a function of the risk rating of the client and ING’s credit risk exposure on the client.
Given the nature of the retail business, roles and responsibilities of the local credit risk policy are delegated to the local retail credit risk management. However, the global head retail risk needs to be informed on all local retail risk policies so as to monitor that the local policies do not conflict with any C&TR policies. This framework serves to ensure more global alignment while preserving existing empowerment of local units. As such, approval authorities differ depending on the materiality of the deviation between the local policy and the global policy.
Credit risk measurement There are two ways to measure credit risk within ING Bank’s portfolio, depending on whether the exposure is booked under an ING office which is permitted by the ECB to use the advanced internal rating based (AIRB) approach, or if it falls under the standardised approach (SA).
Advanced internal rating based approach There are five main elements that drive the determination of risk-weighted assets under the AIRB approach.
• Loss Given Default (LGD): The third element is the loss given default. LGD models are intended to estimate the amount ING Bank would lose from liquidating collateral pledged in association with a given loan or financial obligation, or alternatively, from liquidating the company as a whole as part of a workout process. LGD models are based on cover types, estimated recovery rates given orderly liquidation, and (in)direct cost of liquidation.
The 22 grades are composed of the following categories: • Investment grade (Risk Rating 1-10); • Non-investment grade (Risk Rating 11-17); • Sub-standard (Risk Rating 18-19); and • Non-performing (Risk Rating 20-22).
Rating Models for retail counterparties are predominantly statistically driven and automated, such that ratings can be updated on a monthly or bi-monthly basis. Models for SME companies, and larger corporates, institutions and banks are manually updated, and are individually monitored on at least an annual basis.
Supranational Organisations; • Institutions include Commercial Banks, non-Bank Financial Institutions, such as Funds and Fund Managers, and Insurance
Companies, as well as local and regional government entities not classified as governments; • Corporates includes all legal entities, that are not considered to be Governments, Institutions or Retail Other; • Retail includes the following classes: • Retail – Secured by immovable property non-SME (hereafter Residential Mortgages) includes all retail loans which are covered by residential properties
• Securitisations include securitisation programs for which ING Bank acts as an investor, sponsor or originator.
ING distinguishes four types of post default scenarios: • No Loss – Cure: the borrower pays all overdue amounts (to the extent ING Bank is legally entitled to) and the asset becomes nondefaulted again. ING Bank does not experience any loss in the process. The relationship is not terminated and the borrower returns back to performing; • No Loss – Exit without loss: ING Bank (or the borrower) liquidates collaterals and calls guarantees in order to recover the exposure or the borrower fully repays. Thereafter the relationship is terminated. ING Bank does not experience any loss in the process; • Loss – Exit with loss: ING Bank (or the borrower) liquidates collaterals and calls guarantees in order to recover the exposure. Thereafter the relationship is terminated. ING Bank suffers loss in the process; and
Data Governance and Data Quality ING Bank recognises that information and the underlying data are assets that are key (together with people, processes and IT systems) to become the next generation digital bank. Cooperation and mutual agreement on global data management roles and responsibilities in ING are critical success factors to meet this objective. As such ING Bank has embraced multiple data management and governance initiatives triggered by internal and external stakeholders (e.g. Principles for Effective Risk Data Aggregation and Risk Reporting). In the Credit Risk and Risk Services departments, these principles are embedded into the credit risk data management and enshrined within the Data Governance framework. The framework outlines roles and responsibilities relevant for the credit risk lifecycle and data quality assurance.
• Derived data: data derived from other data elements (atomic or derived) as a result of data transformations such as credit risk models, calculations and aggregation. Derived data is hosted in the central credit risk system (Vortex).
The total ING Bank portfolio size increased by 1.0% to EUR 845 billion in terms of READ, which was driven by volume growth and FX changes. The increase related to FX changes was driven by the appreciation of the US Dollar and Australian Dollar against the Euro, and partly offset by the depreciation of the British Pound and Turkish Lira.
The lower concentration in sovereigns was caused by decreased deposits at central banks, nostros at the Japanese Central Bank and government bonds. The investment portfolio decreased in proportion as well as in absolute value and was observed in government bonds, covered bonds and securitisations (RMBS) in Germany, Italy and Spain. Along with fulfilling liquidity requirements the investment portfolio remains a source of supporting assets in Retail Challengers & Growth Markets with exposure primarily to European central governments and central banks. The shrinking securitisations portfolio within ING Bank comprised of Investor and sponsor securitisations.
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities. 2 Covered bonds are presented on the basis of the external credit rating of the issuer in question. Covered bond issues generally possess a better external credit rating than the issuer standalone, given structural features of such covered bonds.
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 Based on the total amount of credit risk in the respective column using ING Bank’s internal credit risk measurement methodologies. Economic sectors below 2%
During 2016, the overall portfolio continued to expand, which caused shifts in the concentration per economic sector. ING Bank’s main concentration in Private Individuals was related to mortgage lending. Underlying, a decline in mortgage exposure in Retail Benelux was offset by growth in Retail Challengers & Growth Markets. The Central Banks concentration decreased mainly due to lower amount of deposits and the Central Governments concentration decreased due to reduced government bond exposures in Wholesale Banking and Retail Challengers & Growth Markets. Concentration in Natural Resources increased due to growth in structured finance exposure, but also due to the appreciation of the US Dollar. The risk concentration of Non-Bank Financial Institutions declined significantly in Wholesale Banking Belgium and Netherlands due to decreased exposures in interest rate derivatives, exchange traded equity products, nostros and covered bonds.
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1 Geographic areas are based on country of residence, except for private individuals for which the geographic areas are based on the primary country of risk. 2 The top 5 exposures within Rest of Europe are to United Kingdom (4.1%), France (3.4%), Poland (3.3%), Spain (3.2%) and Italy (2.4%).
The cover values are presented for the total portfolio of ING Bank. Covers of both AIRB and SA portfolios are presented in detail reflecting ING Bank’s complete portfolio. Next to that, detailed information is provided on the cover coverage for the performing and non-performing portfolio. The non-performing loan definition is explained in detail in the section ‘Credit Restructuring’. To increase the understanding of the reader on the nature of the collateralised loans, insight is given in the industry and geography breakdown of ING Bank’s portfolio as well. For comparability reasons with previous tables, outstandings are used to show ING Bank’s portfolio.
Total Bank 775,065 614,734 20,498 89,595 125,395 167,511 31.8% 18.1% 50.1% 1 Including loans to ING Group. 2 Excluding intercompany positions. 3 More information on the credit risk mitigants of the Pre-settlement exposure can be found in the Pre-settlement section.
Over the year, the collateralisation level of ING Bank’s total portfolio improved. Excluding the pre-settlement portfolio for which covers are netted to derive the outstandings at risk, 50.1% of the total ING Bank’s outstandings (from 47.4% as of 2015) were fully collateralised in 2016. Investments decreased in 2016 by EUR 5.3 billion, mainly in Italian government bonds and Spanish covered bonds and securitisations. Since investments traditionally do not require covers, the no covers ratio in this portfolio is close to 100%. However, 93% of the investment outstandings are investment grade. In the Lending portfolio, coverage within consumer lending increased influenced by an improvement in the house price index in the Netherlands. The risk profile of the Real Estate portfolio improved as well, which also positively contributed to the coverage.
The increase in business lending for cover Other CRR/CRDIV eligible was mainly situated in UK and America, while the increase in Guarantees was seen in structured finance and C&FI lending.
The collateralisation of the consumer lending portfolio continued to improve over the year 2016. The rise in collateralisation levels was due to improved housing prices, seen over different mortgage markets, including the Netherlands as main market. In addition, due to stringent policies there has been a reduction in mortgages granted with low VTL’s (high loan-to-values).
The two tables above provide the collateralisation of ING Bank’s business lending portfolio with a breakdown per geographical region or main market, which are defined based on the residence of the borrowers. The total increase in the business lending portfolio is in line with the increase in covers. This increase in collateralisation is observed in most regions and main countries. The large increase in America was mainly due to growth in the structured finance portfolio and the appreciated US Dollar.
• The ‘Gross MtM before netting and collateral’ is the exposure calculated in accordance with the Current Exposure Method (CEM, which in the EU regulation is referred to as the Mark-to-Market method) without accounting for any netting or collateral benefit; • The ‘MtM after netting’ is the exposure, according to the CEM, taking into account the benefit of legally enforceable netting agreements (e.g. ISDAs), but without considering the benefit of margin collateral (e.g. CSAs); • The ‘MtM after netting and collateral’ is the exposure according to the CEM, taking into account both the benefit of netting and marginal collateral. In other words, the gap between the ‘MtM after netting’ and ‘MtM after netting and collateral’ is the liquid collateral (cash and securities); and
• ING Bank thinks the borrower is unlikely to pay: The borrower has evidenced significant financial difficulty, to the extent that it will have a negative impact on the future cash flows of the financial asset. The following events could be seen as examples of financial difficulty indicators: (1) The borrower (or 3rd party) has started insolvency proceedings. (2) NPL status of a group company/co-borrower. (3) Significant fraud (affecting the company’s ability to service its debt) (4) There is doubt as to the borrowers’ ability to generate stable and sufficient cash flows to service its debt. (5) Restructuring of debt includes a partial (debt waiver) or debt-equity conversion
• ING Bank has granted concessions relating to the borrower’s financial difficulty, the effect of which is a reduction in expected future cash flows of the financial asset below current carrying amount.
• Default: For clients with non-performing loan(s) in accordance with the definition of the regulator (CRR/CRDIV; EBA; ECB); and • Impairment: For clients with impaired loan(s) in accordance with the definition of accounting (IFRS/IAS).
ISFA, INSFA and IBNR provisions are reported and calculated by using common standards across ING Bank. In case there is objective evidence that one of the default triggers is applicable, ISFA or INSFA provisions are calculated. An analysis takes place on a quarterly basis in order to determine the appropriate level of LLP and Risk Costs. The ING Bank Provisioning Committee (IPC) discusses and approves the LLP for ING Bank, on the basis of proposals originating from ING Business Units.
Changes in the composition of the group 0 0 0 0 0 0 0 0
Increase/(decrease) in loan loss provision 367 478 347 602 260 267 974 1,347
Forbearance Forbearance occurs when a client is considered to be unable to meet its financial commitments under the contract due to financial difficulties and ING decides to grant concessions towards the client. Forborne exposures are exposures in respect of which forbearance measures have been granted. Forbearance measures can be either modifications to existing contractual terms and conditions or total or partial refinancing. Examples include reduction of loan principal and/or interest payments, extended payment terms, debt consolidations and deferral of foreclosures.
For corporate customers, ING Bank applies forbearance measures to support clients with fundamentally sound business models that are experiencing temporary difficulties. The aim is to maximise the repayment ability of the clients.
Exposures with forbearance measures can be either performing (Risk Ratings 1-19) or non-performing (Risk Ratings 20-22). ING applies criteria to move forborne exposures from non-performing to performing as well as criteria to remove the forbearance status that are consistent with the corresponding EBA standards. An exposure is reported as forborne for a minimum of two years, plus a probation period observed for forborne exposures to move from non-performing back to performing.
ING Bank implemented its forbearance policy in 2014. In the course of 2016 based on a detailed re-assessment of the relevant standards set by EBA and subsequent regulatory guidance, ING Bank tightened the definitions under its forbearance policy. Key policy revisions that led to an increase in the scope of forbearance relate to the inclusion of concessions where the risk is significantly mitigated by the client and waivers or modifications of key financial covenants. As a result of these revisions in definition and scope, performing forborne exposure recognised by ING Bank increased significantly as measures taken (in previous periods) were now recognized as forbearance.
ING Bank as Originator ING Bank occasionally originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes. Securitisations originated by a company may only be considered for balance sheet de-recognition when the requirements for significant credit risk transfer have been fulfilled. However, for a securitisation transaction to be recognised as for RWA reduction, risk transfer alone may be insufficient due to the increasing impact of the maturity mismatch formula. As a consequence, the RWA of the retained tranches for one of the transactions would be higher than the total RWA of the underlying pool before securitisation. In such cases the RWA calculation for the transaction is performed as if it was not securitised. ING Bank has done a very limited number of external transactions as originator.
Within ING Bank, the overall risk appetite is set by the Supervisory Board. Market risk falls under the supervision of the MBB and is delegated to the ALCO function, where ALCO Bank is the highest approval authority. ALCO Bank monitors adherence to the risk appetite for market risk and sets additional limits where appropriate. These limits are cascaded through the organisation through lower level ALCO’s. This ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk.
Risk transfer An important element of the management of market risks in the banking books is the process of risk transfer. In this process the interest rate, FX, funding and liquidity risks are transferred from the commercial books through matched funding to Bank Treasury, where it is centrally managed. The scheme below presents the transfer and management process of market risks in the banking books: Risk measurement The main concepts and metrics used for measuring market risk in the banking books are described below per risk type.
The customer behaviour in relation to mortgages, loans, savings and demand deposits is modelled, based on extensive research. Per business unit and product type, exposures are typically segmented into different portfolios based on expected client behaviour. For each of the segments, model parameters for example for the pass through rate and customer behaviour are determined based on historical data and expert opinion. Models are typically back tested at least semi-annually and updated when deemed necessary. Model parameters and the resulting risk measures are approved by (local) ALCO.
Net Present Value (NPV) at Risk NPV-at-Risk measures the impact of changing interest rates on value. For NPV-at-Risk calculations, an instantaneous shock of 1% is applied. The NPV-at-Risk asymmetry between the downward floored scenario and a +100 bps shock is primarily caused by the applying the regulatory 0% floor in this scenario.