Cover values including guarantees received - Business Lending Portfolio – 20151,2
Cover values including guarantees received - Business Lending Portfolio – 20141,2
The next table represents the different types of outstandings in 2015 and 2014. 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-toMarket 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). The Outstandings column represents CEM exposure (MtM after netting and collateral) plus the Potential Future Exposure (PFE) at a 97.5% confidence level for derivatives and securities.
MtM after netting and collateral Outstandings Africa 71 48 46 55 108 85 85 103 America 18,648 10,237 7,127 8,734 18,871 10,224 7,350 8,720 Asia 6,598 3,455 2,823 3,242 6,761 3,629 2,782 3,742 Australia 470 259 236 344 450 245 232 195
Belgium 5,343 3,875 3,360 2,507 6,955 4,704 4,187 2,572 Germany 7,216 3,783 2,486 5,038 8,589 4,673 2,468 3,639 Netherlands 10,256 5,842 4,385 5,138 12,466 6,767 4,924 5,475 Rest of Europe 118,919 34,762 28,211 27,504 129,451 31,986 26,818 27,146
During 2015 the Pre-Settlement portfolio increased slightly when expressed in outstandings, while the MtM before and after netting and collateral remained relatively stable. However, there was a decrease in gross MTM, especially in the Rest of Europe region, due to a 15% decrease from exposures to commercial banks and a 9% decrease from exposure to central clearing houses. The increase recorded in 2014 within interest rate derivatives, which now represent 67.1% of the total Pre-settlement portfolio, was partially reversed in 2015. Rest of Europe forms majority of the Pre-settlement portfolio mainly due to exposures in UK and US which are cleared through CCPs.
Within ING Bank, market risk falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is organised in different levels, whereby the business lines Retail Market Leaders, Retail Challengers and Growth Countries, Wholesale Banking and Corporate Line are represented within the respective lower level ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
Risk profile The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk in banking books in Economic Capital. The main drivers of the Market Risk Economic Capital are the linear interest rate risk positions of Capital Investments and the strategic Equity Investments in the banking books.
Market risk in banking books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books originate from the market risks inherent in commercial products that are sold to clients, the Bank Treasury exposures and from the investment of own funds (core capital). Both the commercial products, and the products used to hedge market risk exposures in these products are intended to be held until maturity, or at least for the long-term. ING Bank distinguishes the following types of market risk in banking books: • Interest Rate Risk, including customer behaviour risk; • Credit Spread Risk; • Foreign Exchange (FX) Risk; • Equity Price Risk; and • Real Estate Price Risk.
Risk measurement and the risk transfer process take place on a monthly basis, but more often if deemed necessary, for instance in volatile markets. The customer behaviour in relation to mortgages, loans, savings and demand deposits is modelled by BSR, based on extensive research. Model parameters are determined from historical data and expert opinion. Models are periodically validated by Model Validation. Models and parameters are back tested at least semi-annually and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, volume developments and the level and shape of the yield curve. The analyses result in an estimated duration and an investment rule for the various portfolios. With respect to mortgages and loans, prepayment behaviour including interest rate dependent prepayment behaviour is modelled, as well as the interest sensitivity of embedded offered rate options.
Earnings Sensitivity (ES) ES measures the impact of changing interest rates on (before tax) net interest income of the banking books. The ES figures in the tables below reflect an instantaneous shock of 1% and a time horizon of one year. For a downward shock it is assumed that interest rates will not be negative after the shock is applied.
2015 2014 –100 bps +100 bps –100 bps +100 bps By currency Euro 39 173 –107 68 US Dollar –33 28 –5 5 Other –28 39 –7 16 Total –22 240 –119 89 2015 2014 –100 bps +100 bps –100 bps +100 bps By business Wholesale Banking -2 165 –19 7 Retail Banking Benelux 9 5 –39 101 Retail Challengers & Growth Markets 30 -10 –27 –86 Corporate Line Banking –59 80 –34 67 Total –22 240 –119 89
ING Bank has aligned existing fair valuation adjustments with the regulatory standards for fair valued instruments issued by EBA, hence where possible it follows a unified valuation framework which meets both IFRS and CRR requirements. This approach is supported by a bank-wide valuation policy framework, which specifies detailed methodologies for fair valued instruments per product and degree of liquidity. Benefits of this framework and chosen approach are a significant increase in consistency and transparency of the fair valuation of financial instruments across different locations and books. For compliance with EBA regulatory standards an additional valuation adjustment through capital on the concentrated positions (the Concentration AVA) of EUR 44.1 million after tax is booked for ING Bank in 2015.
To include credit risk in the fair valuation, ING Bank applies both credit and debit valuation adjustments (hereafter referred to as respectively, CVA and DVA). Own issued debt and structured notes that are valued at fair value are adjusted for credit risk by means of an own credit adjustment. Additionally, derivatives valued at fair value are adjusted for credit risk by a credit valuation adjustment. This credit valuation adjustment is of a bilateral nature; both the credit risks on the counterparty as well as on ING Bank are included in the adjustment. All market data that is used in the determination of the CVA is based on market implied data. Additionally, wrongway risk (when exposure to a counterparty is increasing and the credit quality of that counterparty decreases) and right way risk (when exposure to a counterparty is decreasing and the credit quality of that counterparty decreases) are included in the adjustment. ING Bank applies CVA also for pricing credit risk into new external trades with counterparties. Risk limits and controls are in place to monitor and anticipate CVA risk on a daily basis. The CVA is managed by global risk governance, where the risk limits and controls for CVA are managed and monitored on a global level. Our approach on CVA risk management is driven by increased control, cost efficiency and the global scope of CVA.
To address the risk associated with the illiquid nature of the derivative portfolio, ING Bank applies an additional ‘liquidity valuation adjustment’. The adjustment is based on the market price of funding liquidity and is applied to the uncollateralised derivatives. This additional discounting is taken into account in both the credit and debit valuation adjustments.
Limitations VaR has some limitations, such as the following: VaR uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory capital calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level.
The liquidity horizon has been set to the regulatory minimum of three months for all positions in scope. Given the types of products in ING Bank’s trading portfolio ING Bank considers this horizon to be conservative. We have demonstrated that ING Bank could still actively trade its positions that are significant for IRC under stressed market circumstances, allowing ING Bank to fully redeem its positions within three months.
Risk profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon versus daily trading profits and losses. The overnight VaR is presented for the ING Bank trading portfolio from 2011 to 2015.
Stressed VaR (10-day, 99%) 41 32 110 111 71 54 78 99 Incremental Risk Charge (1-year, 99.9%) 249 341 482 555 380 462 267 426 1 CVA risk is not included in VaR. 2 The total VaR for the columns Minimum and Maximum cannot be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates.
2015 2014 amounts in millions of euros SVaR VaR Total Total Interest rate/Credit spread 154 102 256 193 Equity 58 30 88 93 Commodity1 6 4 10 0 Foreign exchange 17 8 25 33 Incremental Risk Charge 286 426 Total Internal Model Approach 235 144 665 745 Standardised model2 106 113 Total Regulatory Capital 771 858
The decrease in market risk Regulatory Capital for Trading as of 2015 is mainly due to decrease in exposures to sovereign issuers and as a result in IRC, partially offset by increases in VaR and SVaR that resulted from higher market volatility and position changes.
amounts in millions of euros 2015 2014 Foreign exchange Foreign exchange US Dollar 160 Chinese Yuan 282 Romanian New Leu 57 US Dollar –257 Chinese Yuan –42 Swiss Franc –65 South Korean Won –46 Australian Dollar 40 Swiss Franc 18 South Korean Won 21
ING Bank incorporates funding and liquidity management in its business strategy. In order to optimise it’s funding and liquidity risk management, ING Bank has developed a funding and liquidity risk framework aimed at maximising liquidity access and minimising funding risks and costs. The main objective of ING’s funding and liquidity risk management is to maintain sufficient liquidity to ensure safe and sound operations under normal market circumstances and in times of stress.
The identification of liquidity risks is primarily a responsibility of the 1st line commercial function.
Based on the above, ING Bank has defined the following funding and liquidity risk management risk appetite statements: • The structural mismatch in expected liquidity tenors of ING Bank’s assets and liabilities per significant currency must be manageable. Also refer to Note 45 of the financial statements in which ‘Assets by contractual maturity’ are shown; • Home/host regulatory liquidity limits must be pro-actively complied with; • The time-to-survive in a funding stress situation must extend over defined period, also depending on the level of stress applied; • Funding of all longer-term assets and investments must be done by stable and longer-term liabilities; • Geographical dependencies with respect to intra-group funding are to be limited; and • Diversification must be in place of funding profile, across funds providers, instrument types, geographic markets, tenors and currencies.
Intraday liquidity management The objective of managing intraday liquidity and its risks at ING is twofold: it is focused on preventing damage to the institution’s own liquidity position, and, in light of its role in global financial markets, ING also takes into account the potential damage to other parties which can arise through chain effects in payment and securities transactions. Intraday liquidity management is managed through the intraday risk appetite statement, by setting amongst others monitoring metrics and triggers on daily net negative liquidity positions and levels of payments outflows.
Collateral position management The objective of the Collateral Management is to ascertain that ING Bank can at all times meet collateral requirements for ING’s collateral needs. ING Bank maintains a liquidity buffer existing of cash, cash equivalents and other highly liquid unencumbered assets to facilitate this. Tactical (short term) management of the liquidity buffer is performed, by increasing or decreasing the liquidity coverage with collateral transformation by execution of repos, in order to meet internal and regulatory requirements. Reporting and analysis is performed, providing availability of collateral for emergency financing, its eligibility and its route to cash in an efficient manner.
In accordance with Dutch Central Bank guidelines, ING Bank’s liquidity positions are stress tested on a monthly basis under a scenario that is a mix between a market event and an ING Bank specific event. The outcome of stress tests are evaluated and provide input to any follow-up on additional contingency measures required.
In addition to the bank-wide stress test framework as described in the ING Bank risk profile section, ING Bank produces several stress test reports with respect to the funding and liquidity position on a regular basis. Some of these stress tests are regulatory driven, and others are based on internal scenarios: • On a weekly basis ING reports an internal net liquidity position metric. This is reported on a consolidated (bank) level, for the main entities and split in Euro and US Dollar; and • On a monthly basis ING Bank reports a number of stress scenarios, either based on regulatory requirements or internal requirements: • 1-month liquidity buffer, according to DNB regulation(CRD2); • Liquidity Coverage Ratio (LCR) • On own defined stress scenarios related to time-to-survive periods.
The funding mix remained well diversified and according to targets set. Retail deposits remained ING Bank’s primary sources of funds and remained relatively stable at 48% of the total funding mix per 2015 Q4. The Loan-to-Deposit ratio (excluding securities at amortised costs) remained constant at 1.04 per 2015 Q4, compared to 2014 year-end.
Regulatory developments Based on the final Delegated Act on the liquidity coverage ratio issued by the European Commission (EC) in October 2014, the European Banking Authority (EBA) issued Implementing Technical Standards with regard to the reporting of the LCR as per 1 October 2015. The LCR is calculated based on this Delegated Act Implementation Technical Standards.
Non-Financial Risk Introduction The Non-Financial Risk (NFR) department encompasses the operational and compliance risk management functions. It ensures appropriate risk controls in these functional areas by implementing clear policies and minimum standards which are embedded in ING Bank business processes in all divisions. The necessary infrastructure is in place to enable management to track events and nonfinancial risk issues. A comprehensive system of internal controls creates an environment of continuous improvement in managing non-financial risk.
Governance Non-Financial Risk Committees (NFRCs) and Management Teams (MTs) manage, measure and monitor operational and compliance risks. NFRCs exist at Bank level and at other relevant levels. They are chaired by the first line of defence and steer the risk management activities of the first and second lines of defence in their scope. Non-financial risk topics are an integral part of the agenda of regular MTs at all levels in the organisation. The Bank NFRC is the primary approval and oversight committee for non-financial risk matters.
The Head of NFR reports to the Chief Risk Officer (CRO) and is responsible for developing the framework of non-financial risk policies and standards within ING Bank and for monitoring the quality of non-financial risk management in the divisions. Whilst the Head of Corporate Operational Risk Management (CORM) reports to the Head of NFR, the Chief Compliance Officer reports functionally to the CRO and hierarchically to the Head of NFR.
The Chief Compliance Officer (CCO) is the general manager of the Bank Compliance Risk Management department and the Head of the Compliance Risk Management function within the Bank. This is an independent function responsible for developing and establishing the Bank-wide Compliance Risk Management charter & framework which establishes the policies and minimum standards for managing compliance risks. The CCO assists and supports the Management Board Banking in managing ING Bank’s compliance risks and control framework.
The NFR department uses a layered functional approach within divisions to ensure systematic and consistent implementation of the framework of policies and minimum standards within ING Bank. To avoid potential conflicts of interests, it is imperative that the staff working in the department is independent and objective when advising business management on non-financial risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level within Operational Risk Management (ORM) and Compliance is in place. The functional reporting line has clear accountabilities with regard to objectives setting, remuneration, performance management and appointment of new staff as well as obligations to veto and escalate.
Processes are in place to identify key threats, vulnerabilities and the associated risks which might cause adverse events. Event identification is performed proactively and precedes a risk assessment. Different techniques for event identification exist within ING Bank, e.g. Risk & Control Self-Assessments, scenario analysis, external events inventories, internal events analyses (e.g. lessons learned based on information from event reporting), key risk indicators and threat scans.
Operational risk Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.
• External fraud risk is the risk of loss due to deliberate abuse of procedures, systems, assets, products and/or services of ING by external parties who intend to deceitfully or unlawfully benefit themselves or others; • Unauthorised activity risk is the risk of loss due to unauthorised employee activities, approvals or overstepping of authority caused by intentional human behaviour; • Personal and physical security risk is the risk of criminal and environmental threats that might endanger the security or safety of ING personnel at work, people in ING locations, ING assets, or assets entrusted to ING, or might have an impact on the ING organisation's confidentiality, integrity or availability; • Processing risk is the risk of loss due to unintentional human error during (transaction) processing. Processing risk deals with the risk of losses due to failed transaction processing, process management, or contractual liabilities; and
The risk of clients and ING Bank staff being targeted by fraudsters using social engineering techniques to execute payments has increased. Efforts are undertaken to mitigate the risk of CEO impersonation fraud such as creating awareness for customers and staff about this type of fraud. ING Bank continues to strengthen its control environment as fraudsters are increasingly shifting their interest to the end-user. ING Bank continues to stringently monitor both this type of fraud and new emerging fraud methodologies.
Compliance risk Compliance risk is defined as 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. We aim to effectively manage compliance risks that could expose ING Bank to reputational damage, fines, civil and criminal penalties, payment of damages, court orders and suspension or revocation of licenses that would adversely impact our customers, staff, shareholders and other stakeholders.
• Organisational conduct related integrity risk, is the risk of compromising ING Bank or its businesses through deficiencies in management, supervision and/or the effectiveness of governance structures.
Main developments in 2015 Compliance Conduct Risk Monitoring The Bank Compliance Risk Management function enhanced its control framework by assessing the operation of soft controls in relation to compliance risks in addition to hard controls. The aim of conduct risk monitoring is to assess the risks that might influence the conduct and risk culture, promoting the individual integrity of all employees and enhancing the overall culture that is led by integrity.
• Integrity Above All This module takes a closer look at integrity, the ING Values and what is expected from every employee to create the right culture to best service our customers and minimise risks. Real examples and dilemmas are used to ask staff to think about what they can do to make a difference. It emphasises the importance of creating a strong risk culture by doing the right things, where risk awareness is ingrained in everything we do.
In addition, regular global calls and webcasts were organised on various subjects to provide advice and clarification to non-financial risk staff and provide the opportunity to ask questions.
Governance The governance and management of Business Risk differs from the risk types that have been describes in the sections before. ING Bank has not developed explicit risk appetite statement regarding business risk nor has it set-up a department that is responsible for managing this risk. The main reason is that the underlying risk types (expense risk, volume-margin risk, and customer behaviour risk) are mitigated and managed in a different way. Expense risk is monitored and managed via the financial performance of the bank and the local units whereby the reported expense numbers are compared on a quarterly basis with the 2017 Ambition of having a cost/income ratio between 50% and 53%. Deviations from this ambition are monitored as part of the financial projections that are discussed continuously within different parts of the organisation. For customer behaviour risk, the management and monitoring of this risk is part of the day-to-day business of the Balance Sheet Risk department. A more extensive explanation of the risk management practices for customer behaviour risk, please refer to the ‘Market Risk in Banking Books’ section.
ING applies the following main capital definitions: • Common equity Tier 1 capital, Tier 1 capital and Total capital – Tier 1 capital is defined as shareholders’ equity plus Additional Tier 1 (hybrid) capital less regulatory adjustments. Common equity Tier 1, Tier 1 and Total capital divided by risk-weighted assets equal the Common equity Tier 1, Tier 1 and Total capital ratios respectively. Common equity Tier 1 capital is equal to Tier 1 capital excluding Additional Tier 1 (hybrid) capital; • Common equity Tier 1 Risk Appetite – the solvency risk appetite statement is not only compared to the actual reported level, but also includes the potential impact of a standardised and pre-determined 1-in-10-year stress event (i.e. at a 90% confidence level with a 1-year horizon) as described in the Risk Management section; and
Developments In 2015, ING Group further strengthened its capitalisation, reflecting significant progress on ING’s restructuring programme as well as strong profitability. The strong capitalisation not only allows us to cope with severe unexpected losses but also to support the real economy by growing our client franchise and pay a healthy dividend to our shareholders.
Regulatory adjustments additional Tier 1 0 0 –1,716 –5,727 1 Shareholders’ equity (parent), as at 31 December 2014, is not adjusted as a result of the change in the accounting approach for the NN Group Anchor investment transaction. 2 Including EUR 2,061 million is CRR/CRD IV compliant and EUR 5,187 million (2014: EUR 5,727 million) to be replaced as capital recognition is subject to CRR/CRD IV
Total significant investments in FIs 5,607 18,664 5,607 18,664 10% of Group’s common equity Tier 1 –4,218 –4,561 –4,211 –4,517
As per 31 December 2015 the total amount of available distributable items following the CRD IV definition is EUR 36,217 million, slightly higher compared with EUR 35,967 million in 2014.
Result of group companies, associates and joint ventures after taxation 5,185 3,380
Parent company profit and loss account for the years ended 31 December
Additional information in EUR million Share capital Share premium Revaluation reserves
Changes in the composition of the group and other changes1 3,419 –3,262 157 1 Impact of IPO NN Group and Changes in composition of the group and other changes are adjusted as a result of the change in the accounting approach for the NN
In 2014, Voya was deconsolidated following the loss of control. ING’s remaining interest in Voya of 18.9% is included as an availablefor -sale equity investment in Other assets.
In 2015, ING Groep N.V. issued 11.3 million (2014: 18.0 million) (depositary receipts for) ordinary shares at par value in order to fund obligations arising from share-based employee incentive programmes.
The Share of associates and joint ventures reserve includes the following components: Reserve for non-distributable retained earnings of associates and joint ventures of EUR 1,733 million (2014: EUR 1,483 million), Revaluation reserve of associates and joint ventures of EUR 4,288 million (2014: EUR 11,853 million) and Net defined benefit asset/liability remeasurement reserve of EUR –306 million (2014: EUR –504 million).
As at 31 December 2015, the Share of associates and joint ventures reserve includes an amount of EUR 1,201 million (2014: EUR 1,070 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN that cannot be freely distributed.
Changes in the composition of the group and other changes –196 –196
Transfer to share of associates and joint ventures reserve 180 180
Changes in the composition of the group and other changes1 –1,365 –1,365 1 Impact of IPO NN Group and Changes in composition of the group and other changes are adjusted, against Retained earnings, as a result of the change in accounting approach for the NN Group Anchor investment transaction (page 116).
Reference is made to Note 13 ‘Equity’ and the Capital Management section in the consolidated annual accounts for additional information, including restrictions with respect to dividend and repayment of capital
Remuneration of Senior Management, Executive Board and Supervisory Board The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the Consolidated annual accounts. Reference is made to Note 52 ‘Related parties’ (page 247 up to and including page 249).
• the company annual accounts give a true and fair view of the financial position of ING Group as at 31 December 2015, and of its result for 2015 in accordance with Part 9 of Book 2 of the Dutch Civil Code.
We agreed with the Supervisory Board that unadjusted misstatements in excess of EUR 10 million, which are identified during the audit, are reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.
As further discussed in Note 1, ING has amended the accounting for certain aspects of the ‘anchor investment transaction’ undertaken in connection with the July, 2014 IPO of NN Group.
• Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
We are subject to the jurisdiction of a variety of banking regulatory bodies, some of which have proposed regulatory changes in recent years that, if implemented, would hinder our ability to manage our liquidity in a centralised manner. Furthermore, regulatory liquidity requirements in certain jurisdictions in which we operate are generally becoming more stringent, including those forming part of the ‘Basel III’ requirements discussed further below under ‘—We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability’, undermining our efforts to maintain this centralised management of our liquidity. These developments may cause trapped pools of liquidity and capital, resulting in inefficiencies in the cost of managing our liquidity and solvency, and hinder our efforts to integrate our balance sheet, which is an essential element of our Restructuring Plan.
We operate in highly regulated industries. Changes in laws and/or regulations governing financial services or financial institutions or the application of such laws and/or regulations governing our business may reduce our profitability. We are subject to detailed banking laws and government regulation in the jurisdictions in which we conduct business. Regulatory agencies have broad administrative power over many aspects of our business, which may include liquidity, capital adequacy, permitted investments, ethical issues, money laundering, anti-terrorism measures, privacy, recordkeeping, product and sale suitability, marketing and sales practices, remuneration policies, personal conduct and our own internal governance practices. Also, regulators and other supervisory authorities in the European Union (‘EU’), the United States (‘U.S.’) and elsewhere continue to scrutinise payment processing and other transactions and activities of the financial services industry through laws and regulations governing such matters as money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anticorruption measures.
Compliance with applicable laws and regulations is time-consuming and personnel-intensive, and changes in laws and regulations may materially increase costs. We expect the scope and extent of regulation in the jurisdictions in which we conduct our business, as well as regulatory oversight and supervision, to generally continue to increase. However, we cannot predict whether or when future legislative or regulatory actions may be taken, or what impact, if any, actions taken to date or in the future could have on our business, results of operations and financial condition. Regulation is becoming increasingly more extensive and complex and the industries in which we operate are increasingly coming under the scrutiny of regulators, and affected companies, including ING, are required to meet the demands, which often necessitate additional resources. These regulations can limit our activities, among others, through stricter net capital, customer protection and market conduct requirements and restrictions on businesses in which we can operate or invest.
Although the full impact of Dodd-Frank and its implementing regulations cannot be determined at this time, many of their requirements have had and will continue to have profound and/or adverse consequences for the financial services industry, including for us. Dodd-Frank could make it more expensive for us to conduct business, require us to make changes to our business model or satisfy increased capital requirements, subject us to greater regulatory scrutiny or to potential increases in whistleblower claims in light of the increased awards available to whistleblowers under Dodd-Frank and have a material effect on our results of operations or financial condition.
The Group intends to take all necessary steps to comply with FATCA (including entering into such agreements with the U.S. tax authorities as may be required), in accordance with the time frame set by the U.S. tax authorities. However, if the Group cannot enter into such agreements or satisfy the requirements thereunder (including as a result of local laws in non-IGA countries prohibiting information-sharing with the IRS, as a result of contracts or local laws prohibiting withholding on certain payments to account holders or other investors, or as a result of the failure of account holders or other investors to provide requested information), certain payments to the Group may be subject to withholding under FATCA. The possibility of such withholding and the need for account holders and investors to provide certain information may adversely affect the sales of certain of the Group’s products. In addition, (i) entering into agreements with the IRS and (ii) compliance with the terms of such agreements and with FATCA any regulations or other guidance promulgated thereunder or any legislation promulgated under an IGA may substantially increase the Group’s compliance costs. Because legislation and regulations implementing FATCA and the IGAs remain under development, the future impact of this law on the Group is uncertain.
In addition to the Intervention Act, and partly amending it, on 26 November 2015 the ‘Act on implementing the European framework for the recovery and resolution of banks and Investment firms’ (Implementatiewet Europees kader voor herstel en afwikkeling van banken en beleggingsondernemingen) came into force, implementing the ‘Bank Recovery and Resolution Directive’ (‘BRRD’). The BRRD came into effect on 2 July 2014. It includes, among other things, the obligation for institutions to draw up a recovery plan and for resolution authorities in the Member States to draw up a resolution plan, the resolution authorities’ power to take early intervention measures and the establishment of a European system of financing arrangements. The BRRD confers extensive resolution powers to the resolution authorities, including the power to require the sale of (part of a) business, to establish a bridge institution, to separate assets and to take bail-in measures. The stated aim of the Bank Recovery and Resolution Directive is to provide supervisory authorities and resolution authorities, with common tools and powers to address banking crises pre-emptively in order to safeguard financial stability and minimise taxpayers’ exposure to losses.
Many of the rules implementing the BRRD are contained in detailed technical and implementing rules, the exact text of which is subject to agreement and adoption by the relevant EU legislative institutions. Therefore, for some rules, there remains, uncertainty regarding the ultimate nature and scope of these resolution powers and, when implemented, how they would affect us and the securities that have been issued or will be issued by us. Accordingly, it is not yet possible to assess the full impact of the BRRD on ING and on holders of any securities issued or to be issued by ING, and there can be no assurance that, once it is fully implemented, the manner in which it is applied or the taking of any actions by the relevant Dutch resolution authority contemplated in the BRRD would not adversely affect the rights of holders of the securities issued or to be issued by ING, the price or value of an investment in such securities and/or ING’s ability to satisfy its obligations under such securities.
Financial Stability Board In addition to the adoption of the foregoing measures, regulators and lawmakers around the world are actively reviewing the causes of the financial crisis and exploring steps to avoid similar problems in the future. In many respects, this work is being led by the FSB, consisting of representatives of national financial authorities of the G20 nations. The G20 and the FSB have issued a series of papers and recommendations intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated. These proposals address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance, including executive compensation, and a host of related issues associated with responses to the financial crisis. One of the proposals is a common international standard on Total LossAbsorbing Capacity (‘TLAC’) for global systemically important banks (‘G-SIBs’), and proposals were finalized in November 2015. The key requirement mandates G-SIBs to hold long-term debt that can be written down or converted into equity in the event that a G-SIB is put into liquidation, thereby providing a specific means of absorbing losses and recapitalising the G-SIB. The numbers are significant with the minimum standard requiring a G-SIB to hold TLAC of at least 16% of risk weighted assets and at least 6% of the leverage ratio denominator from 1 January 2019, and at least 18% and 6.75% respectively from 1 January 2022 on.
Continued risk of resurgence of turbulence and ongoing volatility in the financial markets and the economy generally have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. General Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Concerns over the slow economic recovery, the European sovereign debt crisis, the potential exit of certain countries from the Eurozone, unemployment, the availability and cost of credit, credit spreads, quantitative easing within the Eurozone through bond repurchases, the ECB’s targeted longer-term refinancing operation (‘TLTRO’), the level of U.S. national debt and the U.S. housing market, inflation/deflation levels, energy costs and heightened geopolitical issues all have contributed to increased volatility and diminished expectations for the economy and the markets in recent years.
Market conditions observed over the past few years may increase the risk of loans being impaired. We are exposed to the risk that our borrowers (including sovereigns) may not repay their loans according to their contractual terms and that the collateral securing the payment of these loans may be insufficient. We may continue to see adverse changes in the credit quality of our borrowers and counterparties, for example, as a result of their inability to refinance their indebtedness, with increasing delinquencies, defaults and insolvencies across a range of sectors. This may lead to impairment charges on loans and other assets, higher costs and additions to loan loss provisions. A significant increase in the size of our provision for loan losses could have a material adverse effect on our financial position and results of operations.
All these effects may be amplified in a (prolonged) negative rate environment. In such environment there may also be the risk that a rate is to be paid on assets, while there is no (partial) compensation on the liabilities. This will reduce our results of operations then.
Inflation and deflation may negatively affect our business. A sustained increase in the inflation rate in our principal markets would have multiple impacts on us and may negatively affect our business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in market interest rates, which may: 1 decrease the estimated fair value of certain fixed income securities that we hold in our investment portfolios, resulting in: • reduced levels of unrealised capital gains available to us, which could negatively impact our solvency position and net income, and/or
There can be no assurance that we will pay dividends on our Ordinary Shares in the future. It is ING’s policy to pay dividends in relation to the long-term underlying development of cash earnings. Dividends can only be declared by shareholders when the Executive Board considers such dividends appropriate, taking into consideration the financial conditions then prevailing and the longer-term outlook. The Executive Board proposes to pay a total dividend of EUR 2,515 million, or EUR 0.65 per (depositary receipt for an) ordinary share, over the financial year 2015. This is subject to the approval of shareholders at the Annual General Meeting in April 2016. Taking into account the interim dividend of EUR 0.24 per ordinary share paid in August 2015, the final dividend will amount to EUR 0.41 per ordinary share and be paid in cash. However, there can be no assurance that we will pay dividends in the future.
It also may not be able to enforce judgments of U.S. courts under the U.S. federal securities laws in courts outside the United States, including the Netherlands. The United States and the Netherlands do not currently have a treaty providing for the reciprocal recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, it will not be able to enforce in the Netherlands a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, even if the judgment is not based only on the U.S. federal securities laws, unless a competent court in the Netherlands gives binding effect to the judgment.
Some of the required information has already been provided elsewhere in the Annual Report, e.g. in the Risk Management section and/or in the Capital Management paragraph. For CRR/CRD IV disclosure requirements a CRD IV reference guide to direct the readers through the different disclosures will be published on the corporate website ing.com. Suite.htm
The ING Group’s ‘additional Pillar III information’ report contains Regulatory Capital requirements, Credit Risk, including securitisations and Other Non-Credit Obligation Assets (ONCOA), Market Risk and Liquidity Risk disclosures. The regulatory requirements provided in the first section of the report for credit risk, market risk and operational risk relates primarily to the first pillar, the minimum capital requirement. The second pillar concerns Economic Capital (EC) and the underlying models used internally by banks and reviewed by supervisors. Economic Capital, and consequently Pillar II, is disclosed extensively in the Risk Management section. Further in the report you will find additional information on regulatory exposures and risk weighted assets which are not in the risk management section. As such, the text of this Pillar III section should be read in conjunction with statements made in the Risk Management section and Capital Management section of the annual accounts, where there is a comprehensive discussion of Risk Management and Capital Management.
Portfolios subject to AIRB approach – Sovereigns 477 5,957 482 6,025 – Institutions 1,545 19,314 1,987 24,835 – Corporate 9,358 116,970 8,135 101,689 – Residential mortgages 3,422 42,776 3,939 49,233 – Other retail 1,356 16,949 1,347 16,838 Total portfolios subject to AIRB approach 16,157 201,967 15,890 198,620
ING Group’s fully loaded leverage ratio using the published IFRS-EU balance sheet, in which notional cash pooling activities are netted, plus off-balance sheet commitments is 4.8% at 31 December 2015.
Applicable amounts Applicable amounts 1 Total assets as per published financial statements 841,769 841,769 2 Adjustment for entities which are consolidated for accounting purposes but are outside the scope of regulatory consolidation 3 (Adjustment for fiduciary assets recognised on the balance sheet pursuant to the applicable accounting framework but excluded from the leverage ratio exposure measure in accordance with Article 429(13) of Regulation (EU) No 575/2013 ‘CRR’)
On-balance sheet exposures (excluding derivatives and SFTs) 1 On-balance sheet items (excluding derivatives, SFTs and fiduciary assets, but including collateral) 898,179 898,179 2 (Asset amounts deducted in determining Tier 1 capital) –7,456 –5,800 3 Total on-balance sheet exposures (excluding derivatives, SFTs and fiduciary assets) (sum of lines 1 and 2) 890,723 892,379 Derivative exposures 4 Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin) 13,439 13,439 5 Add-on amounts for PFE associated with all derivatives transactions (mark-to-market method) 25,575 25,575 EU-5a Exposure determined under Original Exposure Method 6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the applicable accounting framework 7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) –11,800 –11,800 8 (Exempted CCP leg of client-cleared trade exposures) –156 –156 9 Adjusted effective notional amount of written credit derivatives 15,606 15,606 10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) –12,245 –12,245 11 Total derivative exposures (sum of lines 4 to 10) 30,418 30,418 Securities financing transaction exposures 12 Gross SFT assets (with no recognition of netting), after adjusting for sales accounting transactions 88,067 88,067 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) –22,569 –22,569 14 Counterparty credit risk exposure for SFT assets 15,786 15,786 EU-14a Derogation for SFTs: Counterparty credit risk exposure in accordance with Article 429b (4) and 222 of
1 Description of the processes used to manage the risk of excessive leverage ING follows the leverage ratio on a monthly basis and takes it into account when taking certain securitisation and/or Tier 1 issuance decisions.
The change in leverage ratio was mainly due to the increase of qualifying Tier 1 capital as result of (a) the divestment of both Voya Financial and NN Group leading to less deductions for significant investments in financial institutions and (b) AT1 issuance.
The amounts presented in this section relate to amounts used for Credit Risk Management purposes, which follow ING Bank’s interpretation of the definitions as prescribed under CRR/CRD IV. Therefore, the numbers can be different from the accounting numbers as reported in the annual accounts under IFRS-EU. An example is the treatment of ONCOA items – while the accounting numbers include ONCOA, they are excluded from the credit risk section of Pillar III.
Off-balance sheet exposures include letters of credit and guarantees, which are associated with the Lending Risk category. Additionally, off-balance sheet exposures include a portion of the unused limits, associated with the unused portion of the limit between the moment of measurement and the theoretical moment of statistical default. Collectively, these amounts are called ‘Credit Risk outstandings’.
Credit Risk Weighted Assets Migration Analysis The table below explains the changes in Credit RWA during the reporting period and provides additional information by linking the impact of changes in portfolio composition, model changes and shifts in the risk environment on Credit RWA. The table reconciles movements in Credit RWA for the period for each Credit RWA risk type of ING Bank for the SA and AIRB portfolio including securitisations.
• Book quality: As a result of the improving economies in most of our key retail countries, the book quality has improved over the year, decreasing RWA overall by EUR 8.4 billion. Primarily in the Dutch mortgage portfolio, where improved economic conditions especially with respect to house prices and employment in the Netherlands, accompanied with a more efficient arrears management has led to a significant RWA reduction of EUR 3.2 billion. In addition to this, the Real Estate book has shown signs of improvement which increased the cure rate of the portfolio and reduced risk costs. The remainder of the RWA reduction is visible throughout the portfolio as a result of restructuring and improved client ratings.However, deteriorating conditions in Russia and Ukraine have led to a downgrade in ING’s rating of these countries and an increase in the non-performing loan book, increasing RWA by over EUR 2.0 billion.
• Methodology and policy: The main drivers for the EUR 2.8 billion decrease were the LGD floor update for mortgages, which was previously determined on a facility level whereas now it is determined on a portfolio level and the periodical update of the regulatory c-factor (related to the hypothetical capital of the CCP) implemented to calculate capital for the Default Fund Contribution held by ING Bank at central clearing houses.
In the tables below an overall picture is given of the ING Bank portfolio per exposure class, after which a breakdown per exposure class is given segmented by relevant factors. The segmentation on Securitisations is provided in the Securitisation chapter.
Sovereign credit risk disclosure The table below presents the READ and RWA (excl. CVA RWA), segmented by relevant factors for the exposure class ‘Sovereigns’. The figures per geography for each exposure class are based on the country of residence of the obligor.
Sovereigns Europe 104,057 91,402 13.8% 7,671 7,650 0% Netherlands 25,205 15,308 64.7% 224 379 –41% Belgium 14,691 13,775 6.6% 147 141 4% Germany 24,364 26,661 –8.6% 64 - Other Europe 39,797 35,658 11.6% 7,236 7,129 1%
Sovereigns PD Bands 117,789 103,137 14.2% 8,297 7,926 5% <0.05% 91,754 82,105 11.8% 283 240 18% 0.05% to 0.5% 25,532 20,584 24.0% 7,386 7,303 1% 0.5% to 5% 276 251 10.0% 195 46 325% 5% to 10% 63 77 –18.0% 10 20 –51% 10% to 20% 43 111 –61.4% 30 316 –90% 20% to 50% 103 3 2,995.3% 325 1 34,6% more than 50% 18 6 221.4% 68 0 241,1%
Sovereigns LGD Bands 117,789 103,137 14.2% 8,297 7,926 5% <0.10% 1,107 1,388 –20.2% 41 50 –18% 10% to 20% 715 792 –9.7% 42 76 –45% 20% to 30% 3,436 3,086 11.4% 15 18 –17% 30% to 40% 106,645 91,324 16.8% 5,241 4,611 14% 40% to 50% 5,689 6,429 –11.5% 2,443 2,847 –14% 50% to 60% 1 –100% 2 –100% more than 60% 197 116 69.3% 515 324 59%
The sovereigns portfolio increased by EUR 14.7 billion in READ and EUR 0.4 billion RWA. A large part of the READ increase was a result of increased regulatory deposits at DNB, which carries a 0% risk weight therefore not impacting the RWA. Increasing customer deposits in Japanese Yens and consequently higher placements with the Bank of Japan are driving the growth of Sovereign exposures in Asia. This, combined with the deteriorated country rating for Japan, was an important driver behind the RWA increase. The RWA increase in Other Europe was driven by increased regulatory deposits to the Turkish Central Bank, which carries a relatively high risk weight. In contrast to previous years, the Bond Investments decreased during the year due to the sale of bonds, especially seen in
Institutions Geography/business units 107,372 113,407 –5.3% 20,683 25,743 –20% Africa 435 634 –31.3% 515 653 –21% America 17,701 16,562 6.9% 3,249 3,592 –10% Asia 12,274 14,418 –14.9% 2,878 3,950 –27% Australia 1,495 1,789 –16.5% 216 280 –23% Europe 75,467 80,003 –5.7% 13,825 17,269 –20%
Institutions PD Bands 107,372 113,407 –5.3% 20,683 25,743 –20% <0.05% 17,386 19,681 –11.7% 2,346 2,422 –3% 0.05% to 0.5% 84,313 86,446 –2.5% 15,366 19,459 –21% 0.5% to 5% 4,987 6,236 –20.0% 2,393 2,948 –19% 5% to 10% 91 69 32.6% 67 99 –32% 10% to 20% 137 222 –38.2% 262 521 –50% 20% to 50% 104 30 247.7% 43 25 73% more than 50% 354 724 –51.1% 206 270 –24%
Institutions LGD Bands 107,372 113,407 –5.3% 20,683 25,743 –20% <0.10% 26,663 28,219 –5.5% 1,534 1,622 –5% 10% to 20% 9,584 8,179 17.2% 1,346 1,132 19% 20% to 30% 6,012 4,400 36.6% 1,372 1,148 19% 30% to 40% 55,942 63,204 –11.5% 11,057 15,241 –27% 40% to 50% 276 206 34.3% 195 170 15% 50% to 60% 5,147 5,473 –6% 3,037 3,658 –17% more than 60% 3,748 3,727 0.6% 2,142 2,773 –23%
Corporate Geography/business units 269,558 234,493 15.0% 125,091 108,413 15% Africa 1,654 1,675 –1.2% 1,007 1,221 –18% America 39,936 31,679 26.1% 19,191 13,579 41% Asia 25,601 22,046 16.1% 8,044 7,354 9% Australia 4,083 3,511 16.3% 1,556 1,305 19% Europe 198,284 175,581 12.9% 95,293 84,953 12%
Corporate LGD Bands 269,558 234,493 15.0% 125,091 108,413 15% <0.10% 66,795 59,118 13.0% 4,889 4,371 12% 10% to 20% 38,908 34,011 14.4% 12,812 11,738 9% 20% to 30% 43,457 37,498 15.9% 16,322 16,098 1% 30% to 40% 59,761 57,687 3.6% 31,314 33,804 –7% 40% to 50% 38,953 26,329 47.9% 33,286 16,927 97% 50% to 60% 9,642 7,525 28% 10,039 8,551 17% more than 60% 12,042 12,325 –2.3% 16,429 16,924 –3%
Throughout 2015 the retail book showed solid business growth and lower risk costs. The decline in volumes within the Netherlands was, aside from lower demand, mainly caused by the progressing transfer of WestlandUtrecht Bank (WUB) mortgages to NN Group and the run-off in the WUB mortgage portfolio. The decreases were slightly offset by growth seen in Belgium, mainly driven by residential mortgages and exposure to (small) Corporates. The improving Dutch economy resulted in lower arrears for the Dutch portfolio which improved the PD’s and subsequently the non-performing portfolio. Additionally, increased house prices impacted the LGD’s positively, reducing RWA. The READ for the retail franchise in Germany increased, driven by both higher mortgages and consumer lending production. As a result of the improving economies in most of the key retail markets, the risk weights improved.
Includes both AIRB and SA portfolios. 1 Netherlands includes Domestic Bank NL and WestlandUtrecht Bank.
The ING policy is to index property values on a quarterly basis. In some markets only annual figures are available while for others it is more practical to index on an annual basis. Quarterly or annual indexing is done for the Netherlands, Belgium, Australia, Italy and Spain covering 62% of the portfolio.
LGD 1 This LGD model was developed based on expert judgement, supported by limited internal and external data. The developed LGD model is based on ultimate recovery rates.
EAD 1 There is a dedicated EAD model for commercial property finance due to the specificities of this portfolio.
EAD 7 Local statistical models that use various data inputs, including product type and geography.
Other1 16,199 2.0% 1,975 1.0% Other (Covered Bonds, Structured assets) Total 794,148 100% 201,967 100%
The table below provides a back-testing of the PD models per exposure class. In order to better quantify the back-testing, ING has analysed the 31 December 2015 portfolio. The average PD of 31 December 2014 per portfolio is split per exposure class. The 31 December 2014 portfolio is followed through 2015 to determine the observed default rate. The models are based on long series of historical data. In the back-test the model based PD values are compared against the defaults observed in 2015. This back-test is only representative of the year end 2014 portfolio and can be influenced by small sample sizes or incidents. Nonetheless, the back-test gives a comparison of the predicted PD versus the observed default rate. In the table, the default rate is based on the weighted average READ of the defaulted portfolio whereas the models are developed on an obligor basis.
Includes the AIRB portfolio only; excludes securitisations, equities and ONCOA. * Expected loss rate 2014 includes performing loans only.
On balance sheet amount Off balance sheet amount Counterparties Exposure value
Note that the Bank of International Settlements (BIS) requires an exposure class breakdown in this table which differs from the ING Bank exposure classes shown in previous tables.
Exposures and RWA before and after risk mitigation and conversion factors 2015
Reconciliation of non-performing loans disclosures The table below shows the reconciliation of non-performing loans segmented by the lines of businesses used internally by ING Bank. A narrative explanation on these business lines is given in the Risk Management paragraph of the Annual report.
Impairment allowances - movements Impairment allowances at 1 January 20151 2,258 2,529 1,208 5,995 Changes in the composition of the Bank 0 0 0 0 Amounts written off –520 –956 –242 –1,718 Recoveries of amounts written off in previous years 32 50 9 91 Addition to loan loss provisions (from income statement) 478 602 267 1,347 Exchange rate and other movements 123 –26 –26 71 At 31 December 2015 2,371 2,199 1,216 5,786 1 Equals the amount as of 31 December 2014. 2 Unadjusted for exchange rate fluctuations. 3 Based on start and end date of the outstanding positions, unadjusted for inflow and outflow. 4 At the end of 2015, the stock of provisions included provisions for amounts due from banks: EUR 14 million (2014: EUR 6 million).
Risk costs for Wholesale Banking amounted to EUR 0.5 billion, which is slightly lower compared to previous year. After increasing in Q1 2015, the risk costs have shown a declining trend for Wholesale Banking due to continued lower risk costs in Structured Finance and Real Estate Finance. The net risk costs for Retail Banking Benelux were EUR 0.3 billion lower than previous year due to lower reported risk costs within the Netherlands. Total risk costs for Retail Banking Challenger & Growth slightly increased to EUR 0.3 billion and is largely driven by Turkey due to the economic conditions.
Non-performing exposure by industry and geographic area ING Bank uses a common industry classification methodology based on the NAICS system (North American Industry Classification System). This methodology has over 1,500 detailed industry descriptions, which are aggregated into 22 industry classes at the highest level. Certain countries require ING Bank to report locally based on other industry classification methodologies, which are generally derived from the NAICS classifications presented here. Residential mortgages are generally only extended to private individuals. The geographic area is based on the country of residence of the obligor. The Non-performing exposure table should be read in conjunction with the information and statements made in the Risk Management Paragraph of the annual report.
Res. Mortgage Other retail Total Total Netherlands 341 2,907 2,556 551 6,355 8,458 Belgium 1 1,127 990 623 2,741 2,472 Germany 81 534 243 858 973 Other Europe 17 9 3,102 287 832 4,247 4,577 Americas 356 4 2 362 341 Asia / Pacific 3 234 127 9 373 366 ROW 1 91 1 1 94 3 Total 18 354 7,898 4,499 2,261 15,030 17,190
Cumulative provisions by industry and geographic area The tables below show the provisions per NAICS industry and geography and should be read in conjunction with the information and statements made in the Risk Management section of the annual report.
During the year the provisions decreased from EUR 6.0 billion to EUR 5.8 billion which is a decline of 5.4% year to date. The decrease in the level of provisions over the year reflects the improved economic climate in which ING operates, especially in the Netherlands. However, a significant increase in provisions is observed in the Utilities, Natural Resources and Private individuals due to the deterioration of the credit quality of some specific portfolios due to the international and political turmoil in Eastern Europe and the Middle-East, ongoing pressure on emerging markets and the direct and indirect negative effects of continued low oil and other commodity prices. For the second year in a row the Real Estate sector is showing a significant reduction in provisions due to an improved risk profile and write-offs mainly seen in other Europe. Furthermore, a decrease in provisions is seen in Private Individuals caused by the improved risk profile of the Dutch Residential Mortgage portfolio. The decrease of provisions in Germany is in line with the decrease in the non-performing Residential Mortgage loans. Despite this decrease, the coverage ratio for Germany is reported at 67% which is higher than the average coverage ratio for ING Bank. This is mainly due to the application of an in default LGD model in Germany.
Total past due exposure for consumer loans decreased from EUR 5.1 billion to EUR 4.3 billion. The decrease is mainly caused by an improved residential mortgages portfolio in the Netherlands which is a result of the improved economic environment and improved arrears management. In the German Residential Mortgage portfolio an increase is observed in past due exposures payments between 1 to 90 days compared to end of 2014. This is a result of an improvement project in 2015 with stricter policy requirements.
Excludes the business portfolio, includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA.
Interest Rate Derivatives 7,192 0.009 4.5 3,502 FX Derivative 2,351 0.009 1.8 515 Equity Derivative 1,619 0.010 3.7 764 Commodity Derivative 118 0.009 2.1 31 Credit Derivative 318 0.009 3.7 150 Derivatives Other 82 0.008 5.2 30 Securities Financing Total 2015 11,680 0.009 3.8 5,005 Total 2014 21,648 0.009 2.8 6,412
Derivatives by product type The table below is based on the mark-to-market (MtM) plus (regulatory) add-on methodology used for calculating CRR/CRD IV RWA for determining the gross exposures. This means that the READ figure listed hereunder is significantly below the notional amount. The mark-to-market plus (regulatory) add-on is recalculated daily to reflect both changes in the markets as well as portfolio composition. The Current Exposure Method (the methodology to calculate the READ) together with the other building blocks (PD, LGD and Maturity), allow ING Bank to classify a large part of its derivatives exposures under the AIRB approach.
The remaining 18% of the total notional value of OTC derivatives transactions that are not cleared by a CCP are not supported by a CSA agreement or a Clearing Agreement and mainly relate to Corporates with small credit limits and mainly comprises of Interest Rate Derivatives (47%) and FX Derivatives (49%).
Res. Mortgage Other retail Total Total Bond Financing Given 543 6,306 134 6,983 5,335 Equity Financing Given 3,719 1,421 5,140 6,583 Bond Financing Taken 88 2,121 154 2,363 2,079 Equity Financing Taken 1,167 134 1,301 1,597 Total 631 13,313 1,843 15,787 15,595
For the other risk types and especially lending, covers are received which is intended to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. These are subdivided into four groups called collateral values mortgages, cover values cash, cover value guarantees and other physical covers.
Loans Wholesale Banking 93,102 113,038 97,317 39,832 30,165 n.a n.a Retail Banking 52,006 329,451 319,280 33,361 27,277 n.a n.a
ING records collateral value per facility. Those figures are based on original cover values although some business units attempt to update to current market values. This is inherently difficult in volatile markets. Some facilities will have multiple levels of collateral while others have no collateral. The total figures may not reflect the collateral value per facility.
There were no credit derivatives bought for hedging purposes at the end of the year in 2015. The figures above represent the notional amount of credit risk default swaps that ING Bank has entered into for the purpose of hedging. The credit risk on the counterparties associated with credit default swap protection bought is included in the Pre-Settlement risk calculations for the given counterparty, and not in the figures above. In addition, ING engages in CDS trading both in credit protection bought and credit protection sold. These figures essentially cancel each other. However as they are part of the trading book, these figures are provided in the Market Risk section. For credit default protection sold, ING Bank incurs synthetic issuer risk, on which capital is calculated, depending on its purpose, either hedging under the banking book or trading.
These figures exclude any guarantees which are received from a party related to the obligor, such as a parent or sister company. The figures also exclude any guarantees that may be implied as a result of credit default swap activities. The figures do include amounts that are guaranteed through an unfunded risk participation construction.
Depending on ING Bank’s role as investor, originator, or sponsor the objectives, the involvement and the rules applied may be different. ING Bank is primarily engaged in securitisation transactions in the role of investor (in securitisations arranged by others). To a lesser extent, ING Bank is also an originator or sponsor of securitisations that are usually traded in the public markets. ING does not resecuritise its securitisations exposure and even though ING bank hedges its securitisation positions, such instruments are not recognized as credit risk mitigants for regulatory capital purposes.
Valuation and accounting policies ING Bank's activities regarding securitisations are described in Note 51 ’Structured entities’ in the annual accounts. The applicable accounting policies are included in the section ‘Accounting policies for the consolidated annual accounts of ING Bank’ in the annual accounts. The most relevant accounting policies for ING Bank’s own originated securitisation programmes are ‘Derecognition of financial assets’ and ‘Consolidation’. Where ING Bank acts as investor in securitisation positions, the most relevant accounting policy is ‘Classification of financial instruments’.
2015 2014 S&P Fitch Moody’s IAA approach Other Total Total Residential Mortgage Backed Securities 1,148 1,813 359 11 3,331 4,025 Asset Backed Securities 1,011 1,860 145 40 3,056 2,218 Securitisation Liquidity 846 846 947 Interest Rate Derivatives 423 423 106 Other 35 9 10 420 474 519 Total 2,194 3,682 514 1,700 40 8,130 7,815
Securitisations Exposure Class2 8,130 7,815 4.0% Securitisation Investor 6,442 6,357 1.3% Securitisation Sponsor 1,688 1,458 15.8%
During 2015 the exposure to securitisations increased from EUR 7.8 billion to EUR 8.1 billion, mainly due to the increased exposure in German assets. The overall increase is driven by asset backed securities and unsecured bonds while all other product groups demonstrate a decline.
In 2015 the securitisation activities with underlying retail exposure increased by EUR 0.8 billion to EUR 3.1 billion, while the securitisations with underlying Wholesale Banking exposure declined. During 2015 the liquidity portfolio in ABS grew moderately mainly in Auto-ABS from Western Europe and UK RMBS Master Trusts, the majority of Auto-ABS is based on German Assets, and thus there is a notable increase in Germany. ING aims to keep approximately 2% of its liquidity portfolio in LCR eligible Securitisations.
RWA (by regulatory approach) IRB RBA (incl. IAA) 772 712 60 772 1,259 12.50 Risk Weight 902 901 1 902 593 Total 1,674 1,613 61 1,674 1,853
Excludes equities and ONCOA. ING does not have any re-securitisation in its books.
Weight Exposure amount RWA Capital requirements 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Exchange traded equity exposures 1,224 128 290% 1,224 128 3,548 371 283 30 Private equity exposures 556 479 190% 556 479 1,057 910 85 73 Other equity exposures 370% Total 1,780 607 1,780 607 4,605 1,281 368 102
Additional Pillar III information - continued 2015 median in EUR million
Fair value of collateral received or own debt securities issued available for encumbrance
En vi ro nm en ta l c om pl ia nc e
Consumer lending 39.2 ● Financial institutions 17.0 ● Governments 10.5 ● Other 1.5 ● Corporates 31.8 ● ● ● – Real estate 5.5 ● ● ● ● ●
– Food, beverages & personal care 2.6 ● ● ● ● ● ● ● ● ● – General industries 2.3 ● ● ● ● ● ● ● – Builders & contractors 1.8 ● ● ● ● ●
1 The symbols above each column represent our different ESR framework policies. 2 A Sustainable Finance sector strategy identifies sustainability related developments in a specific sector. It outlines how best to pursue the opportunities that arise from them and provides solutions for best-in-class clients and best practices that are outstanding in their environmental performance relative to their sector.
The graphs below show 2015 EP screened transactions versus those that reached financial close for Project Finance and Project Related Corporate Loans categories. The difference between these figures refers to transactions that have not reached financial close due to a number of reasons not necessarily linked to environmental and social matters. Also, some of the screened transactions may reach financial close in the future.
The table below provides an overview of EP transaction in accordance with EPIII reporting requirements, which refer to funded deals or advisory roles that have been mandated to ING in 2015.
1 Refer to note 28 of the ING Group Consolidated Annual Accounts 2015.
On the job training 5.4 11.6 1 Total leavers headcount in 2015 divided by headcount on 1 January 2015.
ING Bank 59.5 in percentage of employees 2015 2014 2013 in percentage of employees Female Male Female Male Female Male
Children and education (incl. UNICEF) 5,235 5,538 6,513 14,614 26,289 27,331
Relative to our base year, our carbon footprint was reduced by 6% in 2015 as a result of increasing our renewable electricity consumption to 86% of total electricity consumption. Our residual waste was reduced by 5% and we remained carbon neutral by offsetting emissions caused by business travel and grey energy use. Our reported water footprint has increased by 22% due to broadened coverage. As water reporting is very new for our local entities, we expect our coverage to increase over time.
Sustainable procurement We have a real opportunity to drive our sustainability agenda through our supply chain. By encouraging suppliers to share our standards and work towards continual improvement, we believe we can make a demonstrable impact while mitigating risks.
Total energy per FTE in MWh and in tonne 7.3 0.9 7.9 1.2 8.5 1.4
Total carbon per FTE in tonne 1.6 1.8 2.2 1 The total carbon amount of 84 tonnes is the sum of scope 1, 2 and 3 emissions. The total here is one kilotonne higher than the sum of the figures displayed due to the fact that we only display figures rounded to the nearest kilotonne. 2 Scope 1: comprises emissions from our use of natural gas and fuel oil; Scope 2: comprises emissions from our use of electricity, renewable electricity and district heating; Scope 3: comprises emissions from our business travel by air and car.
3 The total carbon figure for Scope 2 displayed here is calculated using the GHG Protocol Market-based calculation method outlined within the Scope 2 Guidance. This method takes into account the use of renewable electricity with an emissions factor of 0 g CO₂e/MWh. Using the Location-based method outlined within the Scope 2 Guidance, our scope 2 CO₂e emissions for our base-year (2014) is 116 kilotonnes and for 2015 is 111 kilotonnes. For more information on our calculation methodology and scope, please see our reporting protocol on ING.com.
4 A rise in scope 3 emissions is due to an increase in business travel resulting from intensified cross-border collaboration in an effort to further streamline our global processes and accelerate innovation as a part of our Think Forward strategy.
Supplier Sustainability Performance Assessments # of Suppliers Engaged 596 243 127
Like other banks ING felt the method of research was oversimplifying the complexity of the topic circular economy. As a result several banks did not participate in this investigation. Instead the three biggest Dutch banks worked on a joint initiative, which was launched in January 2016. Next to that, ING published an elaborate report on Rethinking finance in a circular economy: 40b4-9d98-b333009aeca0&owner=b03bc017-e0db4b5d -abbf-003b12934429&contentid=34276 which provides a lot of insight for companies and banks on this topic.
Animal welfare: Myronivsky Hliboproduct (MHP) owns the biggest chicken stable in the EU. Research was conducted by SOMO and published in a Dutch newspaper. Based on said research/publication, questions were raised about animal welfare and the financial institutions financing this company, such as ING bank.
ING shares many of the environmental and social concerns expressed by the FFG. However, we differ in our approach towards these issues. In difference to the FFG, we don’t seek to totally exlude sectors like coal, oil, gas and uranium mining, hampering steel production (coal), the transport industry including freight transport, shipping and aviation (oil), electricity production and heating (gas), or cancer treatment with medical isotopes (uranium). We rather seek to support higher standards applied within sectors than exclusion.
Palm oil - burning of lands: Milieudefensie issued its report ’Up in smoke’, linking two major palm oil production companies to forest fires in Indonesia. Furthermore a link was made with their financiers.
Dutch law ’Wet Werk en Zekerheid’ (re. employment and job security): Certain newspapers speculated that as a result of a change in the aforementioned law employers would prefer laying off temporary employees, to avoid having to offer them a long term/fixed contract.
ING had already announced a reorganisation in the previous year (2014) to address digitalisation and changing customer needs. The reorganisation also impacted temporary employees. This was, however, not related to the new law.
Business risk The exposure to value loss due to fluctuations in volumes, margins and costs. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency.
Collateralised loan obligation (CLO) A type of collateralised debt obligation (CDO) that is backed primarily by leveraged bank loans.
Corporate Governance Committee The Corporate Governance Committee, consisting of members of the Supervisory Board, assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the way it’s reported on in the Annual Report and to the General Meeting of Shareholders. It advises the Supervisory Board on improvements.
Discontinued operations A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and a. represents a separate major line of business or geographical area of operations; b. is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or c. is a subsidiary acquired exclusively with a view to resale.
Economic capital (EC) EC is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general, EC is measured as the unexpected loss above the expected loss at a given confidence level. This economic capital definition is in line with the net market value (or surplus) definition.
Financial asset Any asset that is: • cash; • an equity instrument of another company; and • a contractual right to: • receive cash or another financial asset from another company; • exchange financial instruments with another company under conditions that are potentially favourable; and • a certain contract that will or may be settled in ING’s own equity instruments.
Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity that ING Group has the positive intention and ability to hold to maturity other than: a. those that ING Group upon initial recognition designates as at fair value through profit and loss; b. those that ING Group designates as available-for-sale; and c. those that meet the definition of loans and receivables.
Legal risk Legal risk is the risk related to: • A failure (or perceived failure) to adhere to applicable laws, regulations and standards; • Contractual liabilities or obligations that are defaulted or cannot be enforced as intended, or are enforced in an unexpected or adverse way; and
Market risk Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, credit spreads and real estate prices, negatively impact the bank’s earnings, capital, market value or liquidity position.
Minority interest That part of the profit or loss and net assets of a subsidiary attributable to an interest that is not owned, directly or indirectly, by the parent company.
Non-voting equity securities These refer to the core Tier 1 securities issued to the Dutch State in November 2008 for a total of EUR 10 billion. This capital injection qualified as core Tier 1 capital for regulatory purposes. It was repaid in tranches, with the final repayment made in November 2014. Ultimately, the total amount paid to the Dutch State was EUR 13.5 billion, which comprised EUR 10 billion in principal and EUR 3.5 billion in interest and premiums, and resulted in an annualised return of 12.7% for the Dutch State.
Post-employment benefit plans Formal or informal arrangements under which a company provides post-employment benefits for one or more employees. Post-employment benefits are employee benefits other than termination benefits and equity compensation benefits, which are payable after the completion of employment.
Problem loans In line with IFRS, if a borrower defaults on payment for more than 90 days, or a customer is likely to default payment, the particular loan and all other positions will be regarded as problem or non-performing loans.
Residential Mortgage Backed Security (RMBS) A residential mortgage backed security is when banks and financial institutions pool people’s mortgages into debt securities that investors can buy and trade. These securities are divided into classes based on the risk associated with the mortgage. The least risky are ‘prime’ mortgages, followed by ‘Alt-A’ and then ‘sub-prime’, which is the most risky.
Settlement risk Settlement risk arises when there is an exchange of value (funds, instruments or commodities) for the same or different value dates or times, but the receipt won’t be verified or expected until ING Group has paid or delivered its side of the trade. The risk is that ING Group delivers, but the counterparty doesn’t.
SSA categories are defined per: a. The EU-regulation (EU) 575/2013 CRR, which defines exposure classes in Article 112 – Article 132 (‘CRR’); b. The exemption list in Article 2 of the directive 2013/36/EU
Total loss-absorbency capacity (TLAC) This is a concept proposed by the Financial Stability Board in November 2014 meant to ensure that globally systemically important banks, known as G-SIBs, have sufficient capacity to absorb losses both before and during resolution (the process of sorting out a failed bank) to continue critical functions without requiring taxpayer support or threatening financial stability.
The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING Bank uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital.
These publications are available on www.ing.com. The publications can be downloaded on the internet: www.ing.com, button “Publications”. The printed version of the Annual Report on Form 20-F, in English, can be ordered here.