Message of the CEO 4 ING at a glance 6 Key figures 8 Composition of the Boards 9 ING share 10
– Notes to the consolidated profit and loss account 156 – Notes to the consolidated statement of cash flows 170 – Segment reporting 171 – Additional notes to the consolidated annual accounts 183 Risk management 237 Capital management 335
Parent company balance sheet 345 Parent company profit and loss account 346 Parent company statement of changes in equity 347 Accounting policies for the parent company annual accounts 348 Notes to the parent company annual accounts 349
to manage their procurement and sales processes. It is a similar story in insurance, where we are introducing new ways of serving customers and improving processes. Insurance Europe is building a multichannel distribution platform to service customers across all channels. In the Czech Republic and Spain we introduced For You, a concept of breast cancer insurance and related services.
In anticipation of tougher capital requirements we have strengthened our capital position, but if these requirements are tightened further, our ability to lend to the economy may come under pressure and this will at the same time affect our global competitive position. Moreover, we are pushing for a European level playing field to guarantee a robust competitive position for banks.
We are a customer-centric organisation, but that does not mean that we always execute what the customer wants us to do. That may sound contradictory. We have a duty of care to provide customers with the correct information and to ensure we really act in their interest.
OUR PROFILE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services. We draw on our experience and expertise, our commitment to excellent service and our global scale to meet the needs of a broad customer base, comprising individuals, families, small businesses, large corporations, institutions and governments. The strength of the company is, among other things, based on its relatively high customer satisfaction levels, solid financial position, multi-channel distribution strategy and international network. Moreover, ING is a sustainability leader in its sector.
was agreed upon in 2013. It was completed early 2014. • A successful initial public offering (IPO) of the US insurance business (ING U.S.).
• In 2013, ING Insurance revealed its future brand name: NN. The preparations for the base case IPO of NN Group are progressing well, which is expected to allow us to go to the market in 2014.
OUR FINANCIAL POSITION ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the economy. In 2013 we gained in financial strength. Our funding position improved, our capital and liquidity position remained strong and earnings remained resilient. However, risk costs went up slightly in a weak economic year in many of the markets in which we operate.
Retail Banking provides retail and direct banking services to individuals and small and medium-sized enterprises throughout Europe and Asia, with a base in our Northern European home markets.
* Excluding the results of the discontinued operations of ING U.S. and the results of Insurance Other.
ING Group in accordance with IFRS-EU in EUR million unless otherwise indicated 2013 2012 (1) 2011 (1) 2010 (1) 2009 (1)
Net result from continuing and discontinued operations 3,232 4,161 5,781 2,803 -1,040
Underlying result before tax ING Bank 4,323 3,554 4,205 Operating result ongoing business NN Group 886 833 1,132 Non-operating results ongoing business of NN Group -229 -779 -660 Result before tax Japan Closed Block VA -669 105 138 Underlying result before tax NN Group -12 159 610 Underlying result before tax Insurance Other 89 43 56 Underlying result before tax ING Group 4,400 3,756 4,871 Taxation and minority interests 1,145 1,094 1,218 Underlying net result ING Group 3,255 2,664 3,653 Divestments, discontinued operations and special items -24 1,496 2,128 Net result ING Group 3,232 4,161 5,781
ING Group evaluates the results of its banking segments using the non-GAAP financial performance measures ‘underlying result’. As of 2013, ING Group evaluates the results of its insurance segments using the non-GAAP financial performance measure ‘operating result’. See note 42 in the consolidated anual accounts for more details about these nonGAAP financial performance measures and the reconciliation to IFRS-EU.
Investing in communities Donations to UNICEF (in EUR thousand) (4) 3,154 2,774
J. (Jeroen) van der Veer (66), chairman P.A.F.W. (Peter) Elverding (65), vice-chairman J.P. (Tineke) Bahlmann (63) H.W. (Henk) Breukink (63) I. (Isabel) Martín Castellá (66) C.W. (Carin) Gorter (51) J.H. (Jan) Holsboer (67) H.J.M. (Hermann-Josef) Lamberti (57) J.C.L. (Joost) Kuiper (66) R.W.P. (Robert) Reibestein (57) Y.C.M.T. (Yvonne) van Rooy (62) L.A.C.P. (Luc) Vandewalle (69)
Prices of depositary receipts for ordinary shares Euronext Amsterdam by NYSE Euronext in EUR 2013 2012 2011
ING’s policy is to pay dividends in relation to the long-term underlying development of cash earnings. Dividends will only be paid when the Executive Board considers such a dividend appropriate. Given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repay the remaining outstanding core Tier 1 securities, the Executive Board will not propose to pay a dividend in respect of 2013 at the annual General Meeting. ING intends to resume dividend payments on common shares when all remaining core Tier 1 securities have been repaid to the Dutch State and regulatory capital requirements have been met.
On 19 November 2012, ING announced that, together with the Dutch State, it reached an agreement with the European Commission on significant amendments to the 2009 Restructuring Plan. As part of the agreement, ING filed a schedule for repayment to the Dutch State of the remaining EUR 3 billion in core Tier 1 securities plus a 50% premium, in four tranches in the years 2012-2015. A first tranche of EUR 1.125 billion was paid on 26 November 2012, following approval by De Nederlandsche Bank (DNB), the Dutch central bank. A second tranche of EUR 1.125 billion was paid on 6 November 2013, also following approval of DNB. This brought the total paid to the Dutch State to EUR 11.3 billion, including EUR 8.5 billion in principal and EUR 2.8 billion in interest and premiums.
United States 38 United Kingdom 19 Rest of Europe 12 France 11 Rest of World 9 Netherlands 6 Germany 5 Total 100
TAPER PROSPECTS REALITY CHECK FOR OTHERWISE BUOYANT FINANCIAL MARKETS Financial markets in developed economies had a good year, with stock indices up by double digits. It is difficult to overestimate the importance of the European Central Bank’s Outright Monetary Transactions programme for the restoration of confidence in the eurozone. The gradual progress towards crisis resolution and banking union in Europe also helped to cement the positive sentiment. Financial markets shrugged off the Cyprus bank restructuring and political problems in various countries during 2013: spreads between European sovereigns continued to decline. In the second half of 2013, sentiment was also supported by the fact that the eurozone was emerging from recession.
BANK-WIDE REGULATION Capital Requirements Regulation and Directive IV (CRR/CRD IV) In 2013, the European Union adopted a legislative package to implement the Basel III agreement in the EU legal framework. This new package consists of the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR). CRR/CRD IV was officially agreed upon, allowing for the application of the Regulation on 1 January 2014. The Directive will have to be transposed into national law and because of this a few months delay is envisaged. ING is compliant with the requirements set in the CRR and is waiting for EBA (European Banking Authority) final technical standards to be approved to allow for full implementation. Other important key elements of the Basel III package are still subject to further consideration and calibration such as the liquidity ratios and the leverage ratio.
Markets in Financial Instruments Directive (“MiFID”) MiFiD is a European Union law that aims at harmonising regulation for investment services across the European Economic Area (EEA). MiFiD first became effective in November 2007 and is now being revised to create MiFiD II. Among the main objectives of the revision are the aim to strengthen investor protection and more robust and efficient market structures. At the end of 2013, the negotiations between European Commission, European Parliament (EP) and Council of the European Union were their final stages. In anticipation of the new rules, implementation of MiFID within ING will gradually start in the course of 2014, with full implementation expected in 2016. As the Dutch government has developed national legislation that prohibits granting or receiving inducements for investment services from January 2014, the impact of MiFID II will be limited in this area. The full impact on ING’s financial markets business has yet to be determined, but it is expected to be meaningful.
The proposal also covers a number of other topics, such as strict conditions on severance pay, prohibition on guaranteed bonuses, and tightening of claw-back options.
FINANCIAL MARKETS REGULATION European Market Infrastructure Regulation (“EMIR”) One of the most significant regulatory developments in the financial markets in 2013 was the commencement of the phasing in of EMIR. The main goal of EMIR is to better protect parties to over-the-counter (“OTC”) derivatives transactions, as well as the 14 ING Group Annual Report 2013
Consumer protection package In July 2012, the European Commission published legislative proposals to improve consumer protection in financial services. With the package, the Commission aims to address lack of transparency, low awareness of risks and poor handling of conflicts of interest. The package is composed of three legislative proposals: a regulation on key information documents for Packaged Retail Investment Products (“PRIPS”), a revision of the Insurance Mediation Directive (IMD2), and better protection for buyers of Undertakings for Collective Investments in Transferable Securities (“UCITS”) funds.
ING Bank’s strategic aim is to be a strong, predominantly European bank for its customers. ING Bank wants to be a leading domestic full-service bank in attractive, stable home markets, as well as a leading commercial bank in the Benelux with a strong position in Central and Eastern Europe.
Our goals are to help people and businesses build their future, to realise their ambitions and to help them manage their financial risks. We want to be a financial institution our customers are comfortable with and are eager to refer to friends, colleagues, business partners and family. We put the customer first, offering her or him superior experiences at attractive costs and giving employees opportunities to grow and go the extra mile for customers.
ING invests in building solid relationships with its customers, based on the quality of service and sound financials. We believe opportunities can arise if we continue to work hard on regaining trust, demonstrating that we care, explaining better why certain strategic choices are made and also on getting more out of the wealth of talent we have within our workforce.
Our strong funding position enabled us to continue supporting our customers through lending in 2013.
To meet the agreement with the European Commission (EC) of November 2012, ING had to divest more than 50% of its Asian and 25% of its US insurance and investment management activities by 2013. Both requirements were met: • The divestment of the Asian insurance and investment management activities was effectively completed in 2013. ING Life Japan will be included in the scope of the NN Group base case IPO in 2014. In May 2013 ING U.S. started trading on the New York Stock Exchange under the ticker symbol VOYA. The successful sale of 38 million ING U.S. shares in October 2013 brought ING’s stake down to 57%. The divested 43% was more than the required 25% and moved ING closer to meeting the required divestment of over 50% by the end of 2014. 100% has to be reached by year-end 2016.
ING was also able to reduce the core debt from EUR 7.1 billion at year-end 2012 to EUR 5.0 billion at year-end 2013. This was due to strong capital generation within ING Bank, allowing an upstream payment to the Group, as well as to proceeds from the US IPO and the sale of part of the direct stake in the Brazilian insurer Sul América S.A. (SulAmérica). As ING has committed to eliminate core debt, proceeds from the divestments will be used to that end, provided they are not needed to maintain the leverage of the remaining insurance businesses. The value of the remaining 57% stake in ING U.S., the remaining stake
• Cultural change. Tapping more into the talents of employees. Further developing a transparent no-nonsense culture.
STRENGTHENING THE FINANCIAL POSITION ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the economy. In 2013 we gained financial strength. Capital and funding improved, our liquidity position remained strong, earnings remained resilient. However, risk costs went up slightly in a weak economic year in many of the markets in which we operate.
expected to add approximately 10 basis points to ING Bank’s core Tier 1 ratio. As a result of the unwinding, the restrictions as part of the IABF-agreement will no longer be applicable, including the right of the Dutch State to nominate two members for appointment to the Supervisory Board. The current State nominated member of the Supervisory Board will no longer have special approval rights regarding certain decisions and will have a position equal to the other members of the Supervisory Board. The unwinding was completed early 2014 and resulted in a cash profit for the Dutch State of EUR 1.4 billion.
• Strong capital generation at the Bank facilitated the payment of another tranche of core Tier 1 securities on 6 November 2013, reducing the principal amount of outstanding State aid to EUR 1.5 billion. ING received EUR 10 billion in state aid from the Dutch State in November 2008. Including the latest repayment in November 2013, ING has so far repaid EUR 11.3 billion to the Dutch State, including EUR 8.5 billion in principal and EUR 2.8 billion in interest and premiums. The final tranches of EUR 1.175 and EUR 1.075 billion are scheduled to be paid by March 2014 and by May 2015. The total annualised return for the Dutch State is expected to be 12.5%.
in SulAmérica and the European Insurance business will be more than sufficient to cover the residual core debt of the Group.
• The Thai investment management units. • ING’s 50% stake in its Chinese insurance joint venture ING-BOB
Life Insurance Company. • ING’s 33% stake in China Merchants Fund. • The Mexican mortgage business.
The divestments in 2013 made ING a simpler, smaller and stronger company.
The strength of a company is also determined by the quality of its workforce. ING is a great place to work, as surveys have shown. Among other factors, remuneration needs to be well-balanced to retain and recruit highly qualified staff. Therefore, ING ensures that its remuneration policy in general, but especially for senior management, the Executive Board and the Supervisory Board maintains a balance between short-term and long-term value creation. ING also makes sure that the remuneration policy is properly correlated with our risk profile and the interests of all stakeholders. A comprehensive overview of this framework can be found in the Remuneration chapter in this Annual Report.
To serve customers, ING Bank’s strategy is also built around operational excellence and balance sheet optimisation. In 2013, we made progress towards operational excellence by improving our service and by streamlining our organisation and systems. In order to remain competitive and strong, cost control continues to be a priority at the Bank. ING Bank is used to operating in lean, competitive markets which has helped it become a leader in innovative distribution. It has a prominent position in internet banking with a “direct first, advice when needed” model and a relationship-driven commercial bank offering competitive products in terms of price, efficiency and effectiveness. Nevertheless, there is room to further improve the efficiency of our processes. The mobile and digital revolution means customers now expect fast and simple solutions tailored to their individual needs and an offering that is constantly evolving.
3. We explain the risks, returns and costs of our products and services. Transparency and easy-to-understand language are crucial to our business.
In line with its ambition to be a leading, responsible and customercentric organisation NN Group introduced its new corporate values, which are connected to its roots, heritage and common purpose: • “We care”: We see our customers as the starting point of everything we do. We respect each other and believe working together leads to better results. We take our role in society seriously.
• “We are clear”: We are easy to understand, transparent and accessible. We listen carefully and take action accordingly. We keep our promises.
In 2013, ING was able to make good progress on the strategic priorities for ING Group: strengthening the financial position, restructuring, repaying state aid and building both stronger and sustainable banking and insurance and investment management businesses.
The preparations for the base case IPO of NN Group are progressing well, which is expected to allow us to go to the market in 2014. In 2013, the future brand name was revealed: NN. We believe NN Group has a strong position as a provider of retirement services, insurance, investments and banking in 18 countries and is well-positioned to capitalise on socio-economic trends.
Active capital management is an important factor in achieving ING’s strategic and financial objectives. ING prioritises capital adequacy at all levels within the organisation, and value creation for our shareholders. Maintaining sufficient financial flexibility is especially necessary, given the rapidly changing regulatory landscape and the restructuring of ING which has entered its final phase.
In November 2012, ING Group made a commitment to repay the Dutch State the remaining core Tier 1 securities in four equal tranches of EUR 1.125 billion each, subject to approval from the Dutch central bank (DNB). The first two of these tranches of EUR 1.125 billion were repaid in November 2012 and November 2013. As announced on 6 November 2013 and as agreed with the European Commission, the net present value of the financial benefits realised through liability management actions (EUR 50 million) will be added to the repayment of March 2014. The final tranche will therefore be repaid by May 2015 at a total cost of EUR 1.075 billion. After this final payment ING will have repaid the EUR 10 billion of State aid from 2009 at a total cost of EUR 13.5 billion, providing the Dutch State with an internal rate of return of 12.5%.
During 2013, ING Group received dividends from ING Bank and NN Group which it used to reduce core debt. In the second quarter, NN Group paid a dividend to ING Group of EUR 775 million; this included the EUR 0.6 billion proceeds from the IPO of the US Insurance business, ING U.S. (Voya) and proceeds from the sale of part of the stake in the Brazilian insurer Sul América S.A. (SulAmérica). In addition, ING Bank paid a dividend to ING Group of EUR 1.5 billion to facilitate a further reduction of the Group core debt. Other dividend flows from ING Bank to ING Group in 2013, next to the dividend for the core Tier 1 repayment of November, were a EUR 330 million dividend payment to finance the capital injection into Nationale-Nederlanden Bank.
The remaining stake in ING U.S. was transferred to ING Group from NN Group on 30 September 2013. The subsequent sale of another tranche of 15% shares in ING U.S. took place in October. This reduces the ING Group’s stake to approximately 57%. The sale proceeds were EUR 800 million and will be used to reduce core debt at the Group.
ING took actions in 2013 to reduce volatility in IFRS equity: • The ING Pension Fund became financially independent on 1 January 2014, reducing volatility for ING Group, ING Bank and NN Group.
During the year, ING was able to close the divestment of its life insurance units in Hong Kong, Macau and Thailand. On 24 December, ING closed its divestment of ING Life Korea. After exploring and evaluating the options for the divestment of ING Life
THREE LINES OF DEFENCE The key objective of risk management at ING is to make sure that all risks are managed in the best possible way for all relevant stakeholders. To this end, we have built a strong risk culture that supports appropriate behaviours and judgements within a strong risk governance and a comprehensive risk appetite framework. As part of this ING applies a “three lines of defence” governance model for risk management, whereby ownership for risk is taken at three levels in the organisation.
Despite some signs of recovery, the weak macroeconomic environment persisted through 2013. Against this backdrop, ING’s risk position continued to hold up well. This position was driven by active risk management, but also by on-going restructuring and reform programs in both the banking and the insurance businesses. Both the Bank and the Insurance operations continued to optimise and de-risk their balance sheet. The total exposure in the GIIPSC (Greece, Ireland, Italy, Portugal, Spain and Cyprus) countries decreased by EUR 5.5 billion to EUR 62.3 billion. In addition, the Bank continued to transform its debt securities portfolio into a liquidity book as part of the strategy to optimise the balance sheet.
The growth of electronic distribution and communication channels has increased the speed and convenience with which our customers can conduct their banking business with us. We are committed to providing this convenience without compromising security standards. ING has implemented and continues to implement comprehensive prevention, detection and responsive measures to defend its customers, its information and its systems against cyber attacks and reduce the level of any losses. The Distributed Denial of Service (“DDoS”) attacks on (Dutch) banks in April 2013 made it clear that the investments ING Bank is making in this domain are more necessary than ever and deliver positive results.
Information technology (IT) has vastly transformed the way both the banking and insurance industries interact with their customers. Mobile, particularly in banking, and direct channels in general have become a significant force in distribution. Increasingly, the innovative use of technology will be essential in creating a superior customer experience and will more and more play a leading role in the way ING does business. By continuously investing in innovative technology, developing superior IT skills and putting the customer’s interest first in everything we do, ING aims to distinguish itself as a leading financial services company.
SEPARATION Both IT departments at the Bank and the Insurer continued to work on separation projects in the IT Readiness Program which began in 2010, and which was established because of the planned separation of ING Group’s Bank and Insurance operations into standalone businesses.
make it more resilient to DDoS attacks, not only in the Netherlands but on a global scale. In parallel, it worked with the Dutch justice department to investigate the source of the attacks.
INSURANCE Information technology plays a crucial role in supporting NN Group as a leading insurance and investment management organisation. In 2013, NN Group made significant progress in restructuring its operations in preparation for a standalone future.
FINANCIAL DEVELOPMENTS The underlying result before tax (excluding the impact of divestments and special items) increased 21.6% to EUR 4,323 million in 2013 from EUR 3,554 million in 2012. This increase mainly reflects a strengthening of the interest margin, less volatility in credit and debt valuation adjustments (“CVA/DVA”) in Commercial Banking and the Corporate Line, and the absence of de-risking losses in 2013. This was partly offset by 7.9% higher risk costs, while expenses were almost flat despite higher pension costs and additional restructuring charges.
WHERE WE OPERATE* ING Bank builds on its international network from its Northern European home markets, capitalising on its leadership position in gathering savings, multi-channel distribution, simple propositions, cost leadership and marketing.
quality and quantity of capital is a central element of this new regulatory framework, as is the introduction of a harmonised liquidity framework. The rules came into force in January 2014, although important elements are subject to further consideration and calibration, such as the liquidity and leverage ratios.
During the year ING took several more steps to unwind its support from the Dutch State. In 2013 ING Bank reduced the Dutch State guaranteed funding by EUR 3.6 billion to EUR 2.5 billion, mainly through a tender offer. The remaining bonds will mature
BALANCE SHEET OPTIMISATION ING Bank worked hard to optimise its capital structure and met most of the CRD IV requirements before they were implemented. In November ING Bank announced and also executed a number of liability management actions to optimise the capital structure in anticipation of the upcoming CRD IV implementation.
ING Bank’s balance sheet has also been reduced and strengthened. The balance sheet declined following the transfer and sale of EUR 8.3 billion of assets and EUR 3.7 billion of liabilities from WUB to Nationale-Nederlanden Bank, and the sale of EUR 2.2 billion of Dutch mortgages and EUR 1.0 billon of US Real Estate Finance (“REF”) Loans. The balance sheet was also impacted by the divestment of ING Direct UK in the first quarter of 2013 and the sale of EUR 0.8 billion mortgage portfolio in Australia in the second quarter of 2013.
COST CONTAINMENT In February 2013 a second phase of ING Bank’s Retail Netherlands’ cost reduction programme was announced on top of the programme announced in November 2011, followed by an extension of the existing cost-saving programme in the fourth quarter of 2013. Including this extension, total headcount reductions are 4,400 FTEs and will result in EUR 460 million annual cost savings by 2015. Since the start of the programme, there has been a reduction of about 2,900 FTEs and EUR 279 million has been saved.
The projects announced by ING Belgium at the beginning of 2013 to align its products and services with the new mobile banking environment are on course. ING Belgium’s cost-saving target by 2015 is EUR 160 million. By the end of 2013 cost savings of EUR 41 million have been achieved. Commercial Banking’s restructuring programme is also on track and by the end of 2013 cost savings of EUR 138 million were realised. Commercial Banking continued with its global change programmes which aim to save EUR 260 million by 2015 and at the same time improve product delivery and enhance the One Bank client experience. An example is the integrated client coverage approach, focusing on unifying the sales force and harmonising client services. For more information see the chapter on Commercial Banking. The previously announced cost-saving initiatives are expected to reduce expenses at ING Bank by EUR 880 million by 2015, of which EUR 458 million has already been achieved since the start of the programmes.
CUSTOMER CENTRICITY As a bank we play an important role in helping our retail and commercial customers make the right decisions by providing them with products and services that meet their needs. Our role is to support the economy; ING Bank can only achieve long-term business success if it contributes towards economic development, a healthy environment and a stable society.
We strive to meet growing demand from customers for products that not only generate good financial results, but also serve social and environmental objectives. We do this by integrating sustainability considerations into our business and by managing the socio-environmental risks of our transactions and engagements. We updated our Environmental and Social Risk Framework and embedded client screening as part of the client on-boarding process.
Addressing the problem of the subdued housing market in the Netherlands, ING Bank introduced an online “stress test” which helps homeowners see whether their financial planning can be improved. ING Netherlands also launched an online tool (Afloswijzer) to help customers decide whether to save or pay off their mortgage.
We continued to deliver on our strategic priorities: sharpening our business focus; reducing costs; making capital, funding and liquidity more robust; and meeting customers’ demand.
We include sustainability criteria in our business decision-making. We have witnessed a continued increase in the volume of sustainable portfolios across all our operations. For more details 30 ING Group Annual Report 2013
see the business chapter in ING’s Sustainability Report. We achieved what we set out to do on the balance sheet: increasing the leverage ratio, strengthening the funding profile and meeting our Basel III capital ratio target.
The additions to the provision for loan losses increased by 21.9% to EUR 1,421 million, or 100 basis points of average risk-weighted assets compared with 82 basis points in 2012. The increase was mainly caused by higher risk costs in the Dutch mortgage and business lending portfolio, as well as in India and Turkey.
RETAIL BANKING BUSINESS DEVELOPMENTS In a rapidly changing banking environment, both from a consumer, regulatory and technology point of view, our customers remain at the heart of what we do. We maintain a dialogue with them and are constantly adapting and improving our products, services and processes. Everything is geared to achieving our goal: to be the preferred bank for our customers, a goal that is driven by customer centricity, operational excellence, balance sheet optimisation and being a top employer. We can only be successful when we respond to our customers.
In each of the sections below, we outline some of the main social, economic and regulatory developments of 2013, and show how we responded to them to help customers make the right financial decisions.
Our customer-centric focus has resulted in most countries achieving first or second place in Net Promoter Scores (NPS) compared with competitors. ING applies the NPS methodology in nearly all countries to measure customer engagement and the results are used to improve customer services and internal processes.
As for sustainability, we are meeting the increasing demand for products and services that not only generate good financial returns, but also meet clear social, environmental and ethical objectives. Furthermore, we aim to offer our product offering to all society segments, including young people, the physically challenged and the economically disadvantaged. That is why we offer micro finance to entrepreneurs and proactive assistance to mortgage holders in financial distress. We are increasing the number of branches that have barrier-free access and are reaching out to “under-banked”communities in India. In 2013, many of our business units offered products and services to people with special needs. Our sustainable activities are embedded in the activities of all our business units.
We are in a constant and meaningful dialogue with customers and regulators to get their feedback and improve our performance. For example, customer feedback told us that SME customers would appreciate more personal contact with ING. As a result, in 2013, a further 30,000 SME customers were given access to a relationship manager. Under our Net Promoter Score (“NPS”) programme, which has been in place since 2009, some 250,000 customers a year give us their opinion on their customer experience. We also get customer feedback from several Customer Advisory Boards. We let customers know how we follow-up on their feedback via a dedicated page on our website.
We have introduced a number of tools that help customers make the right financial decisions, such as the Mortgage Stress Test (Hypotheken Stress-test) and the Buffer Calculator (Bufferberekenaar ). ING has also introduced the Mortgage Repayment Calculator (Afloswijzer) – an online tool to help consumers decide whether it is better to save or repay their mortgage. As part of our social engagement efforts, we also offer customers who face an involuntary and substantial decline in income a mortgage repayment scheme called the Interest Payment Freeze (Hypotheek Rentepauze) to help them out.
At ING Zakelijk (ING Corporate), we launched the Entrepreneurial Financing (Ondernemend financieren) campaign in 2013 which, among other things, allows relationship managers to have a dialogue with customers about the various credit options.
In September, several customers of ING Private Wealth & Asset Management, together with ING and other Dutch companies, launched the Dutch Orange Capital Enterprise Fund (Ondernemend Oranje Kapitaal). The Fund makes capital, expertise and advice available to SMEs. The objective is to give the Dutch economy a much-needed boost, and at the same time offer investors an attractive and sustainable commercial return.
Reaffirming ING’s commitment to sustainable lending and saving, ING’s Groenbank (Green Bank) was the lead arranger of a record EUR 100 million syndicated green loan to Dutch energy company Eneco. One of the primary objectives of ING Groenbank is to stimulate sustainable entrepreneurship by offering interest-rate reductions for sustainable projects, ranging from solar panels to wind turbines and waste factories. ING Groenbank also attracts green saving deposits from retail customers in the Netherlands – Groen spaardeposito’s – and allocates these funds to provide green lending services to SMEs, Mid-Corporates and Corporate Clients, and to provide microfinance lending to ING subsidiaries. At year-end 2013, ING Groenbank had a balance sheet total of EUR 769 million.
Cyber security is a growing concern for all banks. ING has therefore been working with the Dutch Ministry of Justice, other banks, consumer organisations and businesses to discuss better ways of combatting cyber attacks. Retail NL suffered several attacks in 2012 and has improved its defensive measures since. However, also ING experienced Distributed Denial-of-Service (“DDoS”) attacks in 2013, during which its website was bombarded with data traffic and, as a result, Mijn ING, the Mobile Banking app and iDEAL payments were blocked for some time. We have since taken further counter measures to block unwanted traffic. At no point during these attacks have customer details been compromised.
WestlandUtrecht Bank continues to service remaining portfolios within ING Retail Banking Netherlands.
ING Belgium (ING BE), one of the largest retail banks in the country, provides its 2,400,000 (year-end 2013) private and business customers with a full range of banking products and services. It continued to carry out its “direct if possible, advice when needed” strategy. It maintained its leading position as a strongly customer focused bank. This was evidenced by, among other things, winning the 2013 “Bank of the Year – Belgium” award from The Banker in recognition for “its solid financial and commercial performance” and “its strategy for investing in new channels”.
ING BE also continued the transformation programme for its branch network and 63 branches were renovated. By year-end, more than 600 out of 748 branches had been completely refurbished into open and more customer-friendly branches. The branches are at the crossroads of advice and online banking in ING BE’s distribution model.
As a result of fundamental changes in customer behaviour, in particular the greater use of online and mobile banking, ING BE announced in early 2013 a plan to reduce the number of employees between then and the end of 2015. While the number of employees in Belgium decreased, mainly as a result of natural attrition, the Bank continued to hire new people. In 2013, 314 new FTEs were welcomed at ING BE. Given the external challenges, the Bank raised its focus on cost containment. While continuing to invest in innovative customer-oriented solutions, ING BE ensured that other expenses were either frozen or reduced.
ING Luxembourg The Luxembourg economy showed signs of gradual recovery in 2013, with an expected GDP growth rate of around 2.0%. Against this background, ING Luxembourg – a top five, full universal bank in the country – delivered a solid performance. The Bank has a local as well as a wide international customer base, with 114,000 customers, of which 84,000 are retail, and 16 branches. It is fourth in the mid-corporate market and third in the corporate market. Its funds entrusted have grown by 10% since year-end 2012, driven by Commercial Banking (+14% in net funds entrusted). There was also an increase in retail funds entrusted in 2013 (+4%): Retail Banking benefited from the success of its savings campaign, focusing on all the savings solutions proposed by ING Luxembourg.
After a weak start, Germany’s economy gained momentum in the course of 2013. At year-end, its unemployment rate was at 6.8% and gross domestic product had risen by 0.5% over the entire year, despite the weakening of most economies in Europe. Germany’s export industry gained volume and private household consumptions increased as well. Due to the stable economic conditions, housing prices are solid and actually showing growth, especially in and around large cities. The Austrian economy is also on a positive track, benefitting from its close ties with Germany. The economy grew by 0.3% year-on-year in 2013 and should accelerate further in 2014.
In Germany, ING-DiBa is a fast growing bank, and the third largest by number of customers, with a continuous focus on the customer. Its customer satisfaction ratings remain high, which is contributing to strong business growth. An easy-to-understand product range, with only 10 different products, offered with the highest service, 24 hours a day, are the ingredients for meeting all main needs of a retail banking customer. ING-DiBa remained committed to its mission to be simple and uncomplicated, giving it the opportunity to increase its market position in the still very fragmented German banking market. It continued to show consistent growth in 2013 in all products. In September, ING-DiBa in Germany and Austria attracted its eight millionth customer, and the total number of customers in 2013 increased by 300,000. Total customer balances in 2013 rose by EUR 12.6 bilion and now exceed EUR 179 billion, of which total funds entrusted amount to EUR 105.9 billion. During 2013 the one millionth payment account was opened and Consumer Lending surpassed EUR 4 billion in volume.
ING-DiBa Germany has the Customers Gain Customers (Kunden werben Kunden) initiative to give current customers an incentive to recommend ING to their friends and family. For every new customer, the recommender can choose to donate EUR 40 to UNICEF or receive a premium instead.
Top Employer ING-DiBa considers its staff to be a distinguishing asset and maintaining a strong corporate culture is a key success factor.
RETAIL REST OF WORLD FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Rest of World rose to EUR 471 million, compared with a loss of EUR 62 million in 2012, when results were impacted by EUR 441 million of losses related to selective de-risking of the investment portfolio. Underlying income increased to EUR 2,374 million from EUR 1,807 million in 2012. Excluding de-risking losses, income rose 5.6% mainly due to improved commercial results in most countries, and a higher dividend received from the Bank of Beijing. The interest result increased 2.2% due to higher margins, partly offset by currency impacts. Excluding currency effects and adjusted for divestments and the sale of a mortgage portfolio in Australia, net production in mortgages was EUR 1.4 billion, while the net growth in other lending was EUR 3.2 billion in 2013. Funds entrusted reported a net inflow of EUR 5.8 billion.
Driven by the Retail Standards Board, progress was made in exchanging best practices and knowledge-sharing. For example, seven business units now use the same tool for listening to social media conversations. The webcare teams in all business units have been organised along the same lines, using the Netherlands’ model. As for mobile banking, ING France’s app was considered a best practice and copied by numerous units, thereby saving time and development costs. In most countries, the ING app is highly rated by its users.
ING Australia launched Dreamstarter, Australia’s first crowdfunding initiative, specifically focused on bringing the ideas of social entrepreneurs to life. This online initiative uses the power of social media and community collaboration to raise the profile of people with innovative ideas for social change.
Operational excellence All business units around the world focus on operational excellence to provide a superior customer experience at optimised costs. In Poland, ING Bank Slaski was the first bank in the country to offer contactless ATM withdrawals. It also launched a commerce and auction platform called ALEO for Polish entrepreneurs; by the year-end more than 10,000 companies had registered for it.
Top Employer Many Top Employer initiatives were continued around the world. ING Australia ran workshops to identify which tools and processes should be improved. ING Romania helped staff develop their careers by, for example, creating a mentoring framework. ING Turkey implemented a performance management system to monitor training for, and communication with, all employees. The CRF Institute awarded Top Employer certificates to ING Spain, ING France, ING Bank Slaski and ING Italy. ING Spain also received a European Great Place to Work Award. “Great Place to Work” is the world’s largest employee satisfaction study, surveying about 5,500 companies. In 2013, 1.35 million employees were surveyed across 19 countries in Europe.
Risk costs decreased to EUR 867 million, or 68 basis points of average risk-weighted assets, from EUR 955 million, or 72 basis points, in 2012. The decrease was mainly visible in Industry Lending,
TRANSACTION SERVICES We offer Transaction Services through integrated advice and solution selling. These activities require a strong emphasis on technology and operational processing. To remain competitive and to enhance our capabilities, we are continuing with our investment programme. Most notably, Payments & Cash Management is undertaking a multi-year programme to improve cost efficiency, improve client service across borders, implement marketcompetitive new technology and comply with new regulatory obligations. The Single Euro Payments Area (“SEPA”) implementation was a high priority area in 2013. SEPA will also remain high on the agenda in 2014 given the announcement by the European Commission, early January 2014, to extend the 1 February 2014 deadline with an additional six-month transition period to 1 August 2014.
INDUSTRY LENDING We have Industry Lending teams specialising in different sectors and competing in selective markets across the world. These are grouped between Structured Finance (“SF”) and Real Estate Finance (“REF”) businesses.
although risk costs in Real Estate Finance slightly increased. In General Lending risk costs were also lower.
The underlying return on equity, based on a 10% core Tier 1 ratio, increased to 11.0% from 9.0% in 2012 due to higher results and lower average risk-weighted assets. At year-end 2013, however, risk-weighted assets were 2.8% higher than a year ago, mainly due to lower foreclosure values of real estate assets partly offset by lower volumes and currency impacts.
We are simplifying our internal organisation, harmonising and streamlining the way in which we service clients across products and countries. We continue to invest in our operating platforms, upgrading our technology and strengthening our processing capabilities. This new operating model will lead to faster and better service, fewer points of contact, better tailored solutions and an enhanced experience for clients. It will improve our overall connectivity, by harmonising processes and practices throughout our business, enabling seamless service delivery and better collaboration with colleagues around the world. This integrated approach to services, better management information and a more efficient way of working, will create an enhanced “One Bank” client experience across our network.
Bank Treasury (BT) has helped improve ING’s liquidity position and supported the development of a strong Funds Entrusted base which will support future asset origination within Commercial Banking. Through its investment portfolio management arm, BT is continuously transforming the bank investment portfolio into a liquid asset buffer, applying selective de-risking while maintaining the net interest margin of the portfolio.
RE&O continued to reduce its exposure substantially despite the ongoing challenging market. RE&O also succeeded in accelerating the wind down of several lease operations by the sale of lease portfolios. Although impairments and risk costs are still at considerable levels, the portfolio is adequately provisioned and being wound down in a controlled manner.
Sustainable business practices A Sustainable Lending team was established within Industry Lending at the end of 2012 to help ING become the preferred bank for fulfilling clients’ sustainability agendas, explore new business opportunities in sustainable areas and build expertise in niche markets. It supports the re-balancing of our lending portfolio towards companies that follow sustainable business practices.
• ING Corporate Finance, for example, acted as joint financial adviser to Heathrow (AH) Ltd, in the sale of Stansted airport to Manchester Airports Group for GBP 1.5 billion. The largest shareholder of Heathrow (AH) Ltd is the Spanish conglomerate Ferrovial with which ING has enjoyed a longstanding relationship.
• ING played a leading role in the GBP 3.6 billion whole business securitisation for Arqiva, a top communications infrastructure and media services company in the UK. Included was an innovative financing structure and security package, in which a wide range of ING products was involved (Structured Finance, Financial Markets and Debt Capital Markets), enabling Arqiva to secure a BBB rating on senior bonds from Standard & Poor’s and Fitch. This transaction has received a Project Finance International Award in the category Europe, Corporate Deal of the Year.
Since 2010, hundreds of clients have participated annually in the Net Promoter Score (NPS) programme of Commercial Banking. The detailed client feedback received through this programme is used to monitor and improve clients’ experiences, optimising our services and internal processes. The NPS programme has been implemented in selected countries and will be further rolled out in Europe and the US in 2014.
In the Netherlands, customer surveys carried out by Greenwich Associates confirmed Commercial Banking’s number one position for the fourth consecutive year. The Greenwich results show that ING has a primary position in term of lead relationships, followed at some distance by other large banks in the Netherlands.
New sales life insurance (APE) 1,227 1,353 Total administrative expenses ongoing business 1,807 1,806 Cost/income ratio ongoing business (adm. exp./ operating income) 37.2% 36.1% Investment Management AuM (end of period, in EUR billion) 174 185 Combined ratio (Netherlands Non-life, year-to-date) 101.5% 101.5% NN Group IGD Solvency ratio 257% 236%
Reconciliation from Operating result ongoing business to Underlying result before tax in EUR million 2013 2012
BUSINESS DEVELOPMENTS In 2013, ING made strong progress in restructuring its insurance and investment management activities. In Europe, preparations for a base case IPO (initial public offering) advanced well and, depending on market conditions, a transaction is planned for 2014, with NN Group N.V. as the IPO entity.
Accelerating the transformation of the European insurance and investment management operations was a major priority during the year. This resulted in increased efficiency and effectiveness, a sharper strategic focus, improved processes and systems and in the Netherlands, reduced management layers of support staff.
In 2013 the business continued to execute its customer-focused strategy. In many countries it won awards for this approach. In Romania, for example, ING won awards from PRIMM-Asigurari si Pensii magazine for “Quality of Services in Life Insurance” as well as an award for “Excellence in Administration” of the ING Optim pension fund. Netherlands Non-life launched a website to help intermediaries provide better customer service. In Greece, a new health product was launched with easy-to-understand language, illustrations and an easy-to-use manual. Japan Life received a three-star rating (out of a maximum of three) from HDI Japan (“Help Desk Institute”) for its after-sales call centre. More than 71% of Investment Management’s funds have outperformed their respective benchmarks on a three year weighted-average basis.
Local business descriptors will be added to the NN brand in different countries. Investment Management will rebrand as NN Investment Partners. The operational rebranding process is scheduled to begin after NN Group has been successfully brought to the market.
ING U.S. has elected to be treated as a “controlled company” for purposes of NYSE corporate governance rules, and accordingly, for as long as ING Group owns more than 50% of the ING U.S. outstanding common stock, ING U.S. will not be subject to the requirement that a majority of its directors be “independent” as defined under such rules.
The board of ING U.S., Inc. consists of: • Rodney Martin, Jr., chairman • John Boers • Patrick Flynn • Barry Griswell • Dick Harryvan • Frederick Hubbell • Henny Koemans • Wilfred Nagel • David Zwiener
Enhancing the customer experience means being accessible, listening to the needs of customers, following-up on their expectations, and offering them products and services that are suitable to their needs. The result is that we help create a stronger financial future for our customers.
AMERICAN DIVESTMENT In May, ING U.S. listed on the New York Stock Exchange and began operating as a publicly traded company. The listing initially reduced ING Group’s stake in ING U.S. to 71%.
NN Group N.V. became the entity for the base case IPO for the European and Japanese insurance and investment management operations. Until 1 March 2014 these operations were conducted under the umbrella of ING Verzekeringen N.V. In this Annual Report, NN Group will be used to indicate these operations.
The trial Internal Model Application Package (“IMAP”) was submitted to DNB, the Dutch regulator, in 2013. The submission was a first step towards gaining approval for an internal model for the quantification of NN Group’s capital requirements. The review of the IMAP by the College of Supervisors (a group of international supervisors) and the further firming up of Solvency II measures will form the basis of ING’s implementation efforts.
FINANCIAL DEVELOPMENTS The operating result for Netherlands Life was EUR 686 million in 2013 compared with EUR 604 million in 2012, mainly due to a higher technical margin partly offset by lower fees and premium based revenues.
DISTRIBUTION As a result of the legislative ban in 2013 on commissions for complex financial products and stricter requirements for certification, there has been a reduction in the number of intermediaries in the Dutch market. At the same time new distributors have appeared, who are expanding their services, and distributing pension products together with financial advice to their clients.
CONCLUSIONS AND AMBITIONS Netherlands Life’s ambition is to help its customers make the right decisions about their financial future and it will achieve this by guiding them through effective and easy-to-understand products.
> The profitability of income protection products improves > Run rate expenses are decreasing due to product and process innovation > Customer service is improving
quarter of 2013, which increased expenditures in the P&C market segment. Administrative expenses increased by EUR 19 million mainly as a result of higher pension expenses, which more than offset the impact of the transformation programme in the Netherlands.
Special items were a loss of EUR 16 million in 2013, primarily due to preparation costs for the base case IPO. This compared to a loss of EUR 140 million in 2012, which mainly reflected reorganisation provisions related to the transformation programme announced in late 2012 and expenses for the operational separation from ING Group.
In the Netherlands, Netherlands Non-Life was the third largest provider of non-life insurance products (excluding healthcare insurance) measured by Gross Written Premiums (GWP) in 2012, the most recent year of official figures, as collected by DNB.
DISTRIBUTION DEVELOPMENTS Netherlands Non-life continues to distribute its products through third-party channels, but in 2012 it started to provide retail products via its own direct channels, and it enhanced these channels in 2013. In the SME market for income protection and for property and casualty products, the intermediary channel remained the dominant distribution channel because of the complexity and the need-for-advice nature of the products. Distribution via ING Bank continued to deliver encouraging results in the Property and Casualty market.
FINANCIAL DEVELOPMENTS The operating result for Insurance Europe was EUR 199 million in 2013, a 9.1% decline compared with EUR 219 million in 2012. Lower investment margin and a lower technical margin were partly offset by lower administrative expenses.
Special items were a loss of EUR 9 million in 2013, primarily related to expenses for a regional transformation programme. This compared with a loss of EUR 38 million in 2012, which included expenses related to the operational separation from ING, expenses for the transformation programme and expenses related to the base case IPO.
BUSINESS DEVELOPMENTS Insurance Europe primarily offers life insurance, mainly to retail, self-employed, SME and corporate customers in 11 countries: Poland, Turkey, Czech Republic, Slovak Republic, Romania, Hungary, Bulgaria, Belgium, Spain, Greece and Luxembourg. It also offers pensions in some of these markets and non-life insurance in Belgium and Spain, and healthcare insurance in Greece.
CUSTOMER FOCUS Insurance Europe is making clear progress in improving the customer experience and received awards for this in several countries. In Poland an electronic application for customers significantly reduced online claims handling and service time. In Romania new functions in MyING, the first self-service portal in the local life insurance market, were introduced. Spain launched a new customer website including a self-service portal with improved functionality; policies can now be delivered within two days from application. In the Czech Republic, about 80% of claims are processed within five days. In Belgium the car insurance claim process was redesigned to make it clearer for customers. In Turkey the website was re-launched with more functions, and the customer portal’s self-service capability was enhanced; in addition, a mobile application was introduced to give customers access to their accounts at any time and wherever they are.
PRODUCTS Insurance Europe offers both protection and investment products. It introduced several customer initiatives in 2013 in line with its strategy to improve the customer experience. In January Greece launched its new health product, Orange Cross, with plain language, illustrations and an easy-to-use manual. In December 2012, ING in the Czech Republic launched For You, breast cancer insurance cover for women which includes online access to information and help about cancer prevention. For You has been well received by customers, achieving an excellent NPS score. In 2013 Spain became the second country to offer For You.
Turkey launched a pilot network of retail insurance shops selling ING products and those of its competitors. In Spain, a pilot network of insurance agents (Orange Points) in the country’s smaller cities was established to reach new and existing customers not covered by the company’s branch network, which is located in the large cities.
In 2013, Japan Life received a three-star rating (out of a maximum of three) for its after-sales call centre from the service and support industry organisation, HDI-Japan (“Help Desk Institute”), emphasising the company’s commitment to deliver superior service to its customers and distribution partners.
FINANCIAL DEVELOPMENTS The operating result for Investment Management was EUR 130 million in 2013, a 19.3% increase compared with EUR 109 million in 2012, driven by higher fees and lower administrative expenses.
Administrative expenses were EUR 314 million in 2013, a 2.2% decrease compared with EUR 321 million in 2012, primarily due to non-recurring costs incurred at the end of 2012. The result before tax increased to EUR 131 million in 2013 from EUR 105 million in 2012, as a result of the increase in operating result.
In 2013, Investment Management continued to simplify and streamline its operations, in line with the separate divestment of the Asian insurance and investment management businesses. During the year, ING completed the divestment of its 33.3% stake in China Merchant Fund, ING Funds Berhad in Malaysia, ING IM Thailand, and ING IM Korea. It also closed down its regional office in Hong Kong. The offices in Singapore and Japan are part of the Investment Management organisation and as such included in the base case IPO. In early 2014, an agreement was reached to sell the investment management business in Taiwan.
This expansion will be also driven by successful products. More than 71% of its funds have outperformed their respective benchmarks on a three-year asset-weighted basis as at 31 December 2013. 43% of Investment Management’s investment funds had a four- or five-star Morningstar rating, which was above the industry average.
CONCLUSIONS AND AMBITIONS Investment Management aims to partner with its customers for the long run. It will continue to focus on delivering best-in-class performance and services for its customers. It has a strong focus on growing its third-party business. Its future name will be NN
Holding result was a loss of EUR 345 million in 2013, an improvement of 15.6% compared with a loss of EUR 409 million in 2012, largely due to lower interest expense on hybrids and debt. Interest expense on hybrids and debt was EUR 167 million in 2013, a decrease of 23.0% compared with EUR 217 million in 2012, mainly reflecting a EUR 2 billion senior debt refinancing by ING Group in September 2013.
CONCLUSIONS AND AMBITIONS Nationale-Nederlanden Bank aims to become a one-stop shop for integrated financial solutions for retail customers. With its portfolio of integrated solutions, a strong brand and its extensive distribution base it aims to have a competitive presence in the Dutch financial sector. ING Re will continue to support NN Group businesses by providing reinsurance services.
> The Closed Block primarily consists of single premium variable annuities sold from 2001 to 2009 > Focus on managing risks, cost and efficiency management
In 2013, it became apparent that consumers increasingly favoured self-directed business, execution-only services via call centres and online rather than financial advice-related services.
In November, the format for the 2013 Supervisory Board selfassessment was approved. The action points resulting from the 2012 self-assessment were acted upon during the year. For the 2013 self-assessment of the Supervisory Board, its Committees and its members, which was conducted in December, an external consultant drafted the questionnaires as well as the report based on the outcome of the questionnaires. Furthermore, bilateral meetings were held between the chairman and each Supervisory Board member (concerning the chairman: a bilateral meeting between the vice-chairman and the chairman). The self-assessment resulted in action points concerning the meeting documents, strategy discussions and HR topics.
In May, the Supervisory Board discussed self-regulation proposed by the Dutch Banking Association and its associated “Bankers’ Oath” before taking the Oath in June.
A legal restructuring, in preparation for the possible IPO of NN Group, was approved in August, including the consequences for the governance structure. The first proposed equity narrative for the NN Group IPO was presented and extensively discussed by the Supervisory Board. The annual risk appetite statements for Bank and NN Group were approved. An updated capital plan for ING Bank was presented whereby several divestment transactions for ING Bank were proposed. The Supervisory Board mandated the Executive Board to execute those transactions within the terms and conditions approved. The Supervisory Board was informed on the scheduled EUR 1.125 billion repayment on the outstanding core Tier 1 securities to the Dutch State as well as the intention to transfer all future funding and indexation obligations under ING’s current closed Defined Benefit (DB) Pension Plan in the Netherlands to the ING Pension Fund.
In December, the Supervisory Board met to discuss the first drafts of the NN Group MTP. The Supervisory Board was informed that ING had completed the agreement with the Dutch State on the unwinding of the Illiquid Assets Back-up Facility (IABF). An update was given on the proposal to transfer all future funding and indexation obligations under ING’s current closed Defined Benefit (DB) Pension Plan in the Netherlands to the ING Pension Fund. An agreement was reached with the pension fund in January 2014 and it became effective in February 2014.
During the internal meetings of the Supervisory Board – which the CEO joined, except when the annual evaluation of the Supervisory Board was tabled or matters concerning the CEO were discussed – the Executive Board 2013 performance assessments and the Executive Board performance objectives for 2013 were approved.
TRANSACTIONS WITH THE DUTCH STATE On 12 November 2008, ING Group issued 1 billion core Tier 1 securities (“Securities”) for a total consideration of EUR 10 billion to the Dutch State. Following the repurchase of 500 million Securities on 21 December 2009, the repurchase of 200 million Securities on 13 May 2011, the repurchase and/or redemption of a total number of 75 million Securities on 26 November 2012, and the repurchase and/or redemption of 75 million Securities on 6 November 2013, another 150 million of Securities representing EUR 1.50 billion remain outstanding. The Securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the shareholders’ meeting of ING Group (“General Meeting”). The financial entitlements of the Securities are described in note 33 to the consolidated annual accounts.
DUTCH INSURERS’ CODE The Dutch Insurers’ Code (“Insurers’ Code”) is applicable to the Dutch subsidiaries of NN Group N.V. pursuing insurance business and not to ING Group, ING Verzekeringen N.V. or NN Group N.V. The Insurers’ Code can be downloaded from the website of the Dutch Association of Insurers (www.verzekeraars.nl). However, insurance companies that are part of a group (“concern”) can decide whether to apply all or parts of the Insurers’ Code at the group level. The remuneration policy for the Management Board and senior management is compliant with the corporate governance-related principles of the Insurers’ Code and is voluntarily applied on group level. The application of the Insurers’ Code principles is described in the publication “Application of the Insurers’ Code by ING Insurance Eurasia” available on the website of ING Group (www.ing.com).
In the 2013 annual General Meeting, it was discussed that under the original agreement between ING Group and the European Commission, the restructuring was initially expected to be completed by the end of 2013, so that any reconsideration would be done in 2014. However, ING Group, together with the Dutch State, reached an agreement with the European Commission on an amended restructuring plan, in November 2012, part of which was an extended deadline for the aforementioned divestments.
members who are independent of ING Group. No Executive Board member or former Executive Board member, Supervisory Board member or former Supervisory Board member, ING Group employee or former ING Group employee or permanent advisor or former permanent advisor to ING Group is on the Board of ING Continuity Foundation. The Board of ING Continuity Foundation appoints its own members, after consultation with the Supervisory Board of ING Group, but without any requirement for approval by ING Group. For more information on ING Continuity Foundation, see page 77.
• In contrast to the Sarbanes-Oxley Act of 2002, the Corporate Governance Code contains a “comply-or-explain” principle, offering the possibility to deviate from the Corporate Governance Code as long as any such deviations are explained. To the extent that such deviations are approved by the General Meeting, the company is deemed to be in full compliance with the Corporate Governance Code.
• The shareholder approval requirements for equity compensation plans under Dutch law and the Corporate Governance Code differ from those applicable to US companies which are subject to NYSE’s listing rules that require a shareholder vote on all equity compensation plans applicable to any employee, director or other service provider of a company. The results of such votes are advisory in nature rather than binding. Under Dutch company law and the Corporate Governance Code, binding shareholder approval is only required for equity compensation plans (or changes thereto) for members of the executive board and supervisory board, and not for equity compensation plans for other groups of employees.
ING Group strives to provide clear, accurate and timely financial information that is in strict compliance with the applicable rules and regulations, in particular those concerning selective disclosure, price sensitive information and equal treatment. In addition to the annual General Meeting, ING Group communicates with its shareholders and the investment community through earnings announcements, presentations, and meetings with analysts or investors.
The purpose of this delegation of authority is to allow ING Group to respond promptly to developments in the financial markets. Without such delegation, if ING Group wished to issue new shares, there would be an increased risk that conditions in the financial markets may have changed during the time needed for convening a general meeting, especially due to the 42-day statutory convocation period. In view of the importance of flexibility with respect to the issuance of shares, the Executive Board and the Supervisory Board will periodically evaluate the delegation of authority to issue shares and, if necessary, make adjusted proposals to the General Meeting.
SHAREHOLDERS’ STRUCTURE Pursuant to the Dutch Financial Supervision Act (Wet op het financieel toezicht), any person who, directly or indirectly acquires or disposes of an interest in the voting rights and/or the capital of ING Group as a result of which acquisition or disposal the percentage of his voting rights or capital interest, whether through ownership of shares, depositary receipts, American depositary shares or any other financial instrument whether stock-settled or 65ING Group Annual Report 2013 1 W h o w e are 2 R
The geographical distribution of ING Group’s investor base is diverse – an estimated 38% of shares outstanding are held in the US, 19% in the UK, 11% in France, 6% in the Netherlands, 5% in Germany, 12% in Rest of Europe and 9% in the Rest of World. For more information, see the ING share chapter on page 10.
GENERAL MEETING FREQUENCY, NOTICE AND AGENDA OF GENERAL MEETINGS General Meetings are normally held each year in April or May, to discuss the course of business in the preceding financial year on the basis of the reports prepared by the Executive Board and the Supervisory Board, and to decide on the distribution of dividends or other distributions, the appointment and/or reappointment of members of the Executive Board and the Supervisory Board, if any, other items requiring shareholder approval under Dutch law, and any other matters proposed by the Supervisory Board, the Executive Board or shareholders or holders of depositary receipts in accordance with the Articles of Association.
PROPOSALS BY SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS Proposals to include items on the agenda for a General Meeting that have been adequately substantiated under applicable Dutch law can be made by shareholders and holders of depositary receipts representing a joint total of at least 0.1% of the issued share capital or representing together, on the basis of the stock prices on Euronext Amsterdam by NYSE Euronext, a share value of at least EUR 50 million. Given the periods of notice required for proxy voting, proposals have to be submitted in writing at least 60 days before the date of the meeting.
RECORD DATE Pursuant to Dutch law, the record date for attending a general meeting and voting on the proposals at that general meeting is the twenty-eighth day before the day of the general meeting. Shareholders and holders of depositary receipts who hold shares
ING Group participates in several industry conferences and generally hosts one Investor Relations Day each year. These events are announced in advance on ING Group’s website, and presentation materials are made available in real time on the website. This is in accordance with the applicable regulatory requirements intended to ensure that all shareholders and other market participants may have equal and simultaneous access to information that could potentially influence the price of the company’s securities. ING Group’s Investor Relations Days can be accessed by means of live webcasts or telephone conferencing. No Investor Relations Day or conference in which ING Group participates is held shortly before the publication of quarterly financial information.
ING Trust Office promotes the solicitation of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation of holders of depositary receipts and promotes the execution of voting rights in a transparent way. At the same time it prevents that a minority of shareholders and holders of depositary receipts could use a chance majority of votes to the disadvantage of the shareholders and holders of depositary receipts present nor represented at a General Meeting of ING Group.
Executive Board to allocate part of or all of the profits to the reserves – with approval of the Supervisory Board – and the declaration of other distributions, subject to a proposal by the Executive Board which was approved by the Supervisory Board; • the appointment of the external auditor; • an amendment of the Articles of Association, a legal merger or division of ING Group, and winding-up of ING Group, all subject to a proposal made by the Executive Board upon approval by the Supervisory Board; and/or depositary receipts for shares at the record date are entitled to attend the general meeting and to exercise other rights related to the general meeting in question on the basis of their holding at the record date, notwithstanding a subsequent sale or purchase of shares or depositary receipts for shares. The record date is published in the notice for the general meeting. In accordance with US requirements, the depositary sets a record date for the American Depositary Shares (“ADSs”), which date determines which ADSs are entitled to give voting instructions. This record date can differ from the record date set by ING Group for shareholders and holders of depositary receipts.
The following restrictions apply in respect of grants of voting proxies to holders of depositary receipts by ING Trust Office: • the relevant holder of depositary receipts must have announced his or her intention to attend the General Meeting observing the provisions laid down in the Articles of Association; and
REMUNERATION AND SHARE OWNERSHIP Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Transactions by members of the Executive Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are 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 thereto, are provided in the Remuneration report, starting on page 81.
Certain resolutions of the Executive Board, specified in the Articles of Association, the Executive Board Charter and in the Supervisory Board Charter, are subject to approval of the Supervisory Board.
Furthermore, as long as the IABF continued, certain resolutions of the Supervisory Board were subject to the condition that no State Nominee should have voted against the proposal. These rights became effective as from the 2009 annual General Meeting. These resolutions related to the following matters: of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that the disclosure could damage the competitive position of ING Group.
INFORMATION ON MEMBERS OF THE EXECUTIVE BOARD R.A.J.G. (RALPH) HAMERS, CHIEF EXECUTIVE OFFICER (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 chairman of the Executive Board on 1 October 2013. He joined ING in 1991 and has held various positions including Global Head Commercial 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.
The Nomination Committee advises the Supervisory Board, among other things, on the composition of the Supervisory Board and Executive Board. On 31 December 2013, the members of the Nomination Committee were: Jeroen van der Veer (chairman), Henk Breukink, Peter Elverding and Yvonne van Rooy.
REMUNERATION AND SHARE OWNERSHIP The remuneration of the members of the Supervisory Board is determined by the General Meeting and is not dependent on the results of ING Group. Details of the remuneration are provided in the Remuneration report on pages 81-87. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Details are given on page 86. Transactions by members of the Supervisory Board in these shares and depositary receipts for shares are subject to the ING regulations regarding insiders. These regulations are available on the website of ING Group (www.ing.com).
Significant conflicting interests are considered to be absent in case of a relationship that a member of the Supervisory Board may have with ING Group subsidiaries as an ordinary, private individual, with the exception of any loans that may have been granted. For an overview of loans granted to members of the Supervisory Board, see page 86.
The Audit Committee assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group, NN Groep N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements and in monitoring the independence and performance of ING Group’s internal and external auditors. On 31 December 2013, the members of the Audit Committee were: Joost Kuiper (chairman), Tineke Bahlmann, Isabel Martín Castellá, Carin Gorter, Jan Holsboer, Robert Reibestein and Luc Vandewalle. The Supervisory Board has determined that Joost Kuiper is a financial expert as referred to in the Corporate Governance Code, 71ING Group Annual Report 2013 1 W h o w e are 2 R
L.A.C.P. (LUC) VANDEWALLE (Born 1944, Belgian nationality, male; appointed in 2011, term expires in 2014) Former chairman and non-executive member of ING Belgium NV/SA. Other business activities: chairman of the Supervisory Board of Holding Maatschappij P. Bakker Hillegom B.V. Chairman of the Supervisory Board of Plu Holding.
H.W. (HENK) BREUKINK (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2015) Former managing director of F&C and country head for F&C Netherlands (asset management firm). Other business activities: chairman of the Supervisory Board of NSI N.V. (real estate fund) (listed company). Non-executive director of Brink Groep B.V. and of Heembouw Holding B.V. Chairman of the Supervisory Board of Inholland University.
AMENDMENT OF THE ARTICLES OF ASSOCIATION The General Meeting may resolve to amend the Articles of Association, provided that the resolution is adopted on a proposal of the Executive Board, which has been approved by the Supervisory Board. Such a resolution of the General Meeting requires a majority of at least two-thirds of the votes cast at a General Meeting, whereby at least two-thirds of the issued share capital is represented. An amendment of the Articles of Association has to be passed by notarial deed.
The external auditor may be questioned at the annual General Meeting in relation to its audit opinion on the annual accounts. The external auditor will therefore attend and be entitled to address this meeting. The external auditor attended the meetings of the Audit Committee and of the Risk Committee and attended and addressed the 2013 annual General Meeting, wherein the external auditor was questioned on the audit opinion.
CHANGES IN THE COMPOSITION In May 2013 the General Meeting appointed Isabel Martín Castellá, Carin Gorter and Hermann-Josef Lamberti to the Supervisory Board. Furthermore, the General Meeting reappointed Jeroen van der Veer and Tineke Bahlmann to the Supervisory Board. Tineke Bahlmann was recommended as State Nominee. Piet Klaver and Sjoerd van Keulen retired from the Supervisory Board.
FINANCIAL REPORTING A description of the main features of ING Group’s internal control and risk management systems in relation to the financial reporting process is included in the statement with respect to Section 404 of the Sarbanes-Oxley Act on pages 79-80, which is deemed to be incorporated by reference herein.
- The annual General Meeting of ING Group of 13 May 2013
- The functioning of ING Trust Office, the composition of the Board, the 2012 balance sheet and statement of income and expenses of ING Trust Office.
DEPOSITARY-RECEIPT STRUCTURE During the years 2010-2013, participation of shareholders, excluding ING Trust Office, and holders of depositary receipts in the decision-making in annual general meetings of ING Group, consistently increased from 41.3% to 51.4%.
In the 2013 annual General Meeting, it was discussed that under the original agreement between ING Group and the European Commission, the restructuring was initially expected to be completed by the end of 2013, so that any reconsideration would be done in 2014. However, ING Group, together with the Dutch State, reached an agreement with the European Commission on an amended Restructuring Plan, in November 2012, part of which was an extended deadline for the aforementioned divestments. As ING Group was still in the implementation phase of the amended restructuring plan, ING did not regard it as an opportune moment to reconsider its governance and depositary-receipt structure.
The increase came about as follows: add: conversion of shares into depositary receipts 10,071,120 less: conversion of depositary receipts into shares 1,150
51.4% of the total votes that might be cast at the AGM were voted by registered shareholders (excluding ING Trust Office) and holders of depositary receipts, by attending the AGM in person, by being represented by a third party or by giving binding voting instructions to ING Trust Office.
In accordance with the Articles of Association and the Trust Conditions, ING Trust Office voted at its own discretion on the shares for which it did not issue voting proxies and did not receive voting instructions, representing 48.6% of the total votes that might be cast at the AGM. In voting such shares, ING Trust Office was guided primarily by the interests of all holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprise. As a result, ING Trust Office voted on these shares in favour of all voting items on the agenda of the AGM.
The annual remuneration for the chairman of the Board amounts to EUR 25,000.00 and for the other members of the Board to EUR 20,000.00.
The composition of the Board is currently as follows: Sebastian Kortmann, chairman of the Board, who was reappointed as of 13 May 2013, Rob van den Bergh, Allard Metzelaar, and Wim van Vonno.
77ING Group Annual Report 2013 1 W h o w e are 2 R
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. 2013 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; the ING Groep N.V. 2013 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2013 of ING Groep N.V. and the enterprises included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is being confronted with.
The allocation of variable remuneration is conditional on the achievement of a number of performance objectives. The shortterm component, at maximum 40% of total variable remuneration, is equally divided between cash and stock and awarded in the year following the performance year.
2013 Executive Board variable remuneration In 2011, the Executive Board decided that it would not accept variable remuneration for that year. Since 2012 it is also prohibited by Dutch Law applicable to financial institutions that have received state support such as ING, to grant variable remuneration (in cash or otherwise) to Executive Board Members and/ or to increase fixed salaries for Executive Board Members. As such the Executive Board did not receive any variable remuneration in relation to performance year 2013.
Pension costs The table below shows the pension costs of the individual members of the Executive Board.
Long-term Equity Ownership Performance shares were conditionally granted. The number of ING depositary receipts that would ultimately be granted at the end of a three-year performance period depended on ING’s Total Shareholder Return (TSR) performance over three years (return in the form of capital gains and reinvested dividends that shareholders received in that period) relative to the TSR performance of a predefined peer group.
ING’s TSR ranking within this group of companies determines the final number of performance shares that vest at the end of the three-year performance period. The performance shares granted in 2010 had a three-year performance period of 2010-2012 and vested in 2013. The actual results of 133% are based upon ING’s TSR ranking of 7th within the designated peer group. The results were determined by an independent third party. ING’s external auditor has reviewed the performed calculations.
Performance shares are shares conditionally granted, with the final shares awarded in three years (tiered) based on ING’s performance at the end of each performance cycle. The ultimate value of the performance share is based on ING Group’s stock price at the vesting date. Deferred shares are shares of which the ultimate value of each deferred share will be based on ING Group’s stock price at the vesting date.
Patrick Flynn Base salary 750 750 750 Variable remuneration in cash 0 0 0 0 0 0
(1) Ralph Hamers was appointed to the Executive Board on 13 May 2013. The figures for him reflect compensation earned in the capacity as an Executive Board member. Thus the figure for 2013 reflects a partial year as an Executive Board member and CEO.
To all share awards granted to Executive Board members in their capacity as Board member a retention period of five years is applicable. The Executive Board members are only allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested share award.
Benefits The individual members of the Executive Board receive other emoluments apart from the compensation and pension benefits. These other emoluments include employer contributions in lifecycle saving schemes or are related to long home/work distances and housing and amounted in 2013 to the following gross amounts: Other emoluments amounts in thousands of euros 2013 2012
(2) Jan Hommen retired on 1 October 2013. (3) Wilfred Nagel was appointed to the Executive Board on 14 May 2012.
The 2012 emoluments for him reflect the partial year as an Executive Board member.
Loans and advances to Executive Board members The table on the next page presents the loans and advances provided to Executive Board members and outstanding on 31 December 2013, 2012 and 2011.
For the Management Board Insurance and senior management in ING Insurance operations, remuneration is in line with the general principles of the remuneration policy for the Executive Board and the requirements under the Capital Requirements Directive III.
ING has continued to review and amend the remuneration for a select group of ING Bank and ING Insurance employees in order to comply with the Capital Requirements Directive III.
85ING Group Annual Report 2013 1 W h o w e are 2 R
The amendments relate to the allocation of variable remuneration and the ratio between fixed and variable remuneration and are intended to mitigate risk relating to remuneration. Measures include an ex-ante and ex-post assessment of variable remuneration prior to award and vesting respectively, significant deferral of variable remuneration, an equal divide between variable remuneration in cash and in shares, as well as retention periods on all equity remuneration as soon as it becomes unconditional.
The regulatory environment is still in development. The structure as set out above is based on information currently available. If new legislation would come into force, ING will amend the structure as deemed appropriate.
(1) The numbers of depositary receipt for shares reflect the shares held by the members of the Supervisory Board and their partners.
(3) Hermann-Josef Lamberti is a member of the Supervisory Board as of May 2013.
Stock options on ING Group N.V. shares held by members of the Supervisory Board Outstanding as at 31 December Expired in
Outstanding as at 31 December Expired in number of stock options 2013 2012 2011
The following table contains information on the options outstanding and movements during the financial year by the members of the Supervisory Board.
87ING Group Annual Report 2013 1 W h o w e are 2 R
Additional notes to the consolidated annual accounts 44 Pension and other post-employment benefits 183 46 Fair value of assets and liabilities 193 47 Derivatives and hedge accounting 206 48 Assets by contractual maturity 208 49 Liabilities by maturity 209 50 Assets not freely disposable 210 51 Transfer of financial assets 211 52 Offsetting financial assets and liabilities 212 53 Contingent liabilities and commitments 214 54 Legal proceedings 215 55 Companies and businesses acquired and divested 217 56 Principal subsidiaries 223 57 Structured entities 223 58 Related parties 227 59 Other events 234 60 Subsequent events 236
– investments for risk of policyholders 39,589 98,765 116,438 – non-trading derivatives 8,546 13,951 17,159 – designated as at fair value through profit and loss 2,790 4,760 5,437 Investments 5 – available-for-sale 137,897 193,584 208,539 – held-to-maturity 3,098 6,545 8,868 Loans and advances to customers 6 531,663 563,404 602,525
EQUITY 14 Shareholders’ equity (parent) 45,941 51,777 47,038 Non-voting equity securities 1,500 2,250 3,000
The comparison of the balance sheets is impacted by the classification as held for sale of ING U.S. (as of 2013) and the insurance and investment management businesses in Asia (as of 2012) and the classification to continuing operations of ING Group’s business in Japan (as of 2013) as disclosed in the section ‘Other significant changes in 2013’ on page 100.
Consolidated profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2013 2013 2012 2012 2011 2011
Result on disposals of group companies 26 –18 1,604 801 Gross commission income 4,234 3,941 4,763 Commission expense –1,369 –1,258 –1,630
91ING Group Annual Report 2013 1 W h o w e are 2 R
for the years ended 31 December amounts in euros 2013 2012 2011
Net result from continuing and discontinued operations attributable to: Equityholders of the parent 3,232 4,161 5,781
Items that will not be reclassified to the profit and loss account: Remeasurement of the net defined benefit asset/liability 44 –942 –3,221 1,100 Unrealised revaluations property in own use –7 –22 –12
Comprehensive income attributable to: Equityholders of the parent –3,354 4,852 7,708 Minority interests –30 191 83
– available-for-sale investments 129,243 137,418 219,442 – held-to-maturity investments 3,439 2,308 2,370 – real estate investments 265 290 118 – property and equipment 61 71 67 – assets subject to operating leases 43 – investments for risk of policyholders 65,528 72,201 61,898
(2) 2013 includes the repurchase premium paid on the repayment of EUR 750 million (2012: EUR 750 million; 2011: EUR 2,000 million) non-voting equity securities.
Balance as at 1 January 2011 (before change in accounting policy) 919 16,034 23,951 40,904 5,000 729 46,633 Effect of change in accounting policy –739 –739 –739 Balance at 1 January 2011 (after change in accounting policy) 919 16,034 23,212 40,165 5,000 729 45,894
Employee stock option and share plans 7 7 1 8 Repayment of non-voting equity securities –750 –750 Repurchase premium –375 –375 –375 Changes in the composition of the group and other 118 118 Dividend –6 –6 Purchase/sale of treasury shares 255 255 255 96 ING Group Annual Report 2013
Remeasurement of the net defined benefit asset/ liability 44 –905 –905 –37 –942 Unrealised revaluations property in own use –7 –7 –7 Unrealised revaluations available-for-sale investments and other –5,086 –5,086 262 –4,824 Realised gains/losses transferred to the profit and loss account –114 –114 35 –79 Changes in cash flow hedge reserve –812 –812 –15 –827 Transfer to insurance liabilities/DAC 2,200 2,200 –256 1,944 Share of other comprehensive income of associates 6 6 6 Exchange rate differences and other –1,868 –1,868 –226 –2,094 Total amount recognised directly in equity (other comprehensive income) –6,586 –6,586 –237 –6,823
Notes to the consolidated annual accounts of ING Group amounts in millions of euros, unless stated otherwise
Amendments to IAS 19 ‘Employee Benefits’ The most significant change of the revised IAS 19 ‘Employee Benefits’ relates to the accounting for defined benefit pension obligations and the corresponding plan assets. The amendments require immediate recognition in Other comprehensive income (i.e. in equity) of changes in the defined benefit obligation and in the fair value of plan assets due to actuarial gains and losses. The deferral of actuarial gains and losses through the ‘corridor approach’, which was applied under the previous version of IAS 19 until the end of 2012, is no longer allowed. As a related consequence, deferred actuarial gains and losses are no longer released to the profit and loss account upon curtailment. Furthermore, the amendments require the return on plan assets for the purpose of calculating the pension expense to be determined using a high-quality corporate bond rate, equal to the discount rate of the defined benefit obligation; until 2012 management’s best estimate was applied. The amendments also introduce a number of other changes and extended disclosure requirements. The implementation of the amendments to IAS 19 resulted in the recognition of accumulated actuarial gains and losses in equity as at 1 January 2013; more information is provided in Note 44 ‘Pension and other post-employment benefits’. As a result, Shareholders’ equity decreased with EUR 2.6 billion after tax (EUR 3.5 billion before tax) on 1 January 2013. The recognition of actuarial gains and losses in equity will create volatility in equity going forward. The changes in IAS 19 are implemented retrospectively; as a result, comparative figures for previous years have been restated and are presented as if the new requirements were always applied.
Weighted average number of ordinary shares out-standing during the period (in millions) Per ordinary share (in euros)
The change in accounting policy affects the balance sheet lines Other assets, Shareholders’ equity (parent), Liabilities held for sale and Other liabilities. Reference is made to Note 13 ‘Other assets’, Note 22 ‘Other liabilities’, Note 44 ‘Pensions and other post-employment benefits and Note 45 ‘Taxation’ for the financial impact as at 1 January 2012.
As a result of the retrospective change in accounting policies set out above, the Consolidated balance sheet of ING Group includes an additional balance sheet as at 31 December 2011.
OTHER SIGNIFICANT CHANGES IN 2013 ING U.S. In May 2013, ING U.S. was successfully listed on the NYSE. As a result of the IPO, ING’s ownership interest in ING U.S. was reduced from 100% to 71.25%. In October 2013, the sale of a second tranche further reduced ING Group’s interest in ING U.S. to approximately 56.7%. In light of ING’s intention to divest its remaining interest in ING U.S. over time ING U.S. is classified as held for sale and discontinued operations. Reference is made to Note 59 ‘Other events’.
Establishment of NN Group Until recently, ING Verzekeringen N.V. (‘ING Insurance’) was the holding company of the insurance and investment management activities of ING. As such, ING Insurance prepared consolidated financial statements under IFRS-EU that included ING Insurance and all its subsidiaries. ING Insurance was a wholly owned subsidiary of ING Insurance Topholding N.V. (‘ING Topholding’), a wholly owned subsidiary of the ultimate parent ING Groep N.V. ING Topholding was a holding company with no other assets, liabilities and activities than its 100% holding ING Insurance.
On 28 February 2014, before the finalisation of the 2013 consolidated financial statements, ING Insurance and ING Topholding legally merged. Through this merger, the legal entity ING Insurance ceased to exist. The legal merger became effective on 1 March 2014 and on that date the merged entity was renamed NN Group N.V. (‘NN Group’).
The presentation of, and certain terms used in, the consolidated balance sheet, the consolidated profit and loss account, consolidated statement of cash flows, consolidated statement of changes in equity and certain notes has been changed to provide additional and more relevant information or (for changes in comparative information) to better align with the current period presentation. The impact of these changes is explained in the respective notes when significant.
The implementation of IFRS 11 as at 1 January 2014 will not have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income. The impact of IFRS 11 is included in the table below.
IFRS 12 ‘Disclosure of Interests in Other Entities’ IFRS 12 ‘Disclosure of Interests in Other Entities’ introduces extended disclosure requirements for subsidiaries, associates, joint ventures and structured entities. There is no impact on Total equity, Net result and/or Other comprehensive income.
Notes to the consolidated annual accounts of ING Group continued 101ING Group Annual Report 2013 1 W h o w e are 2 R
Reference is made to the ‘Risk management’ section for a sensitivity analysis of net result to insurance, interest rate, equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably likely at the balance sheet date.
Fair values of financial assets and liabilities Fair values of financial assets and liabilities are based on unadjusted quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices may be obtained from independent market vendors, brokers or market makers. In general, positions are valued taking the bid price for a long position and the offer price for a short position. In some cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
Employee benefits Group companies operate various defined benefit retirement plans covering a significant number of ING’s employees.
A list of principal subsidiaries is included in Note 56 ‘Principal subsidiaries’.
On consolidation, exchange rate differences arising from the translation of a monetary item that forms part of the net investment in a foreign operation, and of borrowings and other instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold, the corresponding exchange rate differences are recognised in the profit and loss account as part of the gain or loss on sale.
Notes to the consolidated annual accounts of ING Group continued 108 ING Group Annual Report 2013
Notes to the consolidated annual accounts of ING Group continued 109ING Group Annual Report 2013 1 W h o w e are 2 R
Notes to the consolidated annual accounts of ING Group continued 110 ING Group Annual Report 2013
Notes to the consolidated annual accounts of ING Group continued 111ING Group Annual Report 2013 1 W h o w e are 2 R
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
When an operating lease is terminated before the lease period has expired, any penalty payment to be made to the lessor is recognised as an expense in the period in which termination takes place.
Where a business combination is achieved in stages, ING Group’s previously held interests in the assets and liabilities of the acquired entity are remeasured to fair value at the acquisition date (i.e. the date ING Group obtains control) and the resulting gain or loss, if any, is recognised in the profit and loss account. Amounts arising from interests in the acquiree prior to the acquisition date that have previously
Notes to the consolidated annual accounts of ING Group continued 114 ING Group Annual Report 2013
Financial liabilities at fair value through profit and loss Financial liabilities at fair value through profit and loss comprise the following sub-categories: trading liabilities, non-trading derivatives and other financial liabilities designated at fair value through profit and loss by management. Trading liabilities include equity securities, debt securities, funds on deposit and derivatives. Designation by management will take place only if it eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis. ING Group has designated an insignificant part of the issued debt, related to market-making activities, at fair value through profit and loss. This issued debt consists mainly of own bonds. The designation as fair value through profit and loss eliminates the inconsistency in the timing of the recognition of gains and losses. All other financial liabilities are measured at amortised cost.
Changes in the defined benefit obligation that effects Shareholders’ equity and/or Net result, include mainly: • service cost which are recognised as staff costs in the profit and loss account; • interest expenses using a high quality corporate bond rate at the start of the period which are recognised as staff costs in the profit and loss account; and • remeasurements which are recognised in Other comprehensive income (equity).
Notes to the consolidated annual accounts of ING Group continued 117ING Group Annual Report 2013 1 W h o w e are 2 R
All interest income and expenses from trading positions and non-trading derivatives are classified as interest income and interest expenses in the profit and loss account. Changes in the ‘clean fair value’ are included in Net trading income and Valuation results on non-trading derivatives.
Loans and advances to banks 10,911 14,527 30,011 22,775 40,922 37,302 Cash advances, overdrafts and other balances 1,634 1,227 475 552 2,109 1,779
Reference is made to Note 51 ‘Transfer of financial assets’ for information on securities lending as well as sale and repurchase transactions.
As at 31 December 2013, the non-subordinated receivables amounts to EUR 43,011 million (2012: EUR 39,050 million) and the subordinated receivables amounts to EUR 1 million (2012: EUR 3 million).
The change in Financial assets at fair value through profit and loss includes EUR –78,101 million as a result of the classification of ING U.S. as held for sale and EUR 16,357 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 120 ING Group Annual Report 2013
As at 31 December 2013, Trading assets includes receivables of EUR 48,690 million (2012: EUR 35,575 million) with regard to reverse repurchase transactions.
Derivatives used in – fair value hedges 1,383 2,926 – cash flow hedges 4,630 7,471 – hedges of net investments in foreign operations 138 49 Other non-trading derivatives 2,395 3,505
Notes to the consolidated annual accounts of ING Group continued 121ING Group Annual Report 2013 1 W h o w e are 2 R
Available-for-sale investments 130,632 185,877 Held-to-maturity investments 3,098 6,545 Loans and advances to customers 21,914 26,945 Amounts due from banks 3,059 3,386 Available-for-sale investments and Assets at amortised cost 158,703 222,753
Notes to the consolidated annual accounts of ING Group continued 123ING Group Annual Report 2013 1 W h o w e are 2 R
Approximately 90% of the exposure in the ABS portfolio is externally rated AAA, AA or A.
Debt securities - Exposure to certain Asset backed securities The table below shows certain ABS (US Subprime RMBS, Alt-A RMBS, CMBS and CDO/CLOs). It includes exposures in all relevant balance sheet lines, including not only loans and advances and available-for-sale investments as disclosed above, but also financial assets designated as at fair value through profit and loss.
US subprime RMBS 13 35 –778 756 –35 US Alt-A RMBS 96 –59 –303 457 59
(1) For assets classified as loans and advances to customers: amortised cost; otherwise: fair value.
Since 2010 concerns arose regarding the creditworthiness of certain European countries. As a result of these concerns the value of sovereign debt decreased and exposures in those countries are being monitored closely. With regard to the sovereign debt crisis, ING Group’s main focus is on Greece, Italy, Ireland, Portugal, Spain and Cyprus as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the European Central Bank (‘ECB’) via government bond purchases in the secondary market. For these countries, ING Group’s main focus is on exposure to Government bonds and Unsecured Financial institutions’ bonds.
Greece Government bonds available-for-sale 105 59 46 Italy Government bonds available-for-sale 2,650 90 2,560 Government bonds at amortised cost (loans) 102 102 Financial institutions available-for-sale 233 –1 234 Financial institutions at amortised cost (held-to-maturity) 30 30 30 Ireland Government bonds available-for-sale 59 6 53 Financial institutions available-for-sale 15 15 Portugal Government bonds available-for-sale 497 3 494 Financial institutions available-for-sale 35 1 34 Spain Government bonds available-for-sale 1,323 –49 1,372 Government bonds at amortised cost (held-to-maturity) 50 50 51 Financial institutions available-for-sale 82 3 79 Cyprus Government bonds available-for-sale 10 10 Total 5,191 112 5,079 81
Greece Government bonds available-for-sale 76 31 45 Italy Government bonds available-for-sale 2,337 –63 2,400 Government bonds at amortised cost (loans) 104 –1 104 Financial institutions available-for-sale 498 –7 505 Financial institutions at amortised cost (held-to-maturity) 30 30 31 Ireland Government bonds available-for-sale 55 1 54 Financial institutions available-for-sale 30 30 Financial institutions at amortised cost (held-to-maturity) 34 34 34 Portugal Government bonds available-for-sale 627 –17 644 Financial institutions available-for-sale 77 1 76 Spain Government bonds available-for-sale 1,151 –201 1,352 Government bonds at amortised cost (held-to-maturity) 50 50 52 Financial institutions available-for-sale 99 –11 110 Cyprus Government bonds available-for-sale 13 –5 18 Total 5,181 –261 –11 5,452 117
Notes to the consolidated annual accounts of ING Group continued 125ING Group Annual Report 2013 1 W h o w e are 2 R
Amortisation –650 –371 –6 –15 –656 –386 Transfers and reclassifications –282 –282 Changes in unrealised revaluations 23 1,082 –7,470 10,345 –1 –7,448 11,427 Impairments –177 –181 –11 –64 –188 –245
In 2013, Changes in the composition of the group and other changes includes EUR –55,501 million as a result of the classification of ING U.S. as held for sale and EUR 9,674 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Notes to the consolidated annual accounts of ING Group continued 126 ING Group Annual Report 2013
Impact on the financial years after reclassification: Carrying value as at 31 December 1,098 7,461 366 Fair value as at 31 December 1,108 7,215 422 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December 111 –137 nil Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made 10 –246 56 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) for the year (interest income and sales results) –10 188 20 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
129ING Group Annual Report 2013 1 W h o w e are 2 R
Increase in loan loss provisions 2,289 2,125 42 29 2,331 2,154 Exchange rate differences –109 20 –2 1 –111 21 Changes in the composition of the group and other changes –38 –50 –33 –4 –71 –54
Notes to the consolidated annual accounts of ING Group continued 130 ING Group Annual Report 2013
The associates of ING are subject to legal and regulatory restrictions regarding the amount of dividends it can pay to ING. These restrictions are for example dependant on the laws in the country of incorporation for declaring dividends or as a result of minimum capital requirements that are imposed by industry regulators in the countries in which the associates operate. In addition, the associates also consider other factors in determining the appropriate levels of equity needed. These factors and limitations include, but are not limited to, rating agency and regulatory views, which can change over time.
ING Group’s exposure to real estate is included in the following balance sheet lines: Real estate exposure
Real estate investments 1,142 1,288 Investments in associates 873 1,053 Other assets – property development and obtained from foreclosures 945 1,220 Property and equipment – property in own use 1,243 1,423 Investments – available-for-sale 1,495 1,649
Notes to the consolidated annual accounts of ING Group continued 133ING Group Annual Report 2013 1 W h o w e are 2 R
Revaluation surplus Opening balance 470 498 Revaluation in the year –5 –27 Released in the year –16 –1 Closing balance 449 470
The cost or the purchase price amounted to EUR 1,680 million (2012: EUR 1,806 million). Cost or the purchase price less accumulated depreciation and impairments would have been EUR 794 million (2012: EUR 953 million) had property in own use been valued at cost instead of at fair value.
Most recent appraisal in the current year 63 63 Most recent appraisal one year ago 17 11 Most recent appraisal two years ago 10 13 Most recent appraisal three years ago 4 8 Most recent appraisal four years ago 6 5
Notes to the consolidated annual accounts of ING Group continued 134 ING Group Annual Report 2013
Amortisation and unlocking –25 –207 –289 –274 –40 –59 –354 –540 Impairments –48 –9 –4 –3 –9 –55 Effect of unrealised revaluations in equity 308 –140 308 –140
Disposals –8 –9 –8 –9 Changes in the composition of the group and other changes –819 –89 –485 –40 –65 –72 –33 –931 –672
In 2012, Changes in the composition of the group related mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale. Reference is made to Note 12 ‘Assets and liabilities held for sale’.
Cash and balances with central banks 2,275 1,342 Amounts due from banks 123 Financial assets at fair value through profit and loss 79,546 26,688 Available-for-sale investments 53,096 24,805 Loans and advances to customers 8,536 8,705 Reinsurance contracts 4,388 98 Investments in associates 57 37 Real estate investments 6 Property and equipment 131 56 Intangible assets 875 176 Deferred acquisition costs 4,430 5,124 Other assets 2,774 1,318
For businesses classified as held for sale, the related goodwill is no longer evaluated at the level of the reporting unit to which it was allocated in the regular goodwill impairment test. Instead, it is reviewed as part of the valuation of the disposal unit that is presented as held for sale. In 2012, goodwill of EUR 180 million in Investment Management Korea, EUR 200 million related to ING Life Korea, EUR 15 million related to ING Vysya Life Insurance and EUR 16 million related to ING Direct UK was written off, as the related businesses were expected to be sold below carrying value. In 2013, goodwill of EUR 42 million related to Investment Management Taiwan was written off. The developments in the sales process of Investment Management Taiwan during 2013 (resulting in a sale in January 2014) indicated that the expected sales proceeds was no longer above the carrying value. The related charges are included in the profit and loss account in Net result from discontinued operations (for the Insurance and Investment Management businesses in Asia) and in Result on disposals of group companies (for ING Direct UK).
Fair value measurement The fair value hierarchy of financial assets and liabilities (measured at fair value), which are presented as held for sale is included below. The fair value hierarchy consists of three levels, depending upon whether fair values were determined based on (unadjusted) quoted prices in active markets (Level 1), valuation techniques supported by observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Reference is made to Note 46 ‘Fair value of assets and liabilities’ for more details on the fair value hierarchy.
Financial assets designated as at fair value through profit and loss 37 943 813 1,793 Available-for-sale investments 4,605 47,878 613 53,096
Methods applied in determining fair values of financial assets and liabilities – Held for sale 2012 Level 1 Level 2 Level 3 Total
Notes to the consolidated annual accounts of ING Group continued 138 ING Group Annual Report 2013
The fair values of the non-financial assets carried at fair value were determined as follows: Methods applied in determining fair values of non-financial assets - Held for sale 2013 Level 1 Level 2 Level 3 Total
Disclosures in respect of Net defined benefit assets are provided in Note 44 ‘Pension and other post-employment benefits’ and deferred tax assets are provided in Note 45 ‘Taxation’.
Notes to the consolidated annual accounts of ING Group continued 139ING Group Annual Report 2013 1 W h o w e are 2 R
Other Other includes EUR 3,400 million (2012: EUR 2,630 million) related to transactions still to be settled at balance sheet date.
Currency translation reserve –2,161 –841 93 Net defined benefit asset/liability remeasurement reserve –3,766 –2,861 361
In 2013, ING Groep N.V. issued 9.3 million (depositary receipts for) ordinary shares at par value in order to fund obligations arising from share-based employee incentive programmes. No changes occurred in the issued share capital in 2012 and 2011.
Notes to the consolidated annual accounts of ING Group continued 140 ING Group Annual Report 2013
Unrealised revaluations –7 –5,539 –5,546 Realised gains/losses transferred to profit and loss –327 –327 Changes in cash flow hedge reserve –812 –812 Transfer to insurance liabilities/DAC 2,200 2,200 Impact of ING U.S. –4 –444 2 –446
Notes to the consolidated annual accounts of ING Group continued 141ING Group Annual Report 2013 1 W h o w e are 2 R
Net defined benefit asset/liability remeasurement reserve Reference is made to Note 44 ‘Pension and other post-employment benefits’ for information on the amounts recognised directly in equity (other comprehensive income) related to the net defined benefit asset/liability remeasurement.
The repurchase premium and interest of EUR 1 billion is paid in relation to the repayment of the EUR 2 billion non-voting equity securities.
Non-voting equity securities (Core Tier 1 securities) On 12 November 2008, ING Groep N.V. issued one billion non-voting equity securities to the Dutch State at EUR 10 per non-voting equity security, resulting in an increase of ING Group’s core Tier 1 capital of EUR 10 billion. The nominal value of each security is EUR 0.24. The non-voting equity securities do not form part of ING Groep N.V.’s share capital; accordingly they do not carry voting rights in the General Meeting.
In addition to the legal and regulatory restrictions on distributing dividends from subsidiaries and associates to ING Groep N.V. there are various other considerations and limitations that are taken into account in determining the appropriate levels of equity in the Group’s subsidiaries and associates. These considerations and limitations include, but are not restricted to, rating agency and regulatory views, which can change over time; it is not possible to disclose a reliable quantification of these limitations. Reference is also made to the ‘Capital Management’ section.
ING U.S. - total 100 –1,187 ING Group's share 56.5 –1,124 –63
2013 – Call of perpetual subordinated loans In December 2013, ING Group called the USD 2 billion 8.5% Tier 1 hybrid loan.
ING Groep N.V. was repaid. In addition, ING Groep N.V. issued one new senior bond with a nominal value of EUR 0.7 billion and ING Bank issued two new senior bonds with a nominal value of GBP 0.4 billion and EUR 0.4 billion respectively. The overall transaction resulted in a total gain of EUR 955 million (EUR 716 million after tax), including related hedge results and transaction costs. This gain was recognised in Other income in 2011. From this amount, EUR 767 million (EUR 574 million after tax) related to ING Groep N.V., EUR 93 million (EUR 71 million after tax) to ING Bank and EUR 95 million (EUR 71 million after tax) to NN Group. This affects the subordinated securities as disclosed in this note and in Note 17 ‘Other borrowed funds’.
More than 1 year but less than 2 years 5,037 5,766 More than 2 years but less than 3 years 2,866 1,845 More than 3 years but less than 4 years 1,591 1,374 More than 4 years but less than 5 years 338 1,548 More than 5 years 9,151 5,253 Total floating rate debt securities 31,625 35,740
• ING Bank issued a 5 year USD 0.4 billion privately placed government guarantee senior unsecured bond in March 2009 with a floating rate of 3 months USD LIBOR + 145 basis points. This issue has a due date on 27 March 2014.
In 2012, ‘Changes in the composition of the group and other changes’ related mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale. Reference is made to Note 12 ‘Assets and liabilities held for sale’.
Changes in provision for unearned premiums and unexpired risks Provision net of reinsurance Reinsurance contracts Provision for unearned premiums and unexpired risks
Changes in the composition of the group and other changes 2 –10 1 –2 3 –12
Prior year provisions – payments to contract holders –4,522 –9,471 – interest accrual 13 30 – valuation changes investments 69 129
The change in Financial liabilities at fair value through profit and loss includes EUR –2,271 million as a result of the classification of ING U.S. as held for sale and EUR 1,232 million as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’.
Share-based payment plan liabilities 44 47 39 Prepayments received under property under development 21 83 Amounts to be settled 4,258 4,832 5,442
In 2013, Changes in the composition of the group and other changes includes EUR –10 million as a result of the classification of ING U.S. as held for sale and nil as a result of the classification to continuing operations of ING Japan. Reference is made to Note 59 ‘Other events’. Additions to the reorganisation provision are mainly related to the restructurings for Retail banking in the Netherlands, Commercial banking.
Notes to the consolidated annual accounts of ING Group continued 154 ING Group Annual Report 2013
In 2012, a reorganisation provision of EUR 191 million was recognised in the segment Commercial Banking following a strategic review of the business portfolio through right-sizing of the equities business, run-off of certain leasing units and further operational improvements in several businesses. These measures are expected to result in a reduction of the workforce of around 1,000 FTE’s over a period of three years.
In 2012, an additional reorganisation provision of EUR 55 million was recognised in the segment Insurance Benelux for the strategic initiatives announced in 2011. The main goals of the strategic initiative are to regain customer trust, diversify distribution channels, implement a new product range and increase efficiency. In 2012, the reorganisation measures resulted in a reduction of the workforce of 470 FTE’s.
Notes to the consolidated annual accounts of ING Group continued 155ING Group Annual Report 2013 1 W h o w e are 2 R
Interest income on loans 21,570 24,798 26,415 Interest income on impaired loans 15 41 61 Total interest income on loans 21,585 24,839 26,476
Interest expense on deposits by banks 440 623 902 Interest expense on customer deposits and other funds on deposit 6,618 9,140 9,383 Interest expense on debt securities 3,197 3,822 3,435 Interest expense on subordinated loans 1,347 1,422 1,625 Interest expense on trading liabilities 19,369 24,048 27,209 Interest expense on non-trading derivatives (no hedge accounting) 1,205 1,528 1,658 Interest expense on non-trading derivatives (hedge accounting) 7,873 7,905 7,513 Other interest expense –356 –369 –525 Interest expense banking operations 39,693 48,119 51,200
Impairments and reversals of impairments on investments are presented within Investment income, which is part of Total income. This can be specified for each segment as follows: Impairments/ reversals of impairments on investments per segment Impairments Reversal of impairments
In 2013, the result on the disposal of the insurance and investment management business in Hong Kong, Macau and Thailand and ING Life Korea (2012: Malaysian operations; 2011: Latin American operations) is not included above but included in the Result on disposal of discontinued operations. Reference is made to Note 36 ‘Discontinued operations’ and Note 55 ‘Companies and businesses acquired and divested’.
Change in fair value of derivatives relating to – fair value hedges 871 –428 –956 –6 6 –3 865 –422 –959 – cash flow hedges (ineffective
Included in the Valuation results on non-trading derivatives are the fair value movements on derivatives used to economically hedge exposures, but for which no hedge accounting is applied. For insurance operations, these derivatives hedge exposures in Insurance contract liabilities. The fair value movements on the derivatives are influenced by changes in the market conditions, such as stock prices, interest rates and currency exchange rates. The change in fair value of the derivatives is largely offset by changes in Insurance contract liabilities, which are included in Underwriting expenditure. Reference is made to Note 31 ‘Underwriting expenditure’.
Income from real estate development projects 32 22 31 32 22 31
In ‘Change in life insurance provisions in 2013’ includes EUR 177 million as a result of the refined market interest rate assumption that is used in determining certain components of the insurance liabilities for the separate account pension business in the Netherlands.
This impact was largely offset by the impact of related hedging derivatives. As disclosed in Note 28 ‘Valuation results on non-trading derivatives’, the valuation results on non-trading derivatives include the fair value movements on derivatives used to economically hedge exposures, but for which no hedge accounting is applied. For insurance operations, these derivatives hedge exposures in Insurance contract liabilities. The fair value movements on the derivatives are influenced by changes in the market conditions, such as stock prices, interest rates and currency exchange rates. The change in fair value of the derivatives is largely offset by changes in Insurance contract liabilities, which are included in Underwriting expenditure.
In 2013, the separate reporting of the Japan Closed Block VA business line triggered a charge of EUR 575 million before tax to restore the reserve inadequacy of that business line to the 50% confidence level. This charge includes a reduction of DAC of EUR 1,405 million (included in ‘Underwriting expenditure – Costs of acquiring insurance business’, which is partly offset by a release of the life insurance provision related to unearned revenues of EUR 867 million (included in ‘Underwriting expenditure – Change in life insurance provisions). Reference is made to Note 59 ‘Other events’.
In 2012, impairments on Property development relate to various real estate development projects (including mainly the United Kingdom, Belgium, Spain and Germany) due to worsening market conditions. In 2011, impairments on Property development were recognised due to the sale or termination of large projects in Germany, the Netherlands and on the reassessment of Dutch and Spanish real estate development projects.
In 2012, a goodwill impairment of EUR 48 million (2011: EUR 32 million) is recognised. Reference is made to Note 10 ‘Intangible assets’. Impairments on Loans and advances to customers are presented under Addition to loan loss provision. Impairments on investments are presented under Investment income. Reference is made to the ‘Risk management’ section for further information on impairments.
Continuing operations - average number of employees at full time equivalent basis (1) 22,372 24,940 26,332 52,145 54,450 57,944 74,517 79,390 84,276 Discontinued operations - average number of employees at full time equivalent basis 9,173 13,182 20,143 9,173 13,182 20,143 Total average number of employees at full time equivalent basis 22,372 24,940 26,332 61,318 67,632 78,087 83,690 92,572 104,419
In 2012, Pension costs includes a release (curtailment) of EUR 351 million (EUR 468 million before tax) due to a change to a new pension scheme. Reference is made to Note 44 ‘Pension and other post-employment benefits’.
As at 31 December 2013, ING Group holds no own shares in order to fulfil its obligations with regard to the existing stock option plan. As at 31 December 2012: 26,429,948 own shares (2011: 42,126,329) were held in connection with the option plan.
The weighted average share price at the date of exercise for options exercised during 2013 is EUR 8.24 (2012: EUR 6.15; 2011: EUR 8.09).
As at 31 December 2013, total unrecognised compensation costs related to stock options amounted to nil (2012: EUR 3 million; 2011: EUR 24 million). Cash received from stock option exercises for the year ended 31 December 2013 EUR 22 million (2012: EUR 8 million; 2011: EUR 4 million).
34 OTHER INTEREST EXPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
In 2013, total interest income and total interest expense for items not valued at fair value through profit and loss were EUR 33,526 million (2012: EUR 32,373 million; 2011: EUR 34,796 million) and EUR 18,658 million (2012: EUR 15,702 million; 2011: EUR 16,098 million) respectively. Net interest income of EUR 14,429 million is presented in the following lines in the profit and loss account.
Addition/(releases) of provision for reorganisations and relocations 222 458 387 33 253 43 255 711 430
ING U.S. In light of ING’s intention to divest its remaining interest in ING U.S. over time, ING U.S. is classified as held for sale and discontinued operations in 2013.
Net result from classification as discontinued operations In 2013, Net result from classification as discontinued operations Asia includes a goodwill write-off of EUR 42 million in IIM Taiwan. In 2012, Net result from classification as discontinued operations Asia included goodwill write-offs of EUR 200 million in ING Life Korea, EUR 180 million in Investment Management Korea and EUR 15 million in ING Vysya Life Insurance. Reference is made to Note 12 ‘Assets and liabilities held for sale’.
Cash flows from discontinued operations The net cash flow from discontinued operations was as follows: Net cash flow from discontinued operations 2013 2012 2011
Operating cash flow –6,948 3,181 2,038 Investing cash flow 6,945 –3,022 –2,156 Financing cash flow –225 –142 –200 Net cash flow –228 17 –318
ING’s Insurance and investment management businesses in Asia were previously included respectively in the segments Insurance Asia/ Pacific, ING Investment Management EurAsia and in the Corporate Line EurAsia before they were classified as discontinued operations and held for sale. The segment Insurance Asia/Pacific ceased to exist, following the classification as discontinued operations, as all activities previously included in this segment are now discontinued operations.
The potential conversion of the non-voting equity securities has an anti-dilutive effect on the earnings per share calculation in 2013, 2012 and 2011 (the diluted earnings per share becoming higher or less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account in the calculation of diluted earnings per share for these years.
Less: Net result from discontinued operations 234 1,191 810 Basic earnings from continuing operations 2,472 2,328 3,451 3,825.0 3,796.1 3,783.7 0.65 0.62 0.91
Net result from discontinued operations 259 833 –185 Net result from classification as discontinued operations –42 –394 Net result from disposal of discontinued operations 17 752 995 Total net result from discontinued operations 234 1,191 810 3,825.0 3,796.1 3,783.7
Effect of dilutive instruments: Stock option and share plans 8.5 6.3 5.4
Diluted earnings from discontinued operations 234 1,191 810 3,833.5 3,802.4 3,789.1 0.06 0.31 0.21 38 DIVIDEND PER ORDINARY SHARE In 2013, 2012 and 2011 no dividend was declared, therefore the dividend per ordinary share was nil. The Executive Board, with the approval of the Supervisory Board, has proposed, subject to the ratification by the General Meeting of Shareholders, not to pay a cash dividend for the year 2013.
Included in cash and cash equivalents: – amounts due to banks –11,451 –12,147 –19,121 – amounts due from banks 12,466 16,780 14,617
Not included in cash and cash equivalents: – amounts due to banks –15,806 –26,557 –53,112 – amounts due from banks 30,546 22,273 30,706 14,740 –4,284 –22,406
Retail Netherlands Netherlands Life Retail Belgium Netherlands Non-life Retail Germany Insurance Europe Retail Rest of World Japan Life Commercial Banking Investment Management
As of 2013, ING Group evaluates the results of its insurance segments using a financial performance measure called operating result. Operating result is defined as result under IFRS-EU excluding the impact of non-operating items, divestments and special items. Nonoperating items include realised capital gains/losses and impairments on debt and equity securities, revaluations on assets marked to market through the profit and loss account and other non-operating market impacts. The operating result for the life insurance business is analysed through the margin analysis, which includes the investment margin, fees and premium-based revenues and the technical margin. Until 2012, the main performance measure for the insurance segments was underlying result; this difference between underlying result and operating result are the non-operating items as specified above. The operating results of the insurance segments are reconciled to underlying result (as defined for the banking segments) for the purpose of combining bank and insurance segments in ING Group.
Underlying result and Operating result as presented below are non-GAAP financial measures and are not measures of financial performance under IFRS-EU. Because these are not determined in accordance with IFRS-EU, underlying result and operating result as presented by ING may not be comparable to other similarly titled measures of performance of other companies. The underlying result and operating result of ING’s segments is reconciled to the Net result as reported in the IFRS-EU Consolidated profit and loss account below. The information presented in this note is in line with the information presented to the Executive and Management Boards.
Central and Rest of Europe. Japan Life Income from life insurance, primarily Corporate Owned Life Insurance (COLI) business. Investment Management (IM) Income from investment management activities. Other Income from banking activities in the Netherlands, corporate reinsurance and items related to capital management. Japan Closed Block VA Consists of a closed block single premium variable annuity individual life insurance portfolio in Japan, including the internally reinsured minimum guarantee risk, which has been closed to new business and which is now being managed in run-off.
– Total investment and other income 477 1,695 –61 2,110 Total underlying income 14,313 12,951 –147 27,116
– Other interest expenses 617 –147 468 – Additions to loan loss provision 2,121 2,121
Special items –4 1,194 –949 IFRS-EU (continuing operations) 28,900 24,826 2,970 Total net result from discontinued operations 21,840 20,909 1,191 IFRS-EU (continuing and discontinued operations) 50,741 45,735 4,161
Divestments in 2012, included the gain on the sale of ING Direct Canada of EUR 1,135 million, the gain on the sale of ING Direct USA of EUR 489 million and the loss of EUR 260 million related to the sale of ING Direct UK.
– Other interest expenses 730 –350 380 – Additions to loan loss provision 1,335 1,335
IFRS-EU (continuing operations) 34,147 27,688 4,971 Total net result from discontinued operations 22,358 22,538 810 IFRS-EU (continuing and discontinued operations) 56,505 50,226 5,781
Special items –284 –22 –129 –160 –595 * Analysed as a part of operating expenses.
– Additions to loan loss provision 457 145 91 166 477 1,335
d. Insurance activities Operating result (before tax) is used to evaluate the financial performance of the insurance segments. Each segment’s operating result is calculated by adjusting the reported Net result before tax for the following items: • Non-operating items: related to (general account) investments that are held for own risk (net of policyholder profit sharing): – Capital gains/losses and impairments: realised gains and losses as well as impairments on financial assets that are classified as available for sale. These investments include debt and equity securities (including fixed income and equity funds), private equity (< 20% ownership), real estate funds as well as loans quoted in active markets.
• Result on divestments result before tax related to divested operations. • Special items before tax: items of income or expense that are significant and arise from events or transactions that are clearly distinct from the ordinary business activities and therefore are not expected to recur frequently or regularly. This includes for instance restructuring expenses, goodwill impairments, results related to early retirement of debt and gains/losses from employee pension plan amendments or curtailments.
Non-life operating result 103 7 110 Operating result Other –398 43 –355
Non-life operating result 186 4 191 Operating result Other –313 56 –257
Assets and liabilities classified as held-for-sale 156,114 146,142 184,451 171,065 183,139 169,769
The actual return on the plan assets amounts to EUR –302 million (2012: EUR 2,660 million).
2012 - Effect of curtailment - New pension scheme for employees in the Netherlands In 2012, ING finalised its agreement on a new pension scheme for employees in the Netherlands, following acceptance by both the unions and their members. The new pension scheme has taken effect on 1 January 2014 and will apply to the approximately 19,000 staff members in the Netherlands of ING Bank and WestlandUtrecht Bank as well as to the staff members in the Netherlands of NN Group. Under the agreement, two new separate pension funds have been created, one for banking and one for NN Group. The new scheme qualifies as a defined contribution under IFRS-EU and has replaced the existing defined benefit scheme in the Netherlands.
Expected rates of salary increases (excluding promotion increases) 2.10 2.30 2.00 2.00
The assumptions above are weighted by defined benefit obligations. The rates used for salary developments, interest discount factors and other adjustments reflect country-specific conditions.
The Sensitivity analysis of key assumptions and Expected cash flows presented above does not take into consideration the subsequent event that was announced in January 2014 with regard to the transfer of all future funding and indexation obligations under ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. Reference is made to Note 60 ‘Subsequent events’ for information on this agreement.
Defined benefit plans In 2013 and 2012, curtailments are recognised due changes in various pension schemes.
Additional information on the closed defined benefit plan in the Netherlands The largest plan is a plan in the Netherlands (84% of total DBO).The defined benefit plan is administered by a separate fund (PFI) that is legally separated from ING Group. The board of the pension fund is required by law or by articles of association to act in the interest of the fund and of all relevant stakeholders in the scheme, i.e. active employees, inactive employees, retirees and the employer. The board of the pension fund is responsible for the investment policy with regard to the assets of the fund, including the asset-liability matching strategies of the plan. As of 1 January 2014 the plan is closed for new build up. The plan in the Netherlands typically exposes ING Group to risks such as: investment risk, interest rate risk and longevity risk. The primary financial objective of the closed defined benefit plan in the Netherlands (the plan) is to secure accumulated participant retirement benefits.
Loans and advances to customers 963 –10 –1,179 6 –23 –243 Unused tax losses carried forward –1,453 823 9 –16 –637
Presented in the balance sheet as: – deferred tax liabilities 3,611 2,813 – deferred tax assets –2,702 –2,244 189ING Group Annual Report 2013 1 W h o w e are 2 R
In 2012, Changes in the composition of the group and other changes related mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale. Reference is made to Note 12 ‘Assets and liabilities held for sale’.
The decrease in Total unused tax losses carried forward is mainly due to the classification of ING U.S. as held for sale and the transaction referred to above.
Reconciliation of the weighted average statutory income tax rate to ING Group’s effective income tax rate
Remeasurement of the net defined benefit asset/liability 230 1,060 –476 Unrealised revaluations property in own use 4 Unrealised revaluations available-for-sale investments and other 1,833 –2,678 –830 Realised gains/losses transferred to profit and loss (reclassifications from equity to profit and loss) 57 22 –291 Changes in cash flow hedge reserve 305 –227 –376 Transfer to insurance liabilities/DAC –879 911 847 Exchange rate differences and other –25 –132 –86 Total income tax related to components of other comprehensive income 1,521 –1,040 –1,212 192 ING Group Annual Report 2013
Investment contracts for risk of company 795 4,625 810 4,561 Investment contracts for risk of policyholders 1,588 8,066 1,588 8,066 Amounts due to banks 27,732 39,628 27,257 38,704 Customer deposits and other funds on deposit 474,011 457,623 474,320 455,003 Financial liabilities at fair value through profit and loss
The estimated fair values represent the price at which an orderly transaction to sell the financial asset or to transfer the financial liability would take place between market participants at the balance sheet date (‘exit price’). The fair value of financial assets and liabilities is based on quoted market prices, where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices are obtained from independent vendors, brokers or market makers. Because substantial trading markets do not exist for all financial instruments, various techniques have been developed to estimate the approximate fair values of financial assets and liabilities that are not actively traded. These techniques are subjective in nature and involve various assumptions about the relevant pricing factors, especially for inputs that are not readily available in the market (such as credit spreads for own-originated loans and advances to customers). Changes in these assumptions could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values. Where exposures of a group of financial assets and financial liabilities are managed on a net basis ING applies the IFRS exception that allows ING to measure the fair value of the group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or settle a net short position.
Amounts recognised in the profit and loss account during the year 146 9 409 –253 –103 208 Revaluation recognised in equity during the year –34 –34
Transfers out of Level 3 –158 –9 –832 –129 –165 –1,293 Exchange rate differences 38 –29 9 Changes in the composition of the group and other changes 145 –6 –55 –901 –983 –1,800
Amounts recognised in the profit and loss account during the year 192 2 –375 –246 –50 –477 Revaluation recognised in equity during the year 14 14
The EUR 5.7 billion financial assets classified as Level 3 as at 31 December 2013 includes EUR 3.1 billion for Insurance and EUR 2.6 billion for Bank. The EUR 1.4 billion financial liabilities classified as Level 3 as at 31 December 2013 includes EUR 0.0 billion for Insurance and EUR 1.4 billion for Bank.
Bank Of the total amount of financial assets classified as Level 3 as at 31 December 2013 of EUR 2.6 billion, an amount of EUR 1.6 billion (62%) is based on unadjusted quoted prices in inactive markets. As ING does generally not 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 0.2 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 of EUR 1.4 billion, an amount of EUR 0.5 billion (36%) is based on unadjusted quoted prices in inactive markets. As ING does generally not adjust quoted prices using its own inputs, there is no significant sensitivity to ING’s own unobservable inputs.
Furthermore, Level 3 financial liabilities includes approximately EUR 0.0 billion which relates to financial liabilities that are part of structures that are designed to be fully neutral in terms of market risk. As explained above, the fair value of each of the components of these structures may be sensitive to unobservable inputs, but the overall sensitivity is by design not significant.
Correlation Correlation is a measure of dependence between two underlying references which is relevant in derivatives and other instruments which have more than one underlying reference. For example, correlation between underlying equity names may be a relevant input parameter for basket equity option pricing models. High positive correlation (close to 1) indicates strong positive relationship between underlyings implying they typically move in the same direction. High negative correlation, on the other hand, implies that underlyings typically move in opposite directions.
Sensitivity analysis of unobservable inputs Where the fair value of a financial instrument is determined using inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument the actual value of those inputs at the balance sheet date may be drawn from a range of reasonably possible alternatives. The actual levels chosen for these unobservable inputs in preparing the financial statements is consistent with the valuation methodology.
Recognition of unrealised gains and losses in Level 3 Amounts recognised in the profit and loss account relating to unrealised gains and losses during the year that relates to Level 3 assets and liabilities are included in the profit and loss account as follows: • Results on trading assets and trading liabilities are included in Net trading income; • Investments for risk of policyholders are included in Underwriting expenditure; • Non-trading derivatives are included in Valuation results on non-trading derivatives; • Financial assets and liabilities designated as at fair value through profit and loss are included in Valuation results on non-trading derivatives - Valuation results on assets and liabilities designated as at fair value through profit and loss (excluding trading); • Changes in the fair value of Real estate investments are included in Investment income; and • Impairments on Property in own use are included in Intangible amortisation and other impairments.
Fair value hierarchy of Greek, Italian, Irish, Portuguese, Spanish and Cyprian bonds at fair value 2012 Level 1 Level 2 Level 3 Total
48 ASSETS BY CONTRACTUAL MATURITY Amounts presented in these tables by contractual maturity are the amounts as presented in the balance sheet.
Loans and advances to customers 63,684 16,353 34,546 123,968 292,839 273 531,663
Customer deposits and other funds on deposit 411,647 27,067 25,336 2,912 3,201 3,856 301 474,320 Financial liabilities at fair value through profit and loss
Coupon interest due on financial liabilities 1,316 1,159 4,148 9,525 38,167 54,315
In 2013 the disclosure is further aligned with the EBA requirements for asset encumbrance; the 2012 comparatives have been adjusted accordingly.
51 TRANSFER OF FINANCIAL ASSETS The majority of ING’s financial assets that have been transferred, but do not qualify for derecognition are debt instruments used in securities lending or sale and repurchase transactions. Reference is made to Note 57 ‘Structured entities’.
Transferred assets at carrying amount Amounts due from banks 1,321 Financial assets at fair value through profit and loss (1) 167 39 8,808 29,904
The tables above do not include assets relating to the Illiquid Assets Back-up Facility that ING has agreed with the Dutch State. Reference is made to Note 58 ‘Related parties’ for detailed disclosure on the facility.
Amounts due to banks Repurchase, securities lending and similar agreements 1,085 1,085 21 1,063 1 Other 2,372 –17 2,355 1,714 641
53 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is party to activities whose risks are not reflected in whole or in part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Since the end of 2006, unit-linked products (commonly referred to in Dutch as ‘beleggingsverzekeringen’) have received negative attention in the Dutch media, from the Dutch Parliament, the AFM and consumer protection organisations. Costs of unit-linked products sold in the past are perceived as too high and Dutch insurers are in general being accused of being less transparent in their offering of such unitlinked products. The criticism on unit-linked products led to the introduction of compensation schemes by Dutch insurance companies that have offered unit-linked products. In 2008 ING’s Dutch insurance subsidiaries reached an outline agreement with two main consumer protection organisations to offer compensation to their unit-linked policyholders where individual unit-linked policies had a cost charge in excess of an agreed maximum and to offer similar compensation for certain hybrid insurance products. At 31 December 2008 costs of the settlements were valued at EUR 365 million for which adequate provisions have been established and of which a substantial portion has been paid out. The remaining unpaid part of the provision as per 31 December 2013 is solely available to cover costs relating to the settlements agreed in 2008. A full agreement on implementation was reached in 2010 with one of the two main consumer protection organisations, with the second main consumer protection organisation signing its agreement in June 2012. In addition, ING’s Dutch insurance subsidiaries announced additional measures (flankerend beleid) that comply with the ‘Best in Class’ criteria as formulated on 24 November 2011 by the Dutch Minister of Finance. In December 2011 this resulted in an additional agreement on these measures with the two main consumer protection organisations. In 2012 almost all unit-linked policyholders were informed about the compensation. The agreements with the two consumer protection organisations are not binding on policyholders. Consequently, neither the implementation of the compensation schemes nor the additional measures offered by ING’s Dutch insurance subsidiaries prevent individual policyholders from initiating legal proceedings against ING’s Dutch insurance subsidiaries and making claims for damages.
In July 2011, the Dutch ING Pensioners’ Collective Action Foundation (Stichting Collectieve Actie Pensioengerechtigden ING Nederland), together with two trade unions (FNV Bondgenoten and CNV Dienstenbond) and a number of individual pensioners, instituted legal proceedings against ING’s decision not to provide funding for indexing pensions insured the Dutch ING Pension Fund (Stichting Pensioenfonds ING) in 2009, 2010 and 2011. This claim was rejected by the district court of Amsterdam on 9 November 2012. An appeal was lodged against this court decision. In July 2011, also the Interest Group ING General Managers’ Pensions (Belangenvereniging ING-Directiepensioenen), together with a number of individual retired Dutch General Managers of ING, instituted legal proceedings against ING’s decision not to provide funding for indexing Dutch General Managers’ pensions directly insured with Nationale-Nederlanden in 2010 and 2011. This claim was rejected by the district court of Amsterdam on 22 October 2012. An appeal was lodged against this court decision. It is not feasible to predict the ultimate outcome of these legal proceedings. The ultimate outcome of these proceedings may result in liabilities and provisions for such liabilities which are different from the amounts recognised. At this moment it is not practicable to provide an estimate of the (potential) financial effect of such proceedings.
In December 2005, Interadvies N.V., at the time a subsidiary of ING Bank N.V. (together ‘ING’) sold Arenda Holding B.V. and five subsidiaries (together ‘Arenda’) to Amodo Europe N.V. (‘Amodo’). In November 2006, Amodo instituted legal proceedings against ING. Amodo claimed that ING informed them incorrectly with respect to the current and future financial status of Arenda at the time of the sale. This claim was rejected by the Court on 1 September 2010 but Amodo lodged an appeal against that Court decision. On 6 November 2012, the Court of Appeal partly awarded the claim of Amodo in an interlocutory judgement. In the interlocutory judgement, the Court of Appeal also instructed both ING and Amodo to submit a calculation of the damages involved to the Court of Appeal. Based on both calculations the Court of Appeal will make a final judgement. In January 2014, Amodo has filed a new document to substantiate its claim. ING has until the end of March 2014 to file counter arguments, therefore a final judgment will probably not be given before the end of the second quarter of 2014. ING has the possibility to appeal against the legal grounds on which the final judgement is based. At this moment it is not practicable to provide an estimate of the (potential) financial effect of this proceeding.
Divestments effective in 2013 and divestments announced in 2013 but not closed in 2013 – Asia In 2012, ING’s Insurance and investment management businesses in Asia and the (internally) reinsured Japan SPVA business in corporate reinsurance were classified as held for sale and discontinued operations. Various individual divestment transactions were agreed. The specifics of these transactions are included below. The Asian Insurance and Investment Management businesses and the (internally) reinsured Japan SPVA businesses in Corporate Reinsurance were previously included respectively in the segments Insurance Asia/Pacific, Investment Management and Other before they were classified as discontinued operations. After carefully exploring and evaluating the options available for the divestment of ING Life Japan, it was concluded that a standalone divestment of ING Life Japan, including its Corporate Owned Life Insurance (COLI) and Closed Block VA businesses, is not feasible in a manner that would meet the demands of regulators and other interest holders. As a result, ING Life Japan and the Japanese Closed Block VA guarantees reinsured to ING Re (‘ING Japan’) are no longer classified as held for sale and discontinued operations in 2013. Reference is made to Note 12 ‘Assets and liabilities held for sale’, Note 36 ‘Discontinued operations’ and Note 59 ‘Other events’.
Joint venture KB Life In April 2013, ING agreed to sell its 49% stake in Korean insurance venture KB Life Insurance Company Ltd. (KB Life) to joint venture partner KB Financial Group. ING received a total cash consideration of EUR 115 million (KRW 166.5 billion) for its 49% stake in KB Life. The transaction closed 20 June 2013.
Joint venture ING-BOB Life In July 2013, ING agreed to sell its 50% stake in its Chinese insurance joint venture ING-BOB Life Insurance Company to BNP Paribas Cardif, the insurance arm of BNP Paribas. The transaction, which is subject to regulatory approval, is not expected to have a significant impact on ING Group results. This announcement does not affect ING Bank’s 13.7% stake in Bank of Beijing, nor does it affect ING’s Commercial Banking activities in China.
ING’s investment management business in South Korea In July 2013, ING reached an agreement to sell its investment management business in South Korea to Macquarie Group, an Australiabased, global provider of financial services. The transaction did not have a significant impact on ING Group results. The transaction closed on 2 December 2013.
Divestments effective in 2013 – ING Direct UK In October 2012, ING reached an agreement to sell ING Direct UK to Barclays. Under the terms of the agreement, the approximately EUR 13.4 billion (GBP 11.6 billion) of savings deposits and approximately EUR 6.4 billion (GBP 5.5 billion) of mortgages of ING Direct UK have been transferred to Barclays. The agreement resulted in an after tax loss of EUR 260 million which was recognised in 2012. The transaction closed on 6 March 2013 and a gain of EUR 10 million was recognised on the final settlement. In 2012, ING Direct UK was classified as held for sale. ING Direct UK was included in the segment Retail Rest of World.
Liabilities Insurance and investment contracts 3,964 3,964 Amounts due to banks 5 253 258 Customer deposits and other funds on deposit 63,744 29,383 93,127
Latin American pensions, life insurance and investment management operations In December 2011, ING completed the sale of its Latin American pensions, life insurance and investment management operations (‘Latin American operations’) for a total consideration of EUR 2,637 million to Grupo de Inversiones Suramericana (‘GRUPOSURA’). The sale was the first major step in the divestment of ING’s insurance and investment management activities. Under the terms of the agreement, ING received EUR 2,572 million in cash and GRUPOSURA assumed EUR 65 million in debt. The sale resulted in a net profit of EUR 995 million. Included in the transaction were the mandatory pension and voluntary savings businesses in Chile, Colombia, Mexico, Uruguay and ING’s 80% stake in AFP Integra S.A. in Peru; the life insurance businesses in Chile and Peru; As part of this transaction ING sold its 33.7% stake in Peruvian InVita Seguros de Vida S.A. to the Wiese Family. The transaction also included the local investment management capabilities in these five countries. Not included in the transaction was ING’s 36% stake in the leading Brazilian insurer SulAmérica SA.
Liabilities Insurance and investment contracts 205 715 920 Amounts due to banks 101 101 Customer deposits and other funds on deposit 3,028 66 3,094
The principal subsidiaries of ING Groep N.V. and their statutory place of incorporation or primary place of business are as follows: Companies treated as part of the banking operations Proportion of ownership interest held by the Group
Subsidiary NN Group N.V. The Netherlands 100% 100% Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands 100% 100% Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands 100% 100% Parcom Capital B.V. The Netherlands 100% 100% Nationale-Nederlanden Services N.V. The Netherlands 100% 100% Movir N.V. The Netherlands 100% 100% ING Re (Netherlands) N.V. The Netherlands 100% 100% Nationale-Nederlanden Bank N.V. The Netherlands 100% 100% ING Investment Management Holdings N.V. The Netherlands 100% 100% ING Pojistovna a.s. The Netherlands 100% 100% ING Životná poist'ovna a.s. Slovakia 100% 100% ING Uslugi Finansowe S.A. Poland 100% 100% ING Powszechne Towarzystwo Emerytalne S.A. Poland 80% 80% ING Asigurari de Viata S.A. Romania 100% 100% ING Greek Life Insurance Company S.A. Greece 100% 100% ING Biztosító Zártkörûen Mûködõ Részvénytársaság Hungary 100% 100% ING Pensionno-Osigoritelno Druzestvo EAD Bulgaria 100% 100% ING Life Belgium N.V. Belgium 100% 100% ING Non Life Belgium N.V. Belgium 100% 100% ING Life Luxembourg S.A. Luxembourg 100% 100% Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain 100% 100% Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain 100% 100% ING Emeklilik A.S. Turkey 100% 100% ING Life Insurance Company Limited Japan 100% 100% ING U.S., Inc. (1) United States of America 56% 100% ING International Nominee Holdings, Inc. (1) United States of America 56% 100% ING Life Insurance and Annuity Company (1) United States of America 56% 100% ING North America Insurance Corporation (1) United States of America 56% 100% Lion Connecticut Holdings Inc. (1) United States of America 56% 100% ReliaStar Life Insurance Company (1) United States of America 56% 100% ReliaStar Life Insurance Company of New York (1) United States of America 56% 100% Security Life of Denver Insurance Company (1) United States of America 56% 100% ING USA Annuity and Life Insurance Company (1) United States of America 56% 100% ING Investment Management Co (1) United States of America 56% 100% Security Life of Denver International Limited (1) United States of America 56% 100%
57 STRUCTURED ENTITIES ING Group’s activities involve transactions with various structured entities (‘SE’) in the normal course of its business. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. ING Group’s involvement in these entities varies and includes both debt financing and equity financing of these entities as well as other relationships. Based on its accounting policies, as disclosed in the section ‘Principles of valuation and determination of results’ of these financial statements, ING establishes whether these involvements result in no significant influence, significant influence, joint control or control over the structured entity.
ING’s activities involving structured entities are explained below in the following categories: 1) Consolidated ING originated Credit management securitisation programmes; 2) Consolidated ING originated Liquidity management securitisation programmes (Lions); 3) Consolidated ING originated Covered bond programme (CBC); 4) Consolidated ING sponsored Securitisation programme (Mont Blanc); 5) Unconsolidated Securitisation programme; 6) Investments – ING managed Investment funds; 7) Investments – Third party managed structured entities; and 8) Other structured entities.
ING Group originated a number of these securitisations with approximately EUR 76 billion of AAA rated notes and unrated subordinated notes as at 31 December 2013.
There are no minority interests as part of the securitisation structured entities that are significant to ING Group. ING Group for the majority of the securitisation vehicles provides the funding for the entity except for EUR 5.2 billion which are funded by third parties.
4) Consolidated ING sponsored Securitisation programme (Mont Blanc) In the normal course of business, ING Group structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling (also referred to as ‘factoring’) the clients’ receivables or other financial assets to an ING sponsored SPE.
The liquidity facilities, including programme wide enhancements, provided to Mont Blanc are EUR 1,728 million. The drawn liquidity amount is EUR 159 million as at 31 December 2013.
6) Investments – ING managed Investment funds ING Group originates investment funds mainly as part of its life insurance operations. ING may hold investments in these funds for its own account through the general account investment portfolio of the insurance operations. Other investments in these funds may be held for the account of policyholders or by third parties.
Key management personnel compensation Transactions with key management personnel (Executive Board, Management Boards and Supervisory Board) and post-employment benefit plans are transactions with related parties. These transactions are disclosed in more detail as required by Part 9 Book 2 of the Dutch Civil Code in the remuneration report included in the annual report. The relevant sections of the remuneration report therefore are part of the annual accounts. For the post-employment benefit plans see Note 44 ‘Pension and other post-employment benefits’.
Fixed compensation – Base salary 2,572 3,336 2,589 2,307 10,804 – Pension costs 311 917 556 337 2,121 – Retirement benefits – Termination benefits 618 1,255 1,873 Variable compensation – Upfront cash 434 160 2,136 2,730 – Upfront shares 434 160 594 – Deferred cash 651 240 891 – Deferred shares 651 240 2,364 3,255 – Other 339 339 Total compensation 2,883 6,423 4,563 8,738 22,607
Loans and advances to key management personnel Amount outstanding 31 December Average interest rate Repayments amounts in thousands of euros 2013 2012 2013 2012 2013 2012
In order to obtain approval from the European Commission on ING Group’s Restructuring Plan (see below), ING agreed to make additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission to the Dutch State corresponding to an adjustment of the fees for the Illiquid Assets Back-up Facility. In total, these additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission amounted to a net present value of EUR 1.3 billion before tax, which was recognised as a one-off charge in 2009.
Repayment non-voting equity shares In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted to EUR 3 billion and included a 50% repurchase premium. ING funded this repayment from retained earnings. In November 2012 ING reached an agreement with the European Commission on an amended Restructuring Plan. As part of the amended Restructuring Plan, ING submitted a repayment schedule for the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) at a total cost of EUR 4.5 billion in four tranches in the next three years, translating into an overall internal rate of return (IRR) for the Dutch State on the core Tier 1 securities of exactly 12.5%. In accordance with this agreement ING repaid EUR 0.75 billion of the remaining non-voting equity securities (Core Tier 1 securities) respectively in November 2012 and November 2013. The payments in November 2012 and November 2013 amounted to EUR 1.125 billion each including premiums and interest. On the basis of the repayment schedule, ING aims to repay a third tranche by March 2014 and a final tranche ultimately by May 2015, provided that the total capital gain after tax, together with the net present value of the financial benefit to be realised by the calling of the USD 2 billion 8.5% Hybrid Tier 1, totalling approximately EUR 50 million, will be used to increase the next repayment of core Tier 1 securities to the Dutch State, scheduled for March 2014. The final payment to the Dutch State, scheduled for May 2015 will be lowered by the same amount. The total amount of the repayment to the Dutch State remains unchanged. While ING has committed to redeem these securities per the defined schedule, ING has the ability to accelerate payments if it is prudent under prevailing financial circumstance or defer a repayment in full or in part. In the latter case, the subsequent tranche will be increased with a corresponding amount. In the event that ING does not repay in full 2 consecutive repayment tranches or does not pay in total EUR 4.5 billion by 15 May 2015, the Dutch State will re-notify to the Commission who may in principle require compensatory measures. All repayments are conditional upon the approval of the Dutch central bank (DNB).
On 1 July 2013 EUR 3.8 billion of WestlandUtrecht Bank’s Dutch mortgage portfolio, EUR 0.1 billion of consumer lending and EUR 3.7 billion of Dutch savings portfolio were transferred to Nationale-Nederlanden Bank. In addition approximately 400 of WestlandUtrecht Bank’s employees were transferred to Nationale-Nederlanden Bank. All assets and liabilities were transferred at the existing carrying value as included in ING Bank’s balance sheet. This transaction was completed on 1 July 2013.
The 2009 Restructuring Plan included restrictions on acquisitions and price leadership for certain products in EU markets. These restrictions will continue to apply until 18 November 2015 or until the date on which more than 50% of each of the Insurance/IM operations has been divested, whichever date comes first.
The amendments to the restructuring plan of 2013 were formally approved by the European Commission by decision of 5 November 2013.
Master claim agreement In 2012, ING Groep N.V., ING U.S., Inc. and ING Insurance Eurasia N.V. entered into a master claim agreement to (a) allocate existing claims between these three parties and (b) agree on criteria for how to allocate future claims between the three parties. The master claim agreement contains further details on claim handling, conduct of litigation and dispute resolution.
Shareholder agreement and other agreements ING U.S., Inc In connection with the initial public offering of ING U.S., Inc, ING Groep N.V. entered into a shareholder agreement with ING U.S., Inc. that governs certain aspects of our continuing relationship. In particular, the shareholder agreement addresses the composition of the ING. U.S., Inc. board of directors and its committees, other corporate governance matters, ING Groep N.V. approval and consent rights with respect to certain business and corporate actions ING U.S., Inc. may take, mutual rights that ING U.S., Inc and ING Groep N.V. will have with respect to business and financial information and financial accounting matters and ING Groep N.V. rights with respect to subsequent sales of the common stock of ING U.S., Inc.
Minority interests at that date increased with EUR 2,954 million due to the IPO of ING U.S. This amount represented 28.75% of the net asset value under IFRS-EU of ING U.S.
These transactions did not impact the profit and loss account of ING Group. These transactions had a negative impact of EUR 632 million on the Shareholders’ Equity (parent) of ING Group, including EUR 26 million transaction costs after tax. This amount reflects the difference between the net proceeds to ING Group and the IFRS-EU carrying value of the 14.5% stake divested through these transactions. This amount was recognised in ‘Other reserves’.
Classification of ING U.S. In light of ING’s intention to divest its remaining stake in ING U.S. over time Insurance ING U.S, is classified as held for sale and discontinued operations in 2013. Reference is made Note 12 ‘Assets and liabilities held for sale’ and Note 36 ‘Discontinued operations’.
Sale of custody services in seven European countries In 2013, ING reached an agreement to transfer its local custody services business in seven countries in Central and Eastern Europe to Citi. The transaction did not have a significant impact on ING’s results. The full migration of the clients business is expected to be finalised in the second quarter of 2014.
(2) The majority of the corporate lending risk exposures were either deals with country of risk outside of Cyprus, Letter of credits or Trade Commodity Finance with maturity less than 3 months. Therefore, net credit risk linked to Cyprus is not significant for ING Bank. NN Group has no credit risk linked to Cyprus.
Italy Total exposure to Italy decreased by EUR 833 million in 2013 mainly due to a reduction of debt securities with EUR 555 million. The decrease in debt securities was mainly in ABS with EUR 368 million maturing contracts and in the financial institution bonds with EUR 266 million, partially offset by an increase in government bonds of EUR 171 million.
The increase in the lending book and the undrawn committed facilities is driven by additional outstandings and facilities to existing customers.
Interest rate risks are well-known within ING’s risk appetite as these risks are part of doing life insurance business, and within market risk limits defined and monitored on a quarterly basis.
A continuation of the current low interest rate environment would also negatively affect our financial performance. For example, should new money investment rates remain at approximately the same level observed over 2013, we estimate that would reduce our current operating result by less than 5% in each of 2014, 2015 and 2016, in each case as compared to our current projections for such year. This estimated reduction in operating earnings primarily reflects lower investment income, as we invest new premiums and reinvest proceeds from maturing investments at rates lower than the yield on our current investment portfolio, and, in certain businesses, higher amortisation of DAC/VOBA. We believe reduced rates in the insurance policies offset the lower investment income, but such reductions would only be partially effective due to the presence of fixed or minimum rates on many of our products. Under this scenario, we do not currently expect that our reserve adequacy testing will result in charges to the profit and loss account. These estimates do not assume any changes to other assumptions and do not reflect significant management actions, other than reductions to the rates in our policies where relevant.
ING Bank’s risk management disclosures provides qualitative and quantitative disclosures about credit, market, liquidity and non-financial risks based on International Financial Reporting Standards as adopted by the European Union ‘IFRS-EU’. The risk management section is in line with the accounting standards relating to the nature and the extent of the risks as required by IFRS7 ‘Financial Instruments: Disclosures’ as approved by the EU and covered by the opinion of the Statutory Auditors as being part of the notes to the consolidated financial statements. Pillar 3 information is from a regulatory perspective largely based on internal modelled risk metrics under the Basel rules and not addressed for verification to the statutory auditors.
In August 2013, FSB published a progress report on the level and quality of the implementation of the recommendations in the major banks’ 2012 annual reports. The report, based on a self-assessment of global systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs), demonstrated that the recommendations are beginning to make a positive impact on the reporting practises of global banks. The banks’ self-assessment stated that they have implemented 50% of the EDTF recommendations in aggregate in 2012 disclosures, which is a considerable increase from 34% in 2011; and they expect to implement 72% of the recommendations within their 2013 disclosures. Besides the banks ‘self-assessment, the users of the annual reports, investors and analysts, within the EDTF undertook a further review of the disclosures, which indicated however a lower degree of implementation than banks’ self-assessment, particularly for recommendations where they expect more granular, quantitative disclosures. Despite these differences, both banks and investors and analysts in the EDTF see an opportunity to engage and discuss the recommendations for further enhancing risk disclosures. For ING Bank, the implementation efforts were rewarded by including some of the templates in the examples of leading disclosures practices in the FSB progress report.
Credit risk definitions and governance 261 Risk culture 263 Credit risk appetite and concentration risk framework 264 RWA comparison 266 385 Credit risk measurement (SA & AIRB) 268 392 Credit risk models 269 Exposure classes 270 387
Liquidity risk is the risk not to meet its financial liabilities when they come to due, at reasonable cost and in a timely manner.
Operational risk is the risk of direct or indirect loss returning from inadequate or failed internal processes, people and systems or from external events.
Business risk is the exposure to value loss due to fluctuations in volumes, margins and costs, as well as customers behaviour risk.
RISK GOVERNANCE ING Bank’s risk management framework is based on a ‘three lines of defence’ governance model, whereby each line has a specific role and defined responsibilities and at the same time work closely together to identify, assess and mitigate risks. This governance framework ensures that risk is managed in line with the risk appetite as defined by the Management Board Bank (MBB), ratified by the Supervisory Board (SB) and is cascaded throughout ING Bank.
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), and the corporate legal function. The membership of the CRO on the MBB ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation both at bank and regional/local level, which supports the commercial departments in their decision-making, but which also has sufficient countervailing power to prevent risk concentrations and other forms of excessive risks.
The Chief Risk Officer ensures that the boards are well informed and understand ING Bank’s risk position at all times. Every quarter, the CRO reports to the board committees on ING Bank’s risk appetite levels and on ING Bank’s risk profile. In addition the CRO briefs the board committees on developments in internal and external risk related issues and ensures the board committees understand specific risk concepts.
The risk committees described below act within the overall risk policy and delegated authorities granted by the Management Board Bank: • ING Bank Credit Committee – Policy (GCC(P)): Discusses and approves policies, methodologies and procedures related to credit, country and reputation risks within ING Bank. The GCC(P) meets on a monthly basis; • ING Bank Credit Committee – Transaction Approval (GCC(TA)): Discusses and approves transactions which entail taking credit risk
Risk culture In the current social and economic environment risk culture is a critical factor in the success or failure of a bank’s risk management. Issues relating to risk culture are consequently of interest to all stakeholders of ING Bank. ING considers the good reputation and integrity of its organisation as key requirements to operate successfully in the financial world.
With the programme ING gains a sound risk culture and ensures that every employee in every part of the organisation understands how his actions and behaviour can help earn and retain customer and stakeholder trust. This programme is divided into several mandatory modules among others business principles, customer trust, fraud awareness, Financial Economic Crime and IT security. To enhance risk awareness these topics are discussed between managers and employees through dialogue sessions that managers organise within their teams to create clear and consistent understanding. The endorsement from the executive level and the emphasis in the communication strengthen the culture.
For further information with regards to the compensation policies please refer to the remuneration report in the corporate governance section of the annual report.
Risk cycle process ING uses a stepwise risk management approach to know, mitigate and manage its financial and non-financial risks. The approach consists of a cycle of five recurrent activities: risk identification, risk assessment, risk control, risk monitoring and risk reporting. In short this implies: determine what your risks are, assess which of those risks can really do harm, take mitigating measures to control these risks, monitor if the measures are effective and monitor the development of the risk and report the findings to management at all relevant levels to enable them to take action when needed.
The recurrence is twofold. One: identification, assessment and review and update of mitigating measures are done periodically. Two: if, during the period, monitoring findings indicate new risks arising, or known risks to change, assessed risk levels to change, or control measures not to be effective enough, analyses of these findings may result in renewed and more frequent risk identification, and/or assessment, and/or in a change of the mitigating measure.
Risk assessment and control Each identified risk is assessed to determine the importance, or risk level, of the risk for the ING entity in scope. This enables the entity to decide which of the identified risks need control measures and how strict or tolerant these measures must be. Known risks are re-assessed to either confirm the risk level or detect change.
The importance of a risk is assessed based on the likelihood that the risk occurs and the financial or reputational impact should the risk occur. A risk that is not very likely to happen but has a huge financial impact when it does needs to be controlled. For a risk that is likely to happen at a higher frequency, but that has a modest financial impact, business management may decide to not mitigate and accept the consequences when it happens.
Risks can be controlled by mitigating measures that either lowers the likelihood the risk occurs, or measures that lower the impact if 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.
Risk appetite framework ING Bank uses an integrated risk management approach for its banking activities. The Management Board Bank uses the bank risk appetite framework both to set boundaries for the Medium Term Plan (MTP) budget process and to monitor and manage the actual risk profile in relation to the risk appetite.
Process The ING Bank risk appetite framework consists of specific risk appetite statements which are approved in the MBB on an annual basis or more frequently if this is felt necessary, and reviewed quarterly in the MBB and the SB. The bank risk appetite process is focused on setting the appetite at the consolidated Bank level and across the different risk categories. It is therefore essentially a top down process, which bases itself on the ambition of the Bank in terms of its risk profile and is a function of the actual risk profile, the regulatory environment and the economic context. The process is set up according to the following steps: Step 4. Monitoring and management of underlying dedicated risk limits
Step 1. Risk assessment & scenario selection ING Bank formally determines its main risks based on the current economic situation, political and regulatory developments and developments in portfolios on an annual basis. Senior management, business representatives and risk specialists are involved in this process. Based on the risk assessment, relevant scenarios to be evaluated in the remainder of the year are selected. The results of the risk assessment and scenario selection are discussed and approved in the Stress Testing Steering Committee (STSC). All stakeholders are represented in the STSC, such as representatives of the different Corporate Risk departments, Capital Management, Finance and the Economic Bureau. The STSC submits the results of the risk assessment and scenario selection to the BF&RC for formal approval.
Step 2. Scenario parameter setting After the determination of the high level scenarios in the previous step, they need to be worked out in greater detail. 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 approved in the STSC and subsequently in the BF&RC.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT After the turmoil in the financial markets and the consequent need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. This has resulted in more stringent regulations intended to avoid future crises in the financial system and taxpayers’ aid in the future.
To accomplish this, a new Basel accord (Basel III) was adopted in 2010 and consequently translated into regulation by the EU in the Capital Requirement Regulation (CRR) and a Capital Requirement Directive IV. The CRR is binding for all EU member states and became effective per 1 January 2014. The CRR/CRD IV directs all EU member states to implement certain components of Basel III in their own law, in the Netherlands in the Wet Financieel Toezicht (WFT). Main objectives are: • Better alignment of risk taking and loss absorbing capacity of financial institutions through a narrower definition of core Tier 1 and Tier 1 capital, back-stops on a bank’s leverage via a ratio that should become part of Pillar 1 of the Basel framework.
Another important element of the regulatory reforms is the Bank Recovery and Resolution Directive (BRRD) which will enter into force on 1 January 2015. The aim of this directive is to make EU banks more resilient and to reduce the possibility of having bank bailed out using public money, The new rules provide authorities with the means to intervene decisively both before problems occur and early on in the process if they do. If, despite these preventive measures, the financial situation of a bank deteriorates beyond repair, the new law ensures that shareholders and creditors of the banks have to pay their share, reflected via the bail-in requirements which will enter into force on 1 January 2016. ING supports the bail-in rules as they are an important component of the new regulatory framework, aimed at reducing the possibility that tax payer money will be needed to bail-out institutions in future crises.
Cybercrime Cybercrime is an increasing threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks are increasing at a global scale. In April 2013 Dutch banks, including ING Bank were targeted by Distributed Denial of Service (DDoS) attacks which resulted in some noticeable unavailability of services.
Following the establishment of a Cybercrime Task Force in 2012, ING Bank has set up a Cybercrime Resilience Program in 2013 to structurally address the cybercrime threats. Within the programme, ING Bank has defined a wide range of measures, on top of existing IT security measures, to strengthen ING’s resilience against e-banking fraud, DDoS and targeted attacks (also called Advanced Persistent Threats). To monitor and to respond to cybercrime effectively across ING Bank, a permanent central CyberCrime Emergency Response Team has been established.
Credit risk definitions Credit risk is the risk of loss from the default and/or credit rating deterioration of counterparties (including bond issuers). Credit risks arise in ING Bank’s lending, financial market and investment activities. 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. Each level can in turn be broken down from the consolidated ING Bank NV level to a local branch/ unit level. As the distribution of the exposures is of great importance in correctly managing the credit risk exposure, ING Bank has established the credit risk appetite and concentration framework.
For the reconciliation between credit risk outstandings categories and financial assets we refer to the section ’Credit risk management classification’ as included in the chapter ‘Accounting policies for the consolidated annual accounts’
Credit risks of commercial and retail banking are monitored by Commercial Banking CRM, Global Credit Restructuring and Retail Banking. These units are guided, instructed and supported by Credit Capitals, Information Management Services and Strategy & Business Management. Each head of the five units reports directly to the CCRM General Manager. As shown in the organisation chart, the CRM General Manager reports directly to CRO.
The CRM role encompasses the following activities: • Measures, monitors and manages the credit risks in the Bank’s portfolio • Challenges and approves new transactions or any changes to previously approved terms and conditions applicable to clients • Manages the levels of provisioning and risk costs, and advice on impairments • Provides consistent policies and systems and tools to manage the credit lifecycle of all credit risk taking activities.
Retail risk The Retail banking business line covers Retail Banking Benelux and Retail Banking International. There is a functional reporting line from the business units to the Retail Risk Management (RRM) department. The retail risk portfolio is defined as a group of homogeneous credit assets, where a set of policies and processes for approving high volumes of counterparties and transactions can be applied. Exposures are pooled and managed through a set of standard policies and procedures over its entire life cycle. Several reports are made regularly for monitoring and managing purposes. These reports are intensively discussed with the (regional) risk managers. RWA and other key credit risk metric developments are monitored on portfolio level during the month. RRM has two specific delegated mandates: RRM has the mandate to re-allocate retail risk appetite statement boundaries between different segments. Secondly, RRM has the mandate to approve the annual update for the PD, LGD, and EAD parameters for the Basel II Standardised portfolio.
Risk culture Apart from supporting and promoting ING’s Business Principles, CRM has identified a number of areas that helps establish and develop sound risk culture. Key areas where CRM puts its focus on are: Risk awareness Various activities are coordinated within CRM with the goal to update, inform and educate CRM employees and create awareness on factors that influence its activities e.g. Credit Risk Alerts address actual credit risk issues relevant to ING. The alerts are published on various ING intranet portals and distributed by email. Credit risk academies where senior leaders and financial specialists address topics ranging from local unit developments to specific credit risk related strategies are held on a regular basis. Short term assignments within risk and finance are promoted to allow experienced employees to heighten their risk awareness.
Scenarios and stress tests Stress testing is a valuable risk management tool. Stress testing evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures the bank to remain a financially-healthy on-going concern after a severe event occurs. In addition to the bank-wide stress test framework as described in the risk profile section of ING Bank, CRM performs stress tests on a monthly basis in order to continually assess the portfolio risks and concentrations. These monthly stress tests are consistent with the stress scenario as established in the ING Bank wide credit risk appetite framework. The monthly stress tests are reviewed in the Credit Portfolio Committee (CPC) and potential management actions are proposed if necessary.
Credit risk capital and measurement Credit risk capital Regulatory Capital is a law based prudent measure defined by regulators and serves as the minimum amount of Tier 1, Tier 2 and supplementary capital required to absorb for unexpected losses. RC is the minimum amount of capital (based on 99.90% confidence level) that ING Bank must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
(¹) ‘Report on the pro-cyclicality of capital requirements under the Internal Ratings Based Approach’, EBA - 17 December 2013 (²) For comparison purposes, we have aligned the 2012 exposure class structure for corporate and institutions with 2013.
Practice based drivers ING Bank tries to have an ‘early in early out’ approach to troubled exposures. This means that ING has a very conservative default definition. This will have a direct impact on the level of RWA. In addition to an impact on RWA, the conservative default definition implies that approximately half of corporate customers classified as non-performing are not in excess of 90 days in either interest or principal. For non-retail customers, ING uses a borrower rating which means that a customer will only have one PD regardless of the type(s) of transactions done with ING Bank. This also means that if one facility is in default, usually all facilities of the client are in default. ING Bank generally does not use a ‘quarantine’ period for defaulters. Once a customer is deemed to be performing, a non-default PD will be given to the borrower.
Regulatory environment ING Bank is regulated by many host supervisors; however the primary regulating entity is DNB. Several strict interpretations of the Basel Accord are enforced by DNB including the requirement to have at least 85% of the portfolio qualify as AIRB before allowing AIRB implementation. This prevents arbitrage between the different Basel approaches. DNB also has a strict ‘significant change’ policy that requires all changes to the Basel measurement above a threshold to be reviewed and approved by DNB.
Conceptual differences between Regulatory Capital and Economic Capital Regulatory Capital Economic capital
EC for securitisations is calculated with the Corporates Basel 2 approach (based on internal PD, EAD, DLGD values and remaining maturity).
The CRR/CRD IV based confidence level of 99.90% is used. Linked to Risk Appetite, a confidence level of 99.95% is used. CRR/CRD IV compliant correlations are used. The Increased Correlations for FI’s will be applied in 2014.
Credit risk model governance All PD, EAD and LGD models are built according to the ING Bank internal credit risk modelling methodology standards and model life cycle. After thorough review of the documentation by the Model Development Committee (MDC) and Model Validation (MV) the Credit Risk Committee (CRC) approves the models. For certain local models, the approval authority is delegated by the CRC to the MDC. Each model has both a credit risk and a front office co-sponsor. Both the MDC and the CRC have participation from both credit risk officers as well as the front office to ensure maximum acceptance by the organisation. The capital impact from the implementation of approved models is reported to the DNB in a quarterly report. In addition, MV validates each model on an annual basis. During such periodical validation the model performance is analysed via amongst others backtesting. Most of the credit models reviewed by MV show a conservative observed performance compared to predicted levels.
• EAD models: Exposure at Default is the expected amount of ING’s exposure to a customer or counterpart at the time of default. Usually, this amount is higher than the amount of current outstanding. The EAD is facility-specific. EAD models estimate the expected amount of ING’s exposure to a borrower at the time of default based upon the current exposure and current limit. The methodology for EAD models divides the products into revolving and non-revolving products. Depending on the relationship between the limit and exposure at the moment of observation different calculations apply. A separate dimension is required for off-balance sheet exposures to estimate the fraction of off-balance sheet exposure that will be converted to an on-balance sheet exposure in the event of default. Important factors that determine the outcome of the EAD models are related to the portion of the unutilised amount of the limit that is expected to be utilised at the time of default and a factor that translates the (notional) exposure at default into a cash equivalent and is only relevant for off-balance sheet products. The models also make use of a factor that measures unauthorised excess, i.e. drawings 271ING Group Annual Report 2013 1 W h o w e are 2 R
• Retail Other: Main changes were to Private Individuals Belgium PD model and NL Unsecured PD, EAD and LGD models. The several model changes had plus and minus effects which on a net basis were not significant.
GRID’s cross-reference functionality is essential. It enables us to link company information from different internal and external databases, with different local identification codes. Additionally, ING Bank automatically uploads credit ratings (from S&P, Fitch, and Moody’s) and any (new) security ID (CUSIP, SEDOL, Bloomberg ID, or ISIN) on a daily basis, based on this cross-reference structure. To ensure data integrity, GRID is reconciled on a weekly basis to over 17 external databases.
(usually monthly) basis to determine new risk ratings; and • Manual ratings, which are calculated on an individual basis and where the user is required to also answer additional qualitative questions in order to create a rating.
Once a rating is approved the rating results are forwarded in real time to GRID. GRID then redistributes the rating (update) to the subscribing systems. The Loan Pricer module is used to price loans and investments. It accesses existing data from within Vantage for existing deals and uses this data in the loan pricing component, a tool which assists the user in structuring and optimising a deal, while determining if the transaction meets ING Bank’s internal risk/reward requirements. Functionality includes the ability to create and compare different scenarios, and to search for break-even values. The Approval Package module supports the credit approval process by automating the creation and management of credit application documents and routing them to reviewers and approvers. Approval Package is the tool that collects the data from all of the other modules (including data received from other STARpro modules and all exposure data from Vortex), in order to put together the credit application package. For annual reviews, the user is required to check the existing data (sourced from their local tools via Vortex), and make any requested changes. For new deals, the user (usually an account manager) inputs the entire deal structure (using local source system codes) directly into Approval Package. The tool then has a workflow function to guide the credit application through the credit approval process. The Problem Loans module is used to create provisions for organisations where the rating is set to 20, 21 or 22 and the outstanding is equal or bigger than the threshold (in general 1 million Euro, in individual cases or for certain units, the threshold could be lower). It also records detailed information on organisations in default. In addition the Problem Loan tool supports the non-performing loan provisioning process by automating the creation of problem loan applications and routing provisioning proposals to designated reviewers and approvers. It also provides a centralised ING Bank-wide repository for problem loan applications. All relevant policies, regulations and methodologies are as much incorporated in the systems as possible, providing an integrated approach.
Risk rating buckets per line of business Risk rating buckets are defined based upon the quality of the exposures in terms of creditworthiness, varying from investment grade to problem grade expressed in S&P, Moody’s and Fitch/IBCA equivalents.
(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.
The shift in Retail Banking Benelux from rating class BBB to BB, was the result of the reflection of the economic environment in the ING Dutch mortgage models, leading to a somewhat weaker, but more accurate rating. The increase in Commercial Banking in rating group A, was particularly the result of increased outstandings to Central Counterparties, which particularly have a low PD and good risk rating.
(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% are not shown separately but grouped in Other.