Chairman’s message 4 ING at a glance 6 Key figures 8 Composition of the Boards 9 ING share 10
Financial and regulatory environment 12 Strategy 17 Capital management 22 Risk management 24
Banking overview 26 – Retail Banking 30 – Commercial Banking 39 Insurance overview 44 – Insurance 48
Section 404 Sarbanes-Oxley Act 78 Remuneration report 80 Works councils 88
Parent company balance sheet 312 Parent company profit and loss account 313 Parent company statement of changes in equity 314 Accounting policies for the parent company annual accounts 315 Notes to the parent company annual accounts 316
Risk factors 323 Additional Pillar 3 information 344 Financial glossary 370 General information 377 3ING Group Annual Report 2012
An important priority remains to win back trust, the cornerstone of financial services; and it starts by being a strong and financially sustainable company that puts its customers first. Product development, for example, is something we are increasingly doing in cooperation with our customers, collecting feedback using tools such as focus groups and social media. We are also making every effort to ensure that we have excellent processes and services in place, so that customers can organise their financial affairs simply and easily.
We are responding to the signals society is sending us. In this context, we have amended and tightened up our remuneration policy in 2012. In the Netherlands, we agreed on a new Collective Labour Agreement for Bank staff with the trade unions. Employees under the CLA will in principle no longer receive variable remuneration. In addition, we have taken further steps to tighten up the remuneration policy for senior management.
The strategy is clear; it is now about the execution. In line with our strategic objectives of sharpening the Bank’s focus and further strengthening its capital position, ING made a few divestments as a result of the continuous evaluation of its portfolio of businesses. In 2012, we sold ING Direct Canada and our stake in Capital One. In the first quarter of 2013, we sold ING Direct UK.
The insurance businesses have made progress towards independent futures. The sale of a large part of the Asian insurance and investment management business was announced, and ING U.S. has made great strides in preparing for its initial public offering (IPO), bringing it one step closer to becoming an independent business. Preparations have been stepped up for the basic scenario of an IPO for the European insurance and investment management business.
All these developments propel us further along the road towards a successful, independent future for our businesses. We are not there yet, but we can be proud of what we have achieved.
We have also made progress this year in the area of sustainability. As you might expect from a reliable financial partner, sustainability is anchored in our strategic policy, particularly when it comes to our social, environmental and ethical performance. For example, ING is one of the co-signatories of the United Nation’s sustainable insurance principles. I would also like to mention the establishment of the Sustainable Lending Team which initiates and encourages sustainability opportunities successfully.
We are concentrating on our position as a strong European bank with attractive home market positions in Northern Europe and growth options in Central and Eastern Europe and Asia, while creating an optimal base for independent futures for our insurance operations (including investment management).
ING Insurance/Investment Management (IM) is preparing its businesses for standalone futures. ING Insurance/IM Europe and ING Insurance/IM US are preparing for base case initial public offerings (IPOs) and the sale of ING Insurance/IM Asia is in full progress. ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service.
Financial position strengthened ING places great importance on strengthening its financial position in order to put itself in the best position to facilitate the real economy. Despite persistent market volatility and uncertain economic recovery in the eurozone and elsewhere, ING gained financial strength in 2012. Capital and liquidity improved, our funding position remained strong, earnings remained resilient, and net exposure to riskier asset classes and activities declined.
The amendments extend the time and increase the flexibility for the completion of divestments, and also adjust other commitments in light of the market conditions, economic climate and more stringent regulation.
These activities are divided into five business lines: Insurance Benelux, Insurance Central and Rest of Europe, Insurance US (excluding US Closed Block VA), US Closed Block VA and ING Investment Management.
ING Investment Management provides a broad range of investment strategies and advisory services in Europe, the Americas and the Middle East.
ING Group in accordance with IFRS-EU in EUR million unless otherwise indicated 2012 2011 2010 2009 2008
Net result from continuing operations 3,097 4,174 2,502 –1,698 –514 Net result from discontinued operations (1) 908 1,673 405 572 –406
Underlying net result in EUR million 2012 2011 % change 2010
(2) As a bank and asset manager, ING allocates assets to a wide range of companies, projects and funds. Increasingly, we include sustainability criteria in our capital allocation choices. For reporting purposes, we combine all the assets from our financing and investment activities under the heading Sustainable assets allocated. Sustainability criteria have been applied to these assets. During 2012 we nearly doubled the amount of Sustainable assets allocated, which is mainly attributable to an increase in sustainability mandates managed by ING Investment Management.
CORE TIER 1 SECURITIES In October 2008, to support its capital position, ING Group made use of capital support facilities by the Dutch Government by issuing EUR 10 billion of core Tier 1 securities to the Dutch State with a coupon of 8.5%. The core Tier 1 securities rank pari passu with common equity.
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 equal 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. This brought the total repaid to the Dutch State to EUR 10.2 billion, including EUR 7.8 billion in principal and EUR 2.4 billion in interest and premiums.
* Year-end 2012 figures, estimated on information provided by Thomson Reuters Advisory Services.
ING’s long-term credit ratings are shown in the table above. Each of these ratings reflects only the view of the applicable rating agency at the time the rating was issued, and any explanation of the significance of a rating may be obtained only from the rating agency. A security rating is not a recommendation to buy, sell or hold securities and each rating should be evaluated independently of any other rating. There is no assurance that any credit rating will remain in effect for any given period of time or that a rating will not be lowered, suspended or withdrawn entirely by the rating agency if, in the rating agency’s judgment, circumstances so warrant. ING accepts no responsibility for the accuracy or reliability of the ratings.
CHALLENGES IN FINANCIAL ENVIRONMENT REMAIN The sovereign debt crisis continued in 2012 and its negative effect on the real economy escalated. Since the third quarter of 2012, the general financial market sentiment in the eurozone and in the US improved. By contrast, the real economy deteriorated in most of Europe during the second half of the year.
Shareholders’ equity increased by EUR 7.7 billion, from EUR 46.7 billion at the end of 2011 to EUR 54.4 billion at the end of 2012. This increase was caused by the addition of net profit and positive revaluations on debt securities, partly offset by exchange rate differences and the repurchase premium paid to the Dutch State in November 2012. Shareholders’ equity per share was EUR 14.30 at the end of 2012 versus EUR 12.33 at the end of 2011. Underlying net return on equity, calculated as underlying net result divided by average IFRS-EU equity, decreased to 5.2% from 6.5% in 2011.
Banking recorded an underlying result before tax of EUR 3,219 million in 2012, a 22.0% decrease compared with 2011. This decrease was mainly driven by higher loan losses, losses from active de-risking, negative credit and debt valuation adjustments and the Dutch bank levy. Insurance reported an underlying result before tax of EUR 311 million, which increased by EUR 636 million from the EUR 325 million loss in 2011. De-risking and low interest rates put pressure on investment returns, but underlying results recovered as the impact of market-related items declined to EUR –783 million in 2012 versus EUR –1,984 million in 2011.
BANK STRUCTURAL REFORM The European Commission’s High-level Expert Group on Bank Structural Reform, better known as the Liikanen Committee, published its report on reforming the EU banking sector on 2 October 2012. If the size of certain trading activities compared to a bank’s total activities exceeds certain thresholds, the Liikanen Committee recommends that it may be necessary to require legal separation of these activities into a separate trading entity. The shares of this trading entity could be held by a bank holding company that also holds the shares of the deposit bank. In addition, the Liikanen Committee made a number of other recommendations regarding bail-in instruments, capital requirements and governance and control. The impact of the Liikanen recommendations on ING’s business model is unclear, not in the least because it is uncertain if and to what extent the European Commission will follow the Liikanen Committee separation recommendation in its legislative proposal, which is expected around the summer of 2013.
Trading activities account for only a small percentage of ING’s overall activities. Many of the activities booked in the trading book are directly related to providing services to customers, such as hedging risks and securities underwriting. If trading activities had to be separated from the rest of the bank’s activities, providing such customer services would no longer be possible within one bank, also due to the large exposure rules.
Institutions (SIFIs) will be brought forward in a responsible way, taking the international situation into account. As for macro-prudential tools, CRD IV will introduce a Systemic Risk Buffer which will apply to the whole or parts of the banking sector and will be covered by the core Tier 1 capital ratio. The Systemic Risk Buffer is one of the most important deviations from the Basel III rules, as Basel does not recognise systemic risk. The details and impact of this buffer can only be assessed once CRD IV has been finalised. The delay in the implementation of CRD IV, which was scheduled for 1 January 2013, has created uncertainty about how the regulations will evolve and when they will be implemented. In particular, ING is concerned about the cumulative impact of all the various capital buffers, and the timing of their implementation.
framework, we recognise that the Solvency II framework may have severe consequences, particularly on business models in which long-term guarantees are offered to customers. ING will therefore continue to take part in discussions with the industry and regulators to develop a more workable framework.
ING recognises that the disagreements on the treatment of long-term guarantees have led to a significant delay in implementing Solvency II. We also recognise that the delay has prompted some member states to consider implementing elements of Solvency II ahead of the official date. As this would create an uneven playing field and impede standardised supervision, it is important for everyone to agree on a realistic timeline as soon as possible. ING will continue to play a part in industry discussions on Solvency II.
• Fees for advice on annuities and disability insurance will no longer be tax-deductible, causing the price for advice to rise.
Deposit Guarantee Scheme In August 2011, the Ministry of Finance and DNB published their proposal to establish an ex-ante funded (i.e. pre-funded) Deposit Guarantee Scheme (DGS) in the Netherlands. The scheme was expected to be introduced on 1 July 2013. However, as a consequence of the arrangements made by the Dutch government related to the nationalisation of SNS REAAL, ING and the other Dutch banks will be required to pay a one-time levy of EUR 1 billion in 2014. For ING, based on current limited information, this is estimated to result in a charge of EUR 300-350 million. To avoid a disproportionate financial burden for banks and in view of the ability of banks to lend to the real economy the ex-ante DGS contribution has now been postponed by two years until 1 July 2015.
The Commissie De Wit formulated 20 recommendations, of which 9 are relevant to banks. Recommendations include those on contributions to the Deposit Guarantee Scheme, investigating the possibility of ring-fencing bank activities outside the EU, and creating a strong European banking supervisor.
Moreover, ING updated and streamlined its remuneration policy, and continued to reduce its risk profile. Sustainability has become more central to ING’s strategy and we continue to foster dialogue with all existing and new stakeholders. ING sharpened its strategy for the Bank, and further reduced the size of the Bank’s balance sheet and simplified its product range, making the company easier to manage. At the same time, we managed to increase service levels, which has won ING Bank several industry awards. On the Insurance and Investment Management side, we announced the first five sales of its Asian Insurance/IM units, and both ING U.S. (which is the new name for Insurance and IM activities in the US) and ING Insurance/IM Europe made strides in their initial public offering (IPO) preparations.
In January 2012 the Bank unveiled Ambition 2015, a set of aspirations that included generating more capital and attaining a core Tier 1 capital ratio under Basel III of at least 10% by 2013. The core Tier 1 ratio strengthened to a solid 11.9% under Basel II and 10.4% under Basel III by the end of the fourth quarter 2012 (on a pro-forma basis, taking into account the impact of new accounting rules on pensions, IAS 19R, which came into effect on January 2013). ING was also able to achieve a liquidity coverage ratio of more than 100% in 2012; a level we aimed at for 2015. In line with Ambition 2015, ING Bank’s balance sheet optimisation is on track. The balance sheet was reduced by EUR 137 billion since September 2011 of which EUR 85 billion was related to the sales of ING Direct Canada and ING Direct USA.
our customers through lending in 2012, despite the challenging external circumstances. ING will strive to further strengthen its financial position by improving operating performance, boosting income and lowering risk and costs.
GOOD PROGRESS ON AND RENEWAL OF RESTRUCTURING PLAN During 2012, ING made progress on its Restructuring Plan to fully separate its banking and insurance and investment management activities in a challenging operating environment. We announced the first five sales of our Asian Insurance/IM units, and Insurance U.S. continued with its IPO preparations. Moreover, ING and the Dutch State, reached an agreement with the EC to significantly amend the 2009 Restructuring Plan.
• In November 2012, ING U.S. filed the registration statement for its IPO.
ING has incurred over EUR 500 million in expenses in executing the 2009 Restructuring Plan since it started.
Under the terms of the original Restructuring Plan, ING was required to divest WestlandUtrecht Bank by 2012. However, due to market circumstances and changing regulatory requirements, this has not been feasible.
Under the amended terms of the Restructuring Plan, the commercial operations of WestlandUtrecht Bank will be combined with the recently created Nationale-Nederlanden Bank, which is to be divested as part of Insurance/IM Europe. The retail banking businesses will be integrated in the course of 2013 and will operate under the Nationale-Nederlanden brand, with the goal of becoming a competitive retail bank in the Dutch market with its own funding capabilities and a broad distribution network. Nationale-Nederlanden Bank will offer a broad and coherent product line, with mortgages, savings, bank annuities (‘banksparen’), investments and consumer credit products, combined with the core retail insurance products of Nationale-Nederlanden.
ING has committed itself to ensuring that Nationale-Nederlanden Bank reaches certain targets for mortgage production and consumer credit until 31 December 2015 or until the date on which 18 ING Group Annual Report 2012
PORTFOLIO STREAMLINED, MORE DIVESTMENTS MADE Apart from the divestments required by the EC, ING also made a few divestments as a result of the continuous evaluation of its portfolio of businesses. This is in line with ING’s strategic objectives of sharpening the focus of the Bank and further strengthening its capital position. In 2012, ING sold ING Direct Canada to Scotiabank for CAD 3.1 billion (EUR 2.4 billion at the then current exchange rate). The sale was completed in November 2012 and resulted in a total capital release for ING of EUR 1.3 billion, and a net transaction gain of EUR 1.1 billion after tax.
BUSINESSES STRENGTHENED BANK ING’s goals are to help people and businesses build their future to realise their ambitions and to help them manage their 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.
Our vision is clear, and so are the strategic steps we need to take to execute it. First, we put the customer first, offering superior customer experiences at attractive costs and giving employees opportunities to grow and go the extra mile for customers. Second, ING Bank focuses on the safety of depositors’ money. Our capital base should be solid, our deposit raising smooth and low-cost and our investment selection careful. Third, every ING business has its own roadmap, to excel in its area. Finally, we make a positive contribution to society, allowing future generations to thrive within the resource limits of this planet.
The price leadership restrictions in Europe will be amended to reflect specific conditions in various local markets. Under the amendments, the constraint no longer applies in the Netherlands, and ING Direct in the EU will refrain from offering more favourable prices than its best priced direct competitor among the 10 financial institutions having the largest market share in the respective countries.
The calling or buy-back of Tier 2 capital and Tier 1 hybrid securities will continue to be proposed for authorisation to the European Commission on a case-by-case basis until ING has fully repaid the core Tier 1 securities to the Dutch State, but ultimately until 18 November 2014, whichever date comes first. Notwithstanding this restriction, ING was allowed to call the EUR 1.25 billion ING Verzekeringen N.V. hybrid per 21 December 2012.
REPAYMENT OF STATE AID ING received EUR 10 billion in state aid from the Dutch State in November 2008. Including the latest repayment in November 2012, ING has so far repaid EUR 10.2 billion, including EUR 2.4 billion in interest and premiums. As part of the amended Restructuring Plan, 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 equal tranches of EUR 1.125 billion in a period of two and a half years. These payments add up to EUR 4.5 billion (principal, premium and interest). A first tranche of EUR 1.125 billion was paid on 26 November 2012. That brought the total repaid (including premium and interest) above the EUR 10 billion of capital support provided by the Dutch State in 2008. The other tranches also of EUR 1.125 billion each, are due to be paid in November 2013, March 2014 and May 2015.
ING aims to build on its leading position as a predominantly European bank with a strong international network focused on providing customers with consistently high-quality services. ING’s main priority is to finance the real economy, even in a volatile economic and regulatory environment.
The remaining EUR 2.250 billion core Tier 1 securities will continue to be eligible as core Tier 1 capital. While ING has committed to redeem these securities per the defined schedule, ING has the ability to defer a repayment in full or in part. In the event that ING does not repay in full two 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 require compensatory 22 ING Group Annual Report 2012
During 2012, the extra capital generated within ING Bank enabled it to pay an additional dividend to ING Groep N.V. of EUR 1.0 billion, to help reduce the double leverage, which at the end of 2012 stands at EUR 7.1 billion.
ING plays an important role in society. The essence of our business is transformation, which takes many forms and serves various customer needs. In our retail banking operations, for example, we transform on-demand entrusted deposits into long-dated mortgage loans. Through our payments and cash management operations we make money available when and where customers need it. Our insurance business is about transformation through time, by converting uncertain future cash flows into fixed flows, whether they are in the form of life insurance contracts or pensions. Geographic transformation takes place through our international commercial banking network when we help corporate customers fund their international business plans.
In spite of the challenging economic conditions, ING Bank succeeded in strong capital generation and consequently improved its capital ratios over 2012. ING Bank’s core Tier 1 ratio expressed as a percentage of risk-weighted assets increased from 9.6% at year-end 2011 to 11.9% at year-end 2012. ING Bank continued to have access to funding at acceptable pricing.
Retail Banking 9,019 9,286 Commercial Banking 4,963 5,023 Corporate Line banking 260 –20
Retail Banking 1,698 2,282 Commercial Banking 1,572 2,019 Corporate Line banking –50 –173
retail Banking is the leading bank in the Benelux; also active in Central and Eastern Europe retail Banking is active in China, India and Thailand ing direct is active in Australia
is active in Austria, France, Germany, Italy and Spain compared with 48 basis points in 2011. The underlying return on IFRS-EU equity was 5.9% in 2012, down from 8.8% in 2011.
During the year, ING worked towards its strategic objectives of sharpening the focus of the bank and further strengthening its capital position. It sold ING Direct Canada to Scotiabank and announced the sale of ING Direct UK to Barclays (which was closed on 6 March 2013) as well as divested its shareholding in US-based bank Capital One.
centricity into their day-to-day work. Progress is measured against goals and specific Key Performance Indicators (KPIs). In 2012, several of ING’s business units implemented special customercentric initiatives. In Commercial Banking, ING introduced a new methodology of customer engagement called the Integrated Customer Approach (ICA). The ICA requires an in-depth analysis and understanding of the customer’s strategy, operations and balance sheet. In Retail Banking, ING is implementing a change programme throughout its operations called ‘Customer Interest First’ (CIF). The objective is to make every aspect of ING’s organisation customer-centric, from the type of people recruited, to the products sold, to the way complaints are solved. ING in the Netherlands developed 10 core principles to improve customer satisfaction – over the next two years all operational customer processes will be measured against these principles.
At ING, effective human resources management drives engagement. Managers are encouraged to attract and select people from diverse backgrounds, gender and skills. There is flexibility in the way employees organise their work so long as individual and collective deliverables are met.
It was also a busy year for the financing of transactions in the field of renewable energy. In 2012, the total value of deals in renewable energy by the team accounted for approximately 64% of the total value of all energy deals done by ING during the year. These included wind farms and solar plants in Norway, Slovakia and the UK.
ING will continue to combine its retail and commercial banking activities in certain countries, pursue innovative distribution in retail banking and leverage its strengths as a leading commercial bank in the Benelux.
ING is confident that this strategy will ensure that ING Bank remains profitable and stays competitive in the new banking environment.
The addition to the provision for loan losses increased by 35.7% to EUR 1,167 million, or 80 basis points of average risk-weighted assets compared with 61 basis points in 2011. The increase was mainly caused by higher risk costs in the Benelux, especially in the mid-corporate and SME segments and in the Dutch mortgage portfolio. The increase in Retail Rest of World was largely related to a specific provision for an impaired CMBS position.
* Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items.
Retail Banking 1 W h o w e are 2 R
ING’s retail banks have different roots: some of them were established as part of the traditional, universal banks, while others have been established as new entrants, such as the ING Direct units. ING is now combining the two retail models into one, with the same strategic focus in every country: to provide easy and fair banking, at low costs – ‘direct if possible, advice when needed’. In doing so, ING is meeting the increasing demand by customers for online and mobile products and services.
ING’s customer-centric focus has proved a success, with 10 countries achieving first or second place in Net Promoter Scores (NPS) compared with competitors. ING applies the NPS methodology in all countries to measure customer engagement and compare us with competitors. Detailed feedback is used to improve our internal processes and customer services.
Currently, the Top Employer initiatives are mainly aimed at our current workforce to improve performance and engagement. Early in 2012, all local Top Employer country teams exchanged best practices and ideas and discussed the next steps to take. These teams continued to implement their action plans and will continue to do so in 2013.
ING Belgium offers the ING Real Estate Eco Loan, which allows customers to borrow between EUR 2,000 and 50,000 to finance green home improvements.
ING Vysya Bank offers savings and loan products to people in rural areas, including microfinance for individuals, and self-help groups, which generally comprise of women who take out a loan from microfinance institutions. At year-end the total outstanding retail loan portfolio amounted to EUR 20 million, serving 6,919 people.
Community investment campaigns As part of its financial education initiatives, ING participated in the Week van het Geld (‘Money Week’). Employees of several Dutch banks together gave over 3,300 guest lessons about money matters to primary school children. More than 550 of these guest lessons were given by ING employees in the Netherlands.
ING Netherlands was awarded ‘Best Private Bank 2012’ by Dutch business magazine InCompany, based on a customer survey.
Stakeholder trust ING plays a pivotal role in society and has a big responsibility towards its stakeholders. Restoring stakeholder trust is essential, which is why we take an integrated approach towards stakeholders by engaging them in a constructive dialogue and seeking their feedback throughout the year. This comes in many shapes and forms; for example, online seminars on issues such as student loans, pensions and the housing market, and dialogue sessions with customers, consumer organisations, politicians and NGOs about a variety of topics.
90,000 Business Banking customers were transferred to the single IT platform that had been created in the wake of the merger between Postbank and ING Bank in 2009. Financial Institution customers and Corporate Clients are expected to transfer to this platform in 2013.
Income rose 8.0% to EUR 2,194 million, from EUR 2,031 million in 2011, mainly due to higher interest results, as business growth was combined with higher margins. Last year’s income was, furthermore, negatively affected by EUR 17 million of impairments on Greek government bonds. Net mortgage production was EUR 1.8 billion (2011: EUR 3.0 billion), while other lending grew by EUR 2.5 billion. The net production in funds entrusted was EUR 3.3 billion, mainly attributable to the successful introduction of a new retail savings product in the first half of 2012.
Expanding the ‘direct if possible, advice when needed’ business model will remain the Bank’s major objective going forward.
Branch transformation is an important step in the evolution of our ‘direct if possible, advice when needed’ business model. Customers prefer to manage their day-to-day banking business on their PC or smartphone, but advice remains important for more complex products such as mortgages and investments.
Retail BE was able to gain momentum: income rose by 8% to EUR 2.19 billion. It serves approximately 2.1 million retail and private banking customers and almost 170,000 SME, mid-corporate and Institutional customers. In 2012, it acquired 72,000 customers (net inflow). Since the introduction of the direct model in 2007, ING BE has gained almost 435,000 new customers.
The number of users of the free ING Lion Account – our flagship product – increased from 90,767 at year-end 2011 to 94,858 at the end of 2012.
Online sales as a percentage of total sales continued to grow. Nearly 216,000 online products were sold (2011: nearly 157,000). Our goal is to significantly increase the online product and services range over the next few years.
Debit card renewals are now distributed in a much more customerfriendly and operationally effective way, as customers no longer have to collect their debit cards at a branch but can get them delivered directly to their home.
Furthermore, the Bank’s approach towards start-up businesses was rewarded with an award for ‘Best banking service in 2012’ by the Forum for the Future, a foundation for professionals such as auditors.
Private Banking Retail BE provides private banking services in Belgium and Luxembourg to wealthy individuals. Private Banking has a top three position in Belgium. The unit’s combined amount of funds entrusted and assets under management at year-end was EUR 16.8 billion in Belgium and in Luxembourg EUR 7.9 billion, totalling EUR 24.7 billion.
It contributed favourably to Retail BE’s overall results, despite the adverse economic climate. Revenues are in line with expectations and costs are under control.
ING was awarded Best Private Bank in Belgium for 2012 by The Banker, based on the progres it made in its business and growth strategy, and for boosting inflows and profit.
Following a survey by the Luxembourg Consumer Association, ING Luxembourg’s Visa card was recognised as the best credit card on the Luxembourg market. Customers highly value this card for being the most transparent and innovative Visa offer.
The Bank also received an ESR (Entreprise Socialement Responsable) accreditation for being a socially responsible company from the National Institute for Sustainable Development and Corporate Social Responsibility. It is now one of 60 companies identified as ‘socially responsible’ in the country.
Underlying income increased by 5.2% to EUR 1,193 million, as 2011 included EUR 136 million of impairments on Greek government bonds and EUR 48 million of losses on the selective sale of European bonds against EUR 21 million of de-risking losses in 2012. Excluding impairments and de-risking losses, underlying income decreased to EUR 1,214 million, from EUR 1,319 million in 2011. The interest result dropped 8.5% to EUR 1,141 million, from EUR 1,247 million in 2011, despite higher volumes, reflecting a lower interest margin on savings as the return on the investment portfolio declined following de-risking and higher excess cash positions. Commission income declined by EUR 30 million from 2011, mainly due to lower fees from securities business. In 2012 the total net production in funds entrusted was EUR 9.1 billion, while the net production in mortgages amounted to EUR 3.4 billion.
The still very fragmented German banking market offers ample room to expand ING-DiBa’s market position. Consistent growth was achieved in 2012 in all core products. At year-end, ING-DiBa (including Austria) served 7.8 million customers (2011: 7.4 million). Total retail balances increased by EUR 13.6 billion and amounted to EUR 166.7 billion. This amount includes total funds entrusted and assets under management of EUR 102.8 billion.
ING-DiBa received several awards in recognition of its high service and quality standards. It was again mentioned ‘Deutschlands Beliebteste Bank’ (most preferred bank) by some 130,000 respondents, for the sixth year in a row. It was also elected ‘Onlinebroker of the Year’ for the third time in a row by Börse Online, as a result of offering its brokerage clients direct access to the US stock markets.
Top Employer ING-DiBa concluded a new collective labour agreement in 2012. Under this agreement, it takes more responsibility for childcare and healthcare and for the first time provides employees with earlyretirement opportunities. In addition, a job-rotation programme has been intensified, as well as its health-management programme called ‘DiBa Fit’.
ING-DiBa Germany and Austria were both awarded as one of the best national employers in 2012 by the renowned Great Place to Work Institute.
Underlying income decreased by 12.2% due to the above-mentioned impairments and losses. Excluding these impacts, underlying income was almost flat, decreasing 0.9% to EUR 2,298 million in 2012, from EUR 2,318 million in 2011. The interest result declined by EUR 41 million, or 2.2%, due to pressure on margins. The interest result decreased mainly in Italy, France and the UK, in part offset by increases in Turkey, Spain and India. The total net production in mortgages was EUR 2.2 billion, while the net growth in other lending was EUR 2.4 billion. Funds entrusted reported a net inflow of EUR 6.6 billion.
Progress was made with the One Bank strategy. The balance sheet integration activities remained on track with the finalisation of transfers in Italy, Spain and Australia in order to improve ING’s overall funding position using local funding to finance local assets. Country CEOs and One Bank teams were established in France, Spain and Italy.
All countries continued to reposition the contact centres and branches. The main aim was to convert them into advice channels and to integrate the customer experience and information platforms with other channels.
In 2012, over 250,000 customers and more than 577,000 payment accounts were added. At year-end 2012, RoW served a total number of 11.3 million customers, excluding Bank of Beijing and TMB Bank.
ING Direct Australia introduced the ‘Bank in a Box’ – a private internal cloud solution integrating the Bank’s entire systems into a virtual cloud, facilitating quicker testing of new products and services and improving time to market.
– Industry Lending 1,953 2,050 – General Lending and Transaction Services 1,459 1,377 – Financial Markets 871 1,254 – Bank Treasury, Real Estate and Other 680 343 Total Commercial Banking 4,963 5,023
– Industry Lending 832 1,374 – General Lending and Transaction Services 606 559 – Financial Markets 0 363 – Bank Treasury, Real Estate and Other 135 –276 Total Commercial Banking 1,572 2,019
STRUCTURED FINANCE Structured Finance (SF) is managed in three groups: the Energy, Transport and Infrastructure Group, the Specialised Financing Group, and International Trade and Export Finance. In 2012 the businesses saw a small reduction in income due to a decrease in lending assets, and also a reduction in the regulatory capital employed.
Bank Mendes Gans (BMG) performs the function of an in-house bank for companies and their subsidiaries, offering ‘overlay’ solutions, netting services and cash flow forecasting tools on top of existing local bank infrastructures. BMG had an excellent year in 2012 and its ambition is to continue to grow its market leading position as a provider of high-quality, specialist liquidity management solutions to multi-national corporations.
TS aims to become a leading transaction services bank for international clients in Europe by improving the customer experience through improved execution and customer service; further investing in electronic channels for the combined products; rationalising and simplifying its product portfolio; making decisive investments into core products such as Trade Finance Services and PCM; and by simplifying the organisational structure to make it more client-centric and more efficient. Despite the market conditions and its ongoing transformation process, TS continues to generate stable financial returns.
TS requires a strong focus on technology and operational processing in order to remain competitive and to enhance its capabilities. It is therefore making some long-term investments. For example, PCM is
In the Netherlands, customer surveys carried out by Greenwich Associates confirmed Commercial Banking’s number one position for the third consecutive year. Commercial Banking was also recognised by Euromoney and The Banker as the ‘Best Bank’ in the Netherlands. And at a time when customer focus is more important than ever, ING was very pleased to receive recognition as the Best Overall Broker in the Benelux in the 2012 Extel Survey, again for the third year running. Commercial Banking ranked number one in league tables in the Netherlands and Benelux-wide as bookrunner for syndicated loans. ING relentlessly seeks to live up to this recognition in 2013.
Similarly ING – as bookrunner, MLA and joint global coordinator – closed a USD 1.335 billion syndicated credit facility and related interest rate swaps for Chinese conglomerate HNA Group and Bravia Capital’s buy-out of GE SeaCo, one of the world’s largest container leasing companies.
BANK TREASURY, REAL ESTATE & OTHER BANK TREASURY Following the announcement in January 2012 that ING would combine all its treasury activities across all business lines within the Bank to adapt to new regulations and to execute ING’s balance sheet optimisation strategy, a central Bank Treasury was established and became operational in June. The Treasury and ALCO (Asset and Liability Committee) departments of Financial Markets were separated from the commercial (Clients & Products) business units to form a part of the new Bank Treasury.
ING’s balance sheet strategy is to improve its professional funding profile, to integrate further the balance sheet by matching originated assets with originated liabilities across business units in different countries, to further de-risk the investment portfolio by converting it into a liquid asset buffer.
Within Commercial Banking, several global Top Employer initiatives such as a mentoring programme, short-term assignments for talented staff and improvements in work-life balance for employees were implemented at a regional level.
The focus of Commercial Banking’s Employee Engagement Programme is to keep employees motivated, for example the Line Management Development Programme within Industry Lending, which has been designed to train line managers around the globe on people management, strategy and communication skills.
During the year, Industry Lending financed eight large renewable energy projects throughout Europe, including on- and offshore wind parks and solar photovoltaic. These projects stem from the EU
CONCLUSIONS AND AMBITIONS 2012 was a challenging year for the banking industry and for all parts of Commercial Banking.
Benelux –91 739 Central and Rest of Europe 170 –198 United States (excl. US Closed Block VA) 928 618 US Closed Block VA –379 –1,273
Central and Rest of Europe 184 206 United States (excl. US Closed Block VA) 702 666 US Closed Block VA –122 20 ING Investment Management 159 187 Corporate Line insurance –491 –394
New sales (APE) in 2012 amounted to EUR 2,830 million, an increase from last year’s EUR 2,648 million, or up 6.9% compared with last year. The increase was mainly attributable to higher sales in the US.
Under the amended Restructuring Plan, certain operations of WestlandUtrecht Bank will be merged with the recently created Nationale-Nederlanden Bank. The combination will accelerate the strategy of Nationale-Nederlanden Bank, which will become a new mid-sized bank in the Netherlands under the strong NationaleNederlanden brand.
ING’s sustainability agenda for the insurance and investment management businesses also includes community investment initiatives, fund raising for charities, working closely with our global partner UNICEF, special causes and employees volunteering for local causes.
Due to ongoing discussions on the legislative content of Solvency II, the proposed framework will not come into force on 1 January 2014 as initially envisaged. Most importantly, more time is needed to find
ING Insurance/IM’s strategy of being a customer-driven business providing first-class products and services through multi-distribution channels was recognised in several awards and special mentions received during the year. Awards were won in Romania, the Czech Republic, Slovakia, Hungary, Greece and at ING Investment Management. New customer-centric initiatives were launched in the Netherlands and the Czech Republic. Nationale-Nederlanden launched a pension application to give its customers easy access to information about the size of their pension payouts when they retire as well as a simple guide to better understand their annual pension statements. ‘For You’, a unique breast cancer insurance product was launched in the Czech Republic which goes beyond being a product, it covers a full service proposition including online access to information and help.
In 2012, ING Insurance/IM continued to refine its sales processes and the process for the development of new products to ensure they continue to be compliant in terms of customer suitability. A five point gauge was developed in monitoring compliance. The five points include NPS, customer complaints, welcome call analysis, policy persistency rate and agent turnover rate.
SUPPortIng and engagIng eMPLoYeeS Engaged employees are essential to achieving success, because they make the difference for our customers. The restructuring of the insurance and investment management business had an immediate impact on ING’s employees. Supporting employees through this transition is very important. As the restructuring of the insurance and investment management operations differed in Asia, the US, and Europe, the strategic focus in each region varied as well.
At the insurance and investment management operations in Asia, employees were informed of changes and were assisted in preparing themselves for the divestment process with resources to manage change, including training, coaching and consulting.
EU UNISEX RULE In March 2011, the European Court of Justice ruled that insurers in Europe cannot differentiate in price or benefits for the same insurance products, based on gender. As a result, the European Commission introduced a requirement for gender-neutral pricing in insurance, also called the unisex rule, which required that from 21 December 2012, life insurers’ products and their pricing must be identical for men and women.
To comply with this new regulation, all product portfolios across the insurance business units were reviewed. More than 90 products were re-priced in Insurance Central and Rest of Europe. In the Benelux, all products available for sale were reviewed in the past two years to ensure they were compliant with the EU unisex rule. From 21 December 2012, all ING’s insurance products available for sale throughout the European Union were compliant with the rule.
Insurance Central and Rest of Europe recorded strong life insurance sales growth in 2012 on the back of multi-channel distribution initiatives, new customer propositions and improved service levels.
Insurance US maintained steady progress towards a standalone future by focusing on delivering strong operating performance and focusing steadfastly on its customers and distribution partners.
Non-Life results decreased by 53.9% in 2012 compared with 2011, mainly due to higher claims in Income Protection as a result of the economic downturn in the Netherlands, partly offset by better results in Fire and Liability.
> Strong sales growth > Focus on multi-channel distribution > New products with extra customer benefits
million higher compared with 2011, reflecting 76.1% higher pension sales in Turkey, partly offset by 67.6% lower pension sales in Poland, reflecting regulatory changes.
Bancassurance is growing successfully, largely through distribution agreements negotiated in 2011. In 2012, ING’s Polish business began selling term insurance via Polbank and Raiffeisen Bank.
In direct channels, Insurance CRE is active in Spain, Poland, Romania, the Czech Republic and Slovakia. In Spain, a sales partnership with ING Direct Spain has resulted in strong life insurance sales in the past two years.
Product & Service Innovation Sales through all channels were enhanced by new customer value propositions in life and pensions as well as in investment-related insurance and protection products.
In Spain, CRE launched OptiPlan, an innovative long-term saving solution. Asset allocation is adjusted on an individual basis, making it unique in the Spanish market. In Poland, several new products including a new cancer cover rider were introduced via a very successful campaign in cooperation with non-government organisation ‘Amazonki’.
Improving customer experience Improving the customer experience continued to be a core strategy in 2012. Insurance CRE continually strives to increase customer satisfaction by using feedback from the NPS programme to improve products and services. As a result of valuable NPS insights, CRE businesses, for example, will establish minimum standards for certain customer contact-points that all businesses need to abide by. In many business units (e.g. Spain, Bulgaria, Romania, Poland), other NPS-led improvements include the revision of key client letters so they are clear and jargon free. In the Czech Republic and Slovakia, the businesses made greater use of email to communicate with customers and enhanced the claim process – leading to 85% of claims being resolved within five days.
Awards ING’s efforts to improve the customer experience were recognised by the markets in which we operate. ING’s Czech insurance business was awarded the titles of best insurance business and most customer-friendly insurance company in 2012 by a leading Czech financial newspaper. Insurance Czech Republic also won two insurance awards in the Fincentrum Bank of the Year awards: one for its unit-linked life insurance Smart product for the second consecutive year, and one for its pension fund business. Insurance Slovakia won two first prizes in the country’s Golden Coin 2012 awards: one for its Smart product and one for its Smart Senior product – a new life insurance policy for people over 55.
BUSINESS DEVELOPMENTS Insurance US, US Closed Block VA, ING Investment Management US and Corporate Line US are all part of ING U.S. legal entities.
Retirement Readiness strategy ING U.S. is a major retirement, investment and insurance company serving the financial needs of approximately 13 million individual and institutional customers in the US. The company’s vision is to become America’s Retirement Company™, with approximately 7,100 employees focused on executing its strategy to help Americans with their retirement readiness.
ING U.S. operates its principal businesses through three business lines: Retirement Solutions, Investment Management and Insurance Solutions. Each has strong established market leadership positions and is organised to address all three dimensions of retirement readiness: asset accumulation, asset protection, and asset distribution. The power of ING U.S.’s value proposition comes from the combination of the three.
Insurance Solutions ING U.S. is one of the largest providers of life insurance in the US. It is one of the top 5 providers of term insurance, and one of the top 10 providers of universal life insurance, based on premiums sold. The company ranks as one of the top 5 largest providers of medical stop loss insurance in the US based on in-force premiums.
> Focus on protecting regulatory reserves > Hedging activities in line with expectations > Business has been closed for three years
The operating result decreased to EUR –122 million, from EUR 20 million in 2011. The decrease is mainly attributable to lower fees and premium-based revenues in addition to a lower investment margin.
> Assets under management (AuM) of EUR 321.5 billion > Continued strong investment performance > Both ING IM US and ING IM International on track for standalone future
were implemented. ING IM’s client focus has received market recognition through various awards. For example in the Netherlands, ING IM received the CASHcow magazine People’s Choice Award for 2012, recognising ING IM as the best investment management company in the country in terms of both investment products and services.
RESPONSIBLE INVESTING ING’s business principles are ING IM’s starting point for its policy on social and environmental responsibility. These responsibilities are clearly formulated in ING IM’s Investment Principles where it is stated that ING IM is committed to investing responsibly and delivering customer-oriented investment solutions. The responsible investment policy has a four pillar approach: (i) active ownership (voting & engagement), (ii) integrating environmental, social and governance (ESG) factors in our investment processes, (iii) restrictions (driven by legislation, regulation, specific client requests), and (iv) offering specialised socially responsible investment (SRI) funds and tailor-made responsible investment solutions.
For ING IM International, an internal ESG Board was established in 2012, chaired by the Chief Investment Officer. This board provides advice to senior management on ING IM’s Responsible Investing strategy and approved policies. In the past year, the ESG board approved, amongst other things, a renewed voting policy including social, ethical and environmental issues in addition to good corporate governance.
ING IM INTERNATIONAL ING IM International has been developing its reputation for spread and income investment solutions, based on its strengths in Emerging Market Debt (EMD), credit, multi-asset and equity products. ING IM received market recognition by winning major which were not fully offset by higher fees and premium-based revenues. The higher underlying result was attributable to EUR 34 million higher revaluations in IM US, including a non-recurring EUR 10 million favourable impact for performance fees, which more than offset the lower operating result.
ING IM International opened offices in New York and Atlanta in 2012 to retain and build up its investment capabilities in the fixed income sphere. Given its geographic presence and the inclusion of ING IM Singapore and Japan in its governance, ING IM Europe began externally to refer to its business as ING IM International at the end of the year to signify the global scope of the business both in terms of investment offering and distribution capabilities. ING IM International and ING IM US will continue to operate as a partnership on an arm’s-length basis, This arrangement began in 2011 to ensure continued commercial collaboration and crossselling arrangements between the two businesses.
institutional covered bond, EMD, sustainable equity and insurance solutions mandates during the year. In 2012, ING IM International together with ING Insurance Europe launched the PremiePensioen Instelling (PPI), a new form of pension solution in the Netherlands and secured its first clients. The PPI combines ING’s strengths in pension administration, insurance and investment management, offering Defined Contribution pension solutions to employers.
On the operational side, the implementation of the BlackRock Aladdin IT platform that was purchased in 2011 is on track, and expected to be completed in the course of 2013. With the integration of this new platform, ING IM International has improved on its data quality and integrity and its capacity to service new and existing clients.
The strategic alignment and ongoing initiatives with ING US’s Retirement Solutions business yielded many successful results, including more than USD 6.4 billion in mandates where ING IM replaced other mutual fund managers. This was directly related to ING IM US’s investment performance. The focus on growing the proprietary share of business in US Retirement channels remains a key component of the ING IM US strategy, and is closely aligned with ING US’s focus on retirement readiness (accumulation, protection and distribution) across each of its businesses.
On the sales front, key indicators for institutional, intermediary and retirement markets showed improvement as the Group added net assets in all three segments. ING IM US grew its third party asset base while assembling a robust, third-party pipeline of new business. Intermediary distribution demonstrated annual growth in sales and productivity with a more proprietary focus and lower cost of acquisition. The rebuilding of the Institutional Sales team over the past three years has brought deep, asset management and retirement expertise to the organisation which has enhanced our consultative and solutions-based sales approach. ING IM US investment excellence continues to be recognised in the marketplace with strong annual improvement in pension consulting and retail intermediary approvals and buy ratings on investment strategies.
The 4Q 2011 and the 2011 annual figures were discussed in February, including the related reports from the external auditors and the assessment of the Executive Board of the adequacy and effectiveness of ING’s risk management and control systems. The Supervisory Board supported the proposal not to pay a dividend over 2011 given the uncertain financial environment, increasing regulatory requirements and ING’s priority to repurchase remaining outstanding core Tier 1 securities.
In February the variable remuneration pool was discussed and the performance assessment and variable remuneration proposal for the Executive Board and Management Boards were reviewed. A mandate was given to the Remuneration Committee to review the remuneration proposals for Identified Staff. Succession planning and talent management was discussed in June and August. The capital hurdles 2012, a threshold after which the pool for variable remuneration becomes available, were approved in June.
In August the risk appetite framework for ING Bank was approved, including risk appetite statements for non-financial risk. A business plan for Insurance Europe was presented and strategic options were discussed. Several divestment transactions for Insurance/IM Asia were proposed and the Supervisory Board mandated the Executive Board to execute those transactions within the terms and conditions approved.
Remuneration Committee meetings In 2012, the Remuneration Committee met eight times, with three times one absentee and once two absentees. In January the Remuneration Committee advised positively on the implementation of the remuneration frameworks for ING Bank, ING Insurance EurAsia and ING Group, based on the EU CRD III and the DNB regulation on controlled remuneration policy. In February the Remuneration Committee discussed the remuneration framework for Insurance US once more and supported the proposed implementation. The proposed 2012 performance objectives for the Board were reviewed and positively advised. The Remuneration Committee also advised positively on the 2011 variable remuneration pools.
The functioning of the Executive Board and the Management Boards was discussed regularly. In February, the 2011 performance of the individual Executive Board and Management Board members was discussed on the basis of the Group performance criteria and the individual targets. The Committee also reviewed the individual compensation proposals for the Board members in February while the compensation proposals for Identified Staff were reviewed in March. In June the proposed hurdles for the 2012 capital test were discussed and a governance framework for Identified Staff compensation proposals was agreed upon. Throughout the year the Remuneration Committee approved Identified Staff related remuneration matters, based on the governance framework.
An extensive discussion about an alternative remuneration structure took place as well. In August and September compensation packages for various candidates for the Management Board Insurance EurAsia were supported. In November the Remuneration policy for Insurance US was discussed in light of the intended SEC S1 filing and taking into account the CRD III remuneration regulation. A proposal for changes to performance management and variable remuneration for ING Bank was presented as well as a specific proposal for the compensation structure for Dutch general managers ING Bank. The Remuneration Committee advised positively on both proposals.
ADDITIONAL INFORMATION For more information, see the section on Corporate governance (pages 60-72) and the Remuneration report (pages 80-87), which are deemed to be incorporated by reference here.
RECENT DEVELOPMENTS LEGISLATIVE AND REGULATORY DEVELOPMENTS On 7 June 2012, a legislative proposal on the limitation of liability of supervisors of financial markets and rules on remuneration of persons who determine the day-to-day policy (dagelijks beleidsbepalers) of financial institutions receiving state aid (wetsvoorstel in verband met het invoeren van een aansprakelijkheidsbeperking voor de toezichthouders op de financiële markten en het opnemen van regels met betrekking tot de beloning van dagelijks beleidsbepalers van financiële ondernemingen die staatssteun genieten) was enacted. On 18 June 2012, a legislative proposal regarding the revision of the corporate investigative procedure (wetsvoorstel in verband met de aanpassing van het recht van enquête) was enacted. On 27 September 2012, a legislative proposal to clarify the legislative proposal on Management and Supervision (wetsvoorstel aanpassing regels in bestuur en toezicht in naamloze en besloten vennootschappen) was enacted. The last two acts came into force on 1 January 2013. A legislative proposal on the accountancy profession (Wet op het accountantsberoep) was enacted on 13 December 2012. A legislative proposal on corporate governance (wijziging van de Wet op het financieel toezicht, de Wet giraal effectenverkeer en het Burgerlijk Wetboek naar aanleiding van het advies van de Monitoring Commissie Corporate Governance Code van 30 mei 2007) was enacted on 15 November 2012. This act will come into force on 1 July 2013.
Furthermore, in line with these arrangements a sustainable remuneration policy for the Executive Board and senior management was introduced in 2010, which contains certain specific arrangements in relation to the remuneration of members of the Executive Board.
be exchanged upon request of the holders of depositary receipts for non-listed ordinary shares, without any restriction, other than payment of an administrative fee of one eurocent (EUR 0.01) per depositary receipt with a minimum of twenty-five euros (EUR 25.00) per exchange transaction.
The Board of ING Trust Office currently comprises five members who are independent from 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 Trust Office. The Board of ING Trust Office appoints its own members, without any requirement for approval by ING Group.
Approval by the General Meeting would be required for any share issuances exceeding these limits.
• Dutch law requires that the company’s external auditors be appointed at the general meeting and not by the audit committee.
The Board of ING Continuity Foundation currently comprises four 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 76.
ING Group strives to maintain an open and constructive dialogue with current and potential investors, and with industry analysts. The scope of such bilateral communication may range from single investor queries via e-mail, to more elaborate discussions with analysts or institutional investors that take place via telephone or face-to-face. These meetings are not announced in advance, nor can they be followed by webcast or any other means. ING Group’s
The geographical distribution of ING Group’s investor base is diverse: an estimated 34% of shares outstanding are held in the US, 20% in the UK, 11% in France, 9% in the Benelux, 6% in Germany, 4% in Switzerland and 16% in the rest of the 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.
According to its Articles of Association and the Trust Conditions, ING Trust Office is guided primarily by the interests of the holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprises.
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.
In case of a conflict of interest, the relevant member of the Executive Board abstains from discussions and decision-making on the topic or the transaction in relation to which that Board member has a conflict of interest with ING Group. If all members of the Executive Board have a conflict of interest, the decision will be taken by the Supervisory Board.
INFORMATION ON MEMBERS OF THE EXECUTIVE BOARD JAN H.M. HOMMEN, CHIEF EXECUTIVE OFFICER (Born 1943, Dutch nationality, male; appointed in 2009, term expires in 2013) Jan Hommen graduated with a master’s degree in Business Economics from Tilburg University. He was appointed a member of the Executive Board on 27 April 2009. He is also CEO of ING Bank N.V. and CEO of ING Verzekeringen N.V. Jan Hommen was a member of the Supervisory Board of ING Group as of 1 June 2005 and became chairman of the Supervisory Board of ING Group in January 2008. Until 1 May 2005, he was vice-chairman and chief financial officer of Koninklijke Philips Electronics N.V. From 1975 to 1997, he worked for Alcoa Inc. From 1978, he worked at the Alcoa head office in
(www.ing.com). In a deviation from the default provisions of the Corporate Governance Code shareholders and holders of depositary receipts will not have the opportunity to react to the minutes of a general meeting if a notarial report of the meeting is made, as this would be in conflict with the laws applicable to such notarial report.
ING Group aims to have an adequate and balanced composition of its Executive Board. Thereto, annually, the Supervisory Board assesses the composition of the Executive Board. In the context of such assessment, ING Group aims to have a gender balance by having at least 30% men and at least 30% women amongst its Executive Board members.
• DNB, the Dutch central bank refuses to issue a statement of ‘no objection’ for the appointment of the relevant candidate.
FUNCTION OF THE SUPERVISORY BOARD The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events of ING Group and its businesses, as well as to provide advice to the Executive Board. In line with Dutch company law, the Corporate Governance Code and the Articles of Association, the Supervisory Board Charter the US, becoming chief financial officer in 1991. Jan Hommen is a member of the board of Royal Concertgebouw Orchestra and a member of the Supervisory Board of PSV (football club). Seven Group staff departments report directly to Jan Hommen: Legal Department Group, Corporate Human Resources, Corporate Development, Corporate Communications, Group Public & Government Affairs, Sustainability and Corporate Audit Services.
SUPERVISORY BOARD APPOINTMENT AND DISMISSAL Members of the Supervisory Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. The list will be rendered non-binding if a resolution of the General Meeting to that effect is adopted by an absolute majority of the votes cast, which majority represents more than one-third of the issued share capital. Candidates for appointment to the Supervisory Board must comply with the suitability and reliability requirements set out in the Dutch Financial Supervision Act and must continue to meet these while in office.
ING Group aims to have an adequate and balanced composition of its Supervisory Board. Thereto, annually, the Nomination Committee assesses the composition of the Supervisory Board. In the context of such assessment, ING Group aims to have a gender balance by having at least 30% men and at least 30% women amongst its Supervisory Board members. However, because of the fact that ING Group needs to balance several relevant selection criteria when composing its Supervisory Board, the composition of the Supervisory Board did not meet the above-mentioned gender balance in 2012. ING Group will continue to strive for an adequate and balanced composition of its Supervisory Board in future appointments, by taking into account all relevant selection criteria including but not limited to gender balance, executive experience, experience in corporate governance and experience in the political and social environment.
TERM OF APPOINTMENT OF MEMBERS OF THE SUPERVISORY BOARD A member of the Supervisory Board retires no later than at the end of the first general meeting held four years after his or her last appointment or reappointment. In accordance with the Corporate Governance Code, members of the Supervisory Board may as a general rule be reappointed for two additional four-year terms. Under special circumstances however, the Supervisory Board may deviate from this general rule, among others in order to maintain a balanced composition of the Supervisory Board and/or to preserve valuable expertise and experience. As a general rule, members of the Supervisory Board shall also resign at the end of an annual general meeting in the year in which they attain the age of 70 and shall not be reappointed. The schedule for resignation by rotation is available on the website of ING Group (www.ing.com).
In view of their experience and the valuable contribution that former members of the Executive Board can make to the Supervisory Board, it has been decided, taking into account the size of the Supervisory Board and ING’s wide range of activities that such individuals may become members of the Supervisory Board of ING Group. There is, however, a restriction in that only one in every five other members 68 ING Group Annual Report 2012
JAN H. HOLSBOER (Born 1946, Dutch nationality, male; appointed in 2012, term expires in 2016) Former member of the Executive Board of Univar N.V. and former member of the Executive Boards of ING Group and NationaleNederlanden. Other business activities: non-executive (senior independent) director of PartnerRe Ltd. (Bermuda). Chairman of the Supervisory Board of TD Bank N.V. Non-executive director of YAFA S.p.A. (Turin, Italy). Member of the Supervisory Board of YAM Invest N.V. Chairman of the Supervisory Board of Vither Hyperthermia B.V. Chairman of the Executive Board of Panorama Mesdag B.V. Chairman of the Board of Foundation Imtech. Member of the Investment Committee of the Dutch Cancer Society.
JOOST CH.L. KUIPER (Born 1947, Dutch nationality, male; appointed in 2011, term expires in 2015) Former member of the Executive Board of ABN AMRO Bank N.V. Other business activities: chairman of the Supervisory Board of IMC B.V. Member of the Supervisory Board of Hespri Holding B.V. Member of the Supervisory Council of Nexus Institute. Board member of each of Stichting voor Ooglijders, Prins Bernhard Cultuurfonds and Aanwending Loterijgelden Nederland. Member of the Advisory Board of Boelens de Gruyter. Member of the Advisory Board of Boron.
HENK W. 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: member of the Supervisory Board of NSI N.V. (real estate fund) (listed company). Member of the Supervisory Board of Brink Groep BV. Chairman of the Supervisory Board of Heembouw Holding B.V. Chairman of the Supervisory Council of Omring (health care institution). Member of the Supervisory Board of HaagWonen (housing corporation). Chairman of the Supervisory Council of Inholland University.
Sjoerd van Keulen and Piet Klaver will resign at the end of the 2013 annual General Meeting. The current terms of appointment of Jeroen van der Veer, Tineke Bahlmann and Lodewijk de Waal will expire at the end of the 2013 annual General Meeting. Lodewijk de Waal has decided not to apply for reappointment. At this meeting, Jeroen van der Veer and Tineke Bahlmann will be nominated for reappointment. Tineke Bahlmann is recommended for reappointment by the Dutch State. The Nomination Committee and the Supervisory Board will continue to strive for an adequate and balanced composition of its Supervisory Board when selecting and nominating new members for appointment.
EXTERNAL AUDITOR At the annual General Meeting held on 14 May 2012, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2012 and 2013, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2012. The external auditor attended the meetings of the Audit Committee and the 2012 annual General Meeting.
The Audit Committee also sets the maximum annual amount that may be spent on pre-approved services. Throughout the year, the external auditor and ING monitor the amounts paid versus the pre-approved amounts. ING provides the Audit Committee with a full overview of all services provided to ING, including related fees, supported by sufficiently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
ACTIVITIES BOARD MEETINGS During the 2012 reporting year, the board of ING Trust Office (the ‘Board’) held six meetings.
MEETINGS WITH ING GROUP During the 2012 reporting year, the Board had five meetings with the chairmen of the Executive Board and the Supervisory Board of ING Group.
DEPOSITARY-RECEIPTS STRUCTURE During the years 2009-2012, participation of shareholders, excluding ING Trust Office, and holders of depositary receipts in the decisionmaking in annual general meetings of ING Group consistently increased from 35.6% to 50.8%. Only the extraordinary General Meeting of 25 November 2009 showed a deviation from this trend with a markedly lower participation of 31.1%.
ING Trust Office promotes the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation of shareholders and holders of depositary receipts in the decisionmaking in annual general meetings 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.
Stichting Continuïteit ING (‘ING Continuity Foundation’), a foundation organized under the laws of the Netherlands, established in Amsterdam, was founded on 22 January 1991.
In 2012 the board of ING Continuity Foundation (the ‘Board’) held two meetings, on 20 April and 29 November.
The composition of the Board is currently as follows: Bas Kortmann, chairman of the Board, Rob van den Bergh, Allard Metzelaar and Wim van Vonno, who was reappointed as of 1 July 2012.
PERfORMANCE MANAgEMENT PRINCIPLEs Performance management is a core business process to align individual performance objectives with the long-term strategy of the business of ING Group and to ensure a sustainable and successful business for all its stakeholders. ING Group operates a performance management process linked to remuneration to prevent rewarding for failure and to address the long-term impact of the profitability of the organisation within the risk appetite framework approved by the Supervisory Board of ING Group.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The senior management remuneration policy and remuneration structure are also included.
In addition, the remuneration policy provides for a balanced mix between fixed and variable remuneration. Variable remuneration will not exceed 100% of fixed salary at the time of allocation. Fixed compensation (i.e. the base salary levels) will be determined in line with the relevant market environment as an integral part of total direct compensation, and will be reviewed from time to time by the Supervisory Board. The policy provides for an at target variable remuneration of 40% in cash and 40% in stock (in total 80%) of base salary if performance criteria are met. If performance criteria (as predetermined by the Supervisory Board) are exceeded, the variable component can be increased from target to maximum, not exceeding 100% of base salary at the time of allocation.
Emphasis on long-term value creation The remuneration policy for the Executive Board combines the short and long-term variable components into one structure. This structure intends to support both long-term value creation and short-term company objectives. The emphasis on long-term performance indicators within the variable component of the compensation package is increased by means of deferral, a reasonableness test and claw back mechanisms.
The non-financial indicators depend on the specific responsibilities of the individual Executive Board member and typically include: 1. Improve customer centricity, including full implementation of Net Promoter Score measurement across the Bank and Insurance companies 2. Improve sustainable business practices and corporate responsibility based on the KPIs published annually in the ING Sustainability Report 3. Execute the restructuring and separation plans for the Group and continue repayment of Dutch State 4. Improve employee engagement across the Banking and Insurance operations 5. Improve leadership development, strengthen talent pipeline, retention and diversity 6. Improve operational excellence
Pensions Executive Board members Members of the Executive Board, who are employed on the basis of a Dutch employment contract, will participate in the defined contribution pension plans introduced in 2010 as part of the 81ING Group Annual Report 2012 1 W h o w e are 2 R
remuneration policy. Individual Board members participating in the pension plan that existed before the introduction of the 2010 plans were given the choice to keep their existing pension arrangement. This existing pension arrangement, approved by the 2006 AGM, is based on a defined contribution plan. Alternatively, they can switch to the 2010 arrangements.
Compensation of former members of the Executive Board amounted to nil for 2012, EUR 563 thousand for 2011 and EUR 750 thousand for 2010.
Pension costs of former members of the Executive Board amounted to nil for 2012, EUR 135 thousand for 2011, and EUR 158 thousand for 2010.
(2) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The figures for this member reflect compensation earned in the capacity as an Executive Board member. Thus the figure for 2012 reflects a partial year as an Executive Board member.
(1) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The figures for this member reflect the loans and advances received well before his appointment to the Executive Board.
INg depositary receipts for shares held by members of the Executive Board number of shares 2012 2011 2010
Benefits The individual members of the Executive Board receive other emoluments apart from the compensation and pension benefit. These other emoluments are mainly related to long home/work distances and amounted in 2012 (including employer contributions) to EUR 1 thousand, EUR 238 thousand and EUR 12 thousand for Jan Hommen, Patrick Flynn and Wilfred Nagel, respectively.
2013 REMUNERATION sTRUCTURE EXECUTIVE BOARD 2013 EXECUTIVE BOARD TOTAL DIRECT COMPENsATION The Supervisory Board will continue to monitor the remuneration of the Executive Board members relative to the external market and ING’s internal practices to ensure ING sustains the ability to retain and attract highly skilled and experienced Executive Board members. It is in the interest of ING and its various stakeholders that ING pays its Executive Board members a total direct compensation package which is perceived balanced, fair, competitive and incorporates the right risk measurements in the delivery of such offering, to sustain and optimise the long-term value of its business. The Supervisory Board may decide to moderate at any time the remuneration structure of the Executive Board and rebalance fixed to variable when it feels that the total direct compensation packages of the Executive Board are no longer fair and equitable relative to its peers. Such moderation will be done within the agreed Executive Board Remuneration Policy or in consent with shareholders at the annual General Meeting when it deviates from the agreed Policy, underpinned by internal and external advice from remuneration matter experts.
In light of the Capital Requirements Directive III compensation packages related to control functions (such as risk management functions) are structured such that they provide for a reduced emphasis on variable remuneration. To ensure the autonomy of the individual, financial performance metrics are dependent on objectives determined at the divisional level (i.e. not at the level of the relevant business). In addition, performance assessments are not only determined by business management, but also by the functional line.
For the Insurance US operations we have implemented a remuneration policy which fits the local market practise and requirements but also the Capital Requirements Directive III. It allows us to compete locally with our competitors to attract and retain talent, to meet the different regulatory requirements within the US insurance industry and to support the intended separation of these activities from ING.
Lodewijk de Waal 70 71 66 Sjoerd van Keulen 62 49 Joost Kuiper 74 46 Luc Vandewalle 86 58 Jan Holsboer (7) 41 Yvonne van Rooy (7) 37
(7) Jan Holsboer and Yvonne van Rooy are members of the Supervisory Board as of May 2012. The compensation figures for 2012 reflect a partial year as a member of the Supervisory Board.
Compensation of former members of the Supervisory Board who are not included in the above table amounted to nil in 2012, EUR 77 thousand in 2011 and EUR 466 thousand in 2010.
LOANs AND ADVANCEs TO sUPERVIsORY BOARD MEMBERs Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The table below presents the loans and advances to Supervisory Board members outstanding on 31 December 2012, 2011 and 2010.
INg shares and depositary receipts for shares held by members of the supervisory Board (1)
Jeroen van der Veer 119,469 119,469 99,469 Sjoerd van Keulen (2) 1,703 1,703
Consolidated balance sheet 90 Consolidated profit and loss account 91 Consolidated statement of comprehensive income 93 Consolidated statement of cash flows 94 Consolidated statement of changes in equity 96 Accounting policies for the consolidated annual accounts 98 Notes to the consolidated annual accounts 118 Risk management 217 Capital management 304 5 Parent company annual accounts
Investments in associates 6 2,203 2,370 Real estate investments 7 1,288 1,670 Property and equipment 8 2,674 2,886
Consolidated profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2012 2012 2011 2011 2010 2010
Net result from discontinued operations attributable to: Equityholders of the parent 908 1,673 405 Minority interests –2 6 9 92 ING Group Annual Report 2012
Exchange rate differences comprises EUR –14 million (2011: EUR –35 million; 2010: EUR 251 million) related to the share of other comprehensive income of associates.
Consolidated statement of comprehensive income of ING Group for the years ended 31 December 93ING Group Annual Report 2012 1 W h o w e are 2 R
Taxation paid –745 –1,353 –503 Changes in: – amounts due from banks, not available on demand 5,272 7,188 –4,333
– trading assets 7,367 1,754 –14,782 – non-trading derivatives –1,779 1,988 –1,590 – other financial assets at fair value through profit and loss –2,417 474 832 – loans and advances to customers 531 –25,085 –16,926 – other assets –596 –59 2,003 – amounts due to banks, not payable on demand –26,459 –6,731 –9,831 – customer deposits and other funds on deposit 27,718 27,019 21,202 – trading liabilities –24,031 –369 9,804 – other financial liabilities at fair value through profit and loss –1,376 –207 1 – other liabilities –2,246 –3,931 –6,806
Repayments of subordinated loans –10 –2,356 Proceeds from borrowed funds and debt securities 332,492 428,381 412,804 Repayments of borrowed funds and debt securities –333,165 –429,997 –405,120 Repayment of non-voting equity securities –750 –2,000 Repurchase premium (1) –375 –1,000 Payments to acquire treasury shares –17 –136 Sales of treasury shares 160 41 92 Net cash flow from financing activities –1,665 –6,931 7,640
(1) 2012 includes the repurchase premium paid on the repayment of EUR 750 million (2011: EUR 2,000 million) non-voting equity securities.
In 2012, changes were made to the segment reporting as disclosed in Note 52 ‘Segments’. The presentation of Note 56 ‘Cash and cash equivalents’ was changed to separately present the cash amount included in discontinued operations/businesses held for sale. This change resulted in an increase of Cash and cash equivalents at the beginning of the year of EUR 4,980 million due to inclusion of balances classified as Assets held for sale.
IFRS 13 ‘Fair Value Measurement’ IFRS 13 ‘Fair value measurement’ brings together in one standard all guidance on how to determine fair value. It does not change the scope of assets/liabilities that are measured at fair value. ING Group’s interpretation of fair value measurement is not significantly different from the guidance in IFRS 13. Therefore, the implementation of IFRS 13 ‘Fair Value Measurement’ at 1 January 2013 will not have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income. In addition, IFRS 13 introduces an extended scope for the disclosure of the fair value hierarchy by level of fair value. ING Group will implement the new requirements as of 2013.
Accounting policies for the consolidated annual accounts of ING Group continued 99ING Group Annual Report 2012 1 W h o w e are 2 R
UPCOMING CHANGES IN IFRS-EU AFTER 2013 The following new standards will become effective for ING Group as at 1 January 2014: • IFRS 10 ‘Consolidated Financial Statements’; • IFRS 11 ‘Joint Arrangements’ and amendments to IAS 28 ‘Investments in Associates and Joint Ventures’; and • IFRS 12 ‘Disclosure of Interests in Other Entities’.
IFRS 11 ‘Joint Arrangements’ and amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ IFRS 11 ‘Joint Arrangements’ and the related amendments to IAS 28 ‘Investments in Associates and Joint Ventures’ eliminate the proportionate consolidation method for joint ventures that was applied by ING. Under the new requirements, all joint ventures will be reported using the equity method of accounting (similar to the accounting that is already applied for Investments in associates). The implementation of IFRS 11 is expected not to have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income.
The adoption of these new or revised standards is expected not to have a significant impact on Shareholders’ equity, Net result and/or Other comprehensive income.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This impact is dependent upon the difference between the potential minimum benefits payable and the total account balance, expected mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about factors such as inflation, investment returns, policyholder behaviour, and mortality morbidity trends and other factors. The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expenditure.
FAIR VALUES OF REAL ESTATE Real estate investments are reported at fair value. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values are established using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
Price testing is performed to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate reflection of these valuations in the profit and loss account. Price testing is performed to minimise the potential risks for economic losses due to incorrect or misused models.
Reference is made to Note 35 ‘Fair value of financial assets and liabilities’ and the ‘Risk management’ section for the basis of the determination of the fair value of financial instruments and related sensitivities.
IMPAIRMENTS Impairment evaluation is a complex process that inherently involves significant judgements and uncertainties that may have a significant impact on ING Group’s consolidated financial statements. Impairments are especially relevant in two areas: Available-for-sale debt and equity securities and Goodwill/Intangible assets.
The actuarial assumptions may differ significantly from the actual results due to changes in market conditions, economic and mortality trends, and other assumptions. Any changes in these assumptions could have a significant impact on the defined benefit plan liabilities and future pension costs. The effects of changes in actuarial assumptions and experience adjustments are not recognised in the profit and loss account unless the accumulated changes exceed 10% of the greater of the defined benefit obligation and the fair value of the plan assets. If such is the case the excess is then amortised over the employees’ expected average remaining working lives. Reference is made to Note 21 ‘Other liabilities’ for the weighted averages of basic actuarial assumptions in connection with pension and other post-employment benefits.
A subsidiary which ING Group has agreed to sell but is still legally owned by ING Group may still be controlled by ING Group at the balance sheet date and, therefore, still be included in the consolidation. Such a subsidiary may be presented as a held for sale disposal group if certain conditions are met.
Accounting policies for the consolidated annual accounts of ING Group continued 103ING Group Annual Report 2012 1 W h o w e are 2 R
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 42 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned below in Group companies relating to the disposals of group companies, any exchange rate difference deferred in equity is recognised in the profit and loss account in Result on disposals of group companies. Reference is also made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’, which discloses the amounts included in the profit and loss account.
Accounting policies for the consolidated annual accounts of ING Group continued 105ING Group Annual Report 2012 1 W h o w e are 2 R
Maximum credit risk exposure The maximum credit risk exposure for items on the balance sheet is generally the carrying value for the relevant financial assets. For the off-balance sheet items the maximum credit exposure is the maximum amount that could be required to be paid. Reference is made to Note 28 ‘Contingent liabilities and commitments’ for these off-balance sheet items. Collateral received is not taken into account when determining the maximum credit risk exposure.
Accounting policies for the consolidated annual accounts of ING Group continued 107ING Group Annual Report 2012 1 W h o w e are 2 R
Borrowings are recognised initially at their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds, net of transaction costs, and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.
Accounting policies for the consolidated annual accounts of ING Group continued 113ING Group Annual Report 2012 1 W h o w e are 2 R
As at 31 December 2012, the non-subordinated receivables amounts to EUR 39,050 million (2011: EUR 45,304 million) and the subordinated receivables amounts to EUR 3 million (2011: EUR 19 million).
Derivatives used in: – fair value hedges 2,926 3,192 – cash flow hedges 7,471 6,641 – hedges of net investments in foreign operations 49 141 Other non-trading derivatives 3,505 7,185
Included in the Financial assets designated as at fair value through profit and loss is a portfolio of loans and receivables which is economically hedged by credit derivatives. The hedges do not meet the criteria for hedge accounting and the loans are recorded at fair value to avoid an accounting mismatch. The maximum credit exposure of the loans and receivables included in Financial assets designated as at fair value through profit and loss approximates its carrying value. The cumulative change in fair value of the loans attributable to changes in credit risk is not significant.
Notes to the consolidated annual accounts of ING Group continued 119ING Group Annual Report 2012 1 W h o w e are 2 R
Available-for-sale – equity securities 7,707 9,305 – debt securities 185,877 199,234
The fair value of the securities classified as held to maturity amounts to EUR 6,626 million as at 31 December 2012 (2011: EUR 8,835 million).
Trading assets 17,472 18,251 Investments for risk of policyholders 6,940 9,612 Designated as at fair value through profit and loss 2,682 2,967 Financial assets at fair value through profit and loss 27,094 30,830
In connection with the divestment of ING Direct USA, ING completed in 2012 the restructuring of the agreement with the Dutch State concerning the Illiquid Assets Back-Up Facility (IABF). As a result of the restructuring, EUR 7.3 billion (USD 9.5 billion) of the loan due from the Dutch State was converted into Dutch Government Debt Securities. These debt securities are classified as Loans and advances to customers. The balance as at 31 December 2012 amounts to EUR 6.4 billion (USD 8.5 billion). Reference is made to Note 31 ‘Companies acquired and companies disposed’ and Note 34 ‘Related parties’.
‘Other changes’ mainly relate to the de-risking program of ING and includes sales and redemptions of certain ABS bonds.
The revaluation reserve on debt securities includes EUR 7,977 million (pre-tax) related to Government bonds. This amount comprises EUR 255 million negative revaluation reserve for Government bonds from Greece, Italy, Ireland, Portugal, Spain and Cyprus, which is more than offset by EUR 8,232 million positive revaluation reserves for Government bonds from other countries.
The impact on ING Group’s revaluation reserve in relation to sovereign and unsecured financial institutions debt was limited per 31 December 2011: the negative impact on countries most affected by the sovereign debt crisis is offset by opposite positive movements in bonds of financially stronger European countries and by the positive impact from lower interest rates in general. Furthermore, in the course of 2011, ING Group reduced its sovereign debt exposure to these countries.
Transfers and reclassifications of available-for-sale and held-to-maturity investments Available-for-sale equity securities
Impact on the financial years after reclassification: Carrying value as at 31 December 1,694 8,707 443 Fair value as at 31 December 1,667 8,379 512 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –186 –221 –2 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made –27 –328 69 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 result) –47 –164 22 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Carrying value as at 31 December 5,550 20,551 1,189 Fair value as at 31 December 5,871 20,175 1,184 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –734 –902 –67 Effect on shareholders’ equity (before tax) as at 31 December if reclassification had not been made 321 –376 –5 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) 121 629 n/a Effect on result (before tax) for the year (mainly interest income) n.a n.a 47 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil 125ING Group Annual Report 2012 1 W h o w e are 2 R
Borrowed debt securities are not recognised in the balance sheet and amount to nil (2011: EUR 466 million).
– more than 1 year but less than 5 years 7,673 8,035 – more than 5 years 4,413 4,708
CBRE Retail Property Fund France Belgium C.V. 15 73 1,374 889 117 57 CBRE Nordic Property Fund FGR 14 60 1,079 662 92 67 CBRE Property Fund Central and Eastern Europe 21 51 747 509 122 57 Other investments in associates 631
Notes to the consolidated annual accounts of ING Group continued 129ING Group Annual Report 2012 1 W h o w e are 2 R
Changes in assets under operating leases Cars Other leased-out assets Total
Amortisation and unlocking –1,051 –1,689 –15 –13 –1,066 –1,702 Effect of unrealised revaluations in equity –251 –526 –251 –526 Changes in the composition of the group –5,765 44 –3 –2 –5,768 42 Exchange rate differences –244 304 –244 304
Notes to the consolidated annual accounts of ING Group continued 135ING Group Annual Report 2012 1 W h o w e are 2 R
ING continues to discuss various options for ING Life Japan, including its closed block VA business. However, the closing of sales of ING’s other Asian insurance units may trigger a charge to strengthen reserves for the Japanese closed block VA under ING’s reserve adequacy policy. ING measures reserve adequacy at the business line level, where excess reserves in other Asian business units currently offset a shortfall related to the Japanese closed block VA. As transactions close, if the aggregate reserves for the remaining businesses fall below a 50% confidence level, the shortfall must be recognised immediately in the profit and loss account. The reserve inadequacy for the Japanese insurance business, including the VA guarantees reinsured to ING Re, was approximately EUR 0.4 billion at the 50% confidence level at 31 December 2012. This is an inadequacy of approximately EUR 0.9 billion for the closed block VA, offset by a sufficiency of EUR 0.5 billion for the corporate-owned life insurance business. The nature and timing of any profit and loss charge from such reserve inadequacy depends on the closing of other divestments in Asia as well as various options currently under investigation for ING Life Japan. Further announcements will be made if and when appropriate. The above mentioned amounts refer to ING’s reserve adequacy policy under IFRS which does not affect the local solvency positions of ING Life Japan nor ING Re.
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 quoted prices in an active market (Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Reference is made to Note 35 ‘Fair value of financial assets and liabilities’ for more details on the fair value hierarchy.
Reinsurance and insurance receivables 1,763 1,971 Deferred tax assets 1,653 2,801 Property development and obtained from foreclosures 1,220 1,584 Income tax receivable 558 542 Accrued interest and rents 12,356 14,387 Other accrued assets 1,542 2,200 Pension assets 4,622 3,762
Other includes EUR 2,630 million (2011: EUR 1,840 million) related to transactions still to be settled at balance sheet date.
Accrued interest and rents includes EUR 5,491 million (2011: EUR 6,388 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
The total amount of borrowing costs relating to Property development and obtained from foreclosures, capitalised in 2012 is EUR 2 million (2011: EUR 7 million).
Property under development 163 400 Property developed 927 1,055 Property obtained from foreclosures 130 129
The following equity components cannot be freely distributed: Revaluation reserve, Share of associates reserve (included in Other reserves), Currency translation reserve and the part of the Other reserves that relate to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Groep N.V. currently consists of 14,500 million ordinary shares. It increased in 2011 from 4,500 million ordinary shares to 14,500 million ordinary shares as a result from an amendment made to the Articles of Association on 15 June 2011. As at 31 December 2012, 3,832 million of ordinary shares were issued and fully paid.
Legally non-distributable reserves from ING Group’s subsidiaries and associates are as follows: 2012 iNG Bank iNG insurance Other total
Regulatory capital invested 47,116 23,322 70,438 Required minimum regulatory capital 28,767 9,523 38,290 2011 ING Bank ING Insurance Other Total
Regulatory capital invested 47,123 21,406 68,529 Required minimum regulatory capital 31,107 9,515 40,622 2010 ING Bank ING Insurance Other Total
Property revaluation reserve Available- forsale reserve Cash flow hedge reserve Total
Subordinated loans provided by ING Groep N.V. to ING Bank N.V. and ING Verzekeringen N.V.
The following bonds are all issued under the Credit Guarantee Scheme of the State of the Netherlands. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme: • ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond in February 2009. The issue was priced at a fixed rate of 3.375%, 75 basis points over mid-swaps; and • ING Bank issued a 5 year USD 2 billion fixed rate government guaranteed senior unsecured bond in March 2009. The issue was priced at a fixed coupon of 3.90%, 145 basis points over USD mid-swaps.
Notes to the consolidated annual accounts of ING Group continued 145ING Group Annual Report 2012 1 W h o w e are 2 R
Subordinated loans of group companies 2,907 1,181 81 918 2,309 4,752 12,148 Preference shares of group companies 404 404
Where discounting is used in the calculation of life insurance provisions, the rate is within the range 3.0% to 5.1% (2011: 2.8% to 5.5%) based on weighted averages. The change is mainly due to a change in the composition of the portfolio.
ING transferred part of its life insurance business to Scottish Re in 2004 by means of a co-insurance contract. This business continues to be included in Life insurance provisions. The related asset from the co-insurance contract is recognised under Reinsurance contracts. On 23 January 2009, Hannover Re and Scottish Re announced that Hannover Re has agreed to assume the ING individual life reinsurance business originally transferred to Scottish Re in 2004.
To the extent that the assuming reinsurers are unable to meet their obligations, the Group is liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectable. The life reinsurance market is highly concentrated and, therefore, diversification of exposure is inherently difficult. To minimise its exposure to significant losses from reinsurer insolvencies, the Group evaluates the financial condition of its reinsurers, monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer and maintains collateral. Reference is also made to the ‘Risk management’ section.
– for prior years –39 –71 2 –11 –37 –82 – interest accrual of provision 45 40 45 40
In the last quarter of 2012, excess cash in the banking operations was used to redeem short-term professional funding.
Savings accounts 277,766 291,516 Credit balances on customer accounts 120,708 114,867 Corporate deposits 55,268 49,668
Reference is made to Note 3 ‘Financial assets at fair value through profit and loss’ for information on trading.
Deferred tax liabilities 3,157 3,679 Income tax payable 956 858 Pension benefits 358 378 Post-employment benefits 183 179 Other staff-related liabilities 650 1,111 Other taxation and social security contributions 918 898 Deposits from reinsurers 869 1,015 Accrued interest 10,569 11,698 Costs payable 2,161 2,400 Amounts payable to brokers 50 72 Amounts payable to policyholders 2,138 2,173 Reorganisation provision 919 599 Other provisions 625 638 Share-based payment plan liabilities 47 39 Prepayments received under property under development 21 83 Amounts to be settled 4,831 5,442
Other staff-related liabilities includes vacation leave provisions, variable compensation provisions, jubilee provisions and disability/illness provisions.
More than 1 year but less than 5 years 427 378 198 539 More than 5 years but less than 10 years 157 774 3,227 1,971 More than 10 years but less than 20 years 2,397 3,185 12 192
In 2012, the deferred tax assets for banking operations, for which the utilisation is dependent of future taxable profits, as disclosed above, decreased for Great Britain due to the intended sale of ING Direct UK and for Mexico as Mexico became a run-off operation, and therefore they are not able to recover the losses. The increase in Italy is due to the losses in 2012.
Notes to the consolidated annual accounts of ING Group continued 153ING Group Annual Report 2012 1 W h o w e are 2 R
taxable income for any post-change year which may be offset by a pre-change loss is subject to an annual limitation. As of 31 December 2012, we believe that our U.S. subsidiaries have not had an ‘ownership change´ for purposes of Sections 382 and 383. However, this determination is subject to uncertainties and is based on various assumptions. Future increases of capital or other changes in ownership may adversely affect our cumulative ownership, and could trigger an ‘ownership change ,́ which could limit the ability of our U.S. subsidiaries to use tax attributes, and could correspondingly decrease the value of these attributes.
A reorganisation provision of EUR 233 million is recognised in the segment Retail Netherlands (Bank) mainly as a result of entering the second phase of the transformation program. The transformation program aims to streamline IT systems as well as the further development and integration of ING’s mobile banking services. These measures are expected to result in a further reduction of the workforce of around 1,400 FTEs (of which 400 external FTEs) over a period of three years.
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 will take 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 approximately 8,000 staff members in the Netherlands of Insurance/Investment Management (IM). Under the agreement, two new separate pension funds will be created, one for banking and one for Insurance/IM. The new scheme qualifies as a defined contribution under IFRS and will replace the existing defined benefit scheme in the Netherlands.
The key elements of the new scheme are: • ING contributes a yearly pre-defined premium to the funds. The employee contribution to the new scheme will gradually increase to one-third of the base pension premium; • The minimum salary level at which pensions are provided will be lowered to EUR 15,000; • Pension benefit will be based on average wage over period of employment with a 2% annual accrual rate; • The pension funds, not ING, will bear responsibility for funding adequacy; ING Bank and Insurance/IM to pay an additional risk premium; • Responsibility for inflation indexation will move to the new funds; and • Standard retirement age will be raised to 67.
As of the start of the new defined contribution plan on 1 January 2014, the current defined benefit plan will stop accruing new pension benefits. Accruals built up under the defined benefit plan up to that date will remain valid. The change to the new pension scheme represents a curtailment under IFRS and has resulted in a release of provisions previously taken by ING to cover estimated future liabilities in the existing defined benefit plan that are now no longer required. This release amounts to a one-off after tax gain of EUR 305 million (EUR 407 million before tax). The curtailment is included in the line Staff expenses in 2012. This curtailment relates to the current defined benefit plan in The Netherlands, which represents approximately 75% of the above defined benefit obligation.
Notes to the consolidated annual accounts of ING Group continued 157ING Group Annual Report 2012 1 W h o w e are 2 R
– designated as at fair value through profit and loss 281 52 840 964 1,517 1,106 4,760 Investments
– designated as at fair value through profit and loss 52 78 790 1,212 1,565 1,740 5,437 Investments
24 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. There are no significant assets and liabilities recognised as a result of continuing involvement in transferred assets. Reference is made to Note 29 ‘Special purpose entities and securitisations’.
Transferred assets at carrying amount Amounts due from banks 5,192 Financial assets at fair value through profit and loss (1) 591 47 12,258 30,398
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 34 ‘Related parties’ for detailed disclosure on the facility.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket. ING Group applies the IFRS-EU ‘carve-out’ to its retail operations in which the net exposure of retail funding (savings and current accounts) and retail lending (mortgages) is hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages, using the IFRS-EU provisions.
In 2012 and 2011, Net result from discontinued operations includes the net result (after tax) of the businesses classified as discontinued operations and is presented separately in the profit and loss account. Result from discontinued operations was as follows: Result from discontinued operations 2012 - Asia (2011 and 2010: Asia and Latin America)
In 2012, Net result from classification as discontinued operations Asia includes 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 11 ‘Assets and liabilities held for sale’.
Sales proceeds in cash in 2012 of EUR 1,332 million (2011: EUR 2,572 million) is presented in the consolidated statement of cash flows under ‘Net cash flow from investment activities - Disposals and redemptions: group companies’ and is not included in the table above.
ING’s Insurance and investment management businesses in Asia and the reinsured Japan SPVA businesses in corporate reinsurance were previously included respectively in the segments Insurance Asia/Pacific, ING Investment Management and in the Corporate Line Insurance 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.
Insurance operations 165ING Group Annual Report 2012 1 W h o w e are 2 R
Years after 2017 207 29 SPECIAL PURPOSE ENTITIES AND SECURITISATION Securitisation ING Group as originator ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING Group enters into a credit default swap with securitisation Special Purpose Entities (SPEs), in relation to which ING Group purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPEs have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Group has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Group.
Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands ING Insurance Eurasia N.V. The Netherlands Parcom Capital B.V. The Netherlands Nationale-Nederlanden Services N.V. The Netherlands Movir N.V. The Netherlands ING Re (Netherlands) N.V. The Netherlands ING Fund Management B.V. The Netherlands REI Fund Netherlands B.V. The Netherlands ING Životná poist'ovna a.s. Slovakia ING Uslugi Finansowe S.A. Poland ING Powszechne Towarzystwo Emerytalne S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Biztosító Zártkörûen Mûködõ Részvénytársaság Hungary Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING U.S., Inc. United States of America ING International Nominee Holdings, Inc. United States of America ING Life Insurance and Annuity Company United States of America ING North America Insurance Corporation United States of America Lion Connecticut Holdings Inc. United States of America ReliaStar Life Insurance Company United States of America ReliaStar Life Insurance Company of New York United States of America Security Life of Denver Insurance Company United States of America ING USA Annuity and Life Insurance Company United States of America ING Investment Management Co United States of America Security Life of Denver International Limited Cayman Islands ING Life Insurance Company Limited Japan ING Life Insurance Company Korea, Ltd. South Korea ING Life Insurance Company (Bermuda) Limited Hong Kong 168 ING Group Annual Report 2012
ING Direct USA In June 2011, ING announced that it reached an agreement to sell ING Direct USA to Capital One Financial Corporation, a leading USbased financial holding company. In February 2012, ING announced that the transaction closed. Total proceeds of the transaction were approximately USD 9.0 billion (or approximately EUR 6.9 billion), including USD 6.3 billion in cash and USD 2.7 billion in the form of 54.0 million shares in Capital One, based on the share price of USD 49.29 at closing on 16 February 2012. These shares represented a 9.7% stake in Capital One at closing. The transaction resulted in a positive result after tax of EUR 489 million and had a positive impact on ING Bank’s core Tier 1 ratio of approximately 80 basis points at closing. This result included the release of the currency translation reserve and the available-for-sale reserve. The net negative cash proceeds from the divestment of ING Direct USA of EUR 10.3 billion (being the net amount of cash received of EUR 4.8 billion and cash included in the divestment of EUR 15.1 billion) is included in the cash flow statement in ‘Disposals and redemptions – group companies’. ING Direct USA was previously included in the segment Retail Rest of World (ING Direct). In September 2012, ING sold all of its shares in Capital One Financial Corporation as disclosed in Note 38 ‘Investment income’.
In connection with the divestment of ING Direct USA, ING also completed the adjustment of the agreement with the Dutch State concerning the structure of the Illiquid Assets Back-up Facility (IABF) which was also announced on 16 June 2011. The amendment serves to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State. The IABF was further amended to ensure a continued alignment between ING and the State regarding exposure to the Alt-A portfolio. Reference is made to Note 34 ‘Related parties’ for details on the original agreement and the amendments made.
China Merchants Fund In October 2012, ING announced that it has reached an agreement for the sale of its 33.3% stake in China Merchants Fund, an investment management joint venture, to its joint venture partners China Merchants Bank Co., Ltd., and China Merchants Securities Co., Ltd. Under the terms agreed, ING will receive a total cash consideration of approximately EUR 98 million. At closing of the transaction, ING expects the transaction to realise a net gain of approximately EUR 64 million which will be recognised on closing of the transaction. This transaction is subject to regulatory approvals and is expected to close in the second quarter of 2013.
(1) Cash outflow/inflow on group companies in the cash flow statement includes, in addition to the cash amounts in this table, also cash outflows/inflows on individually immaterial disposals.
Disposals effective in 2011 Pacific Antai Life Insurance Company Ltd. In June 2011 ING completed the sale of its entire stake in China’s Pacific Antai Life Insurance Company Ltd. (PALIC) to China Construction Bank for a consideration of EUR 82 million, and a net profit of EUR 28 million. This is the outcome of a strategic review announced in April 2009 as part of ING’s Back to Basics program. The stake in PALIC was previously included in the segment Insurance Asia/Pacific. The deal had been announced in 2009 and was presented as held for sale since 2009 until the sale was completed.
ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES) ING announced in February 2011 that it has reached agreement with CB Richard Ellis Group, Inc., to sell ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES), ING REIM’s US-based manager of listed real estate securities, as well as part of ING’s equity interests in funds managed by these businesses.
The Latin American operations were previously included in the segments Insurance Latin America and ING Investment Management before they were classified as discontinued operations. The segment Insurance Latin America has ceased to exist following this transaction as the majority of assets and liabilities have been sold. The net result from discontinued operations is presented separately in the consolidated profit and loss account. Reference is made to Note 26 ‘Discontinued operations’ for more detailed disclosures.
General Primary line of business Bank Bank Bank Bank Insurance Insurance
In October 2009 ING reached an agreement to sell its Swiss Private Banking business to Julius Baer for a consideration of EUR 345 million (CHF 520 million) in cash. The transaction generated a net profit for ING of EUR 73 million. The sale was completed in January 2010. The Swiss Private Banking business was previously included in the segment Retail Rest of World (Retail CE).
Liabilities Amounts due to banks 180 755 952 1,887 Customer deposits and other funds on deposit 3,098 1,382 4,480
(1) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually immaterial disposals in addition to the cash flows presented.
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 with Stichting Pensioenfonds ING (the Dutch ING Pension Fund) per 1 January 2011. This claim was rejected by the Court 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 per 1 January 2011. This claim was rejected by the Court 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 addition, like many other companies in the insurance industry, several of ING’s U.S. companies have received formal requests for information from various governmental and regulatory agencies regarding whether and to what extent they proactively ascertain whether customers have deceased, pay benefits even where no claim has been made, and comply with state laws pertaining to unclaimed or abandoned property. Companies may have to make additional payments to beneficiaries and escheat additional funds deemed abandoned, and regulators may seek fines, penalties and interest. It is currently not practicable to estimate the (potential) financial effect of such information requests.
KB Life Insurance Company Ltd (1)(2) 49 2,164 1,997 710 695 ING-BOB Life Insurance Company Ltd (2) 50 495 417 135 130 ING Vysya Life Insurance Company Ltd (1)(2) 26 487 462 119 117
(1) Accounted for as joint venture because of joint control. (2) Assets and liabilities are presented as held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
In 2012 and 2011, ‘Management Boards’ includes the Management Boards of ING Bank N.V. (‘ING Bank’), ING Verzekeringen N.V. (‘ING Insurance’), ING Insurance Eurasia N.V. (‘Insurance EurAsia’) and the Board of ING U.S., Inc. (‘ING U.S.’).
The valuation method of the 20% Alt-A securities in the IFRS-EU balance sheet is not impacted by the IABF. The methodology used to determine the fair value for these assets in the balance sheet under IFRS-EU is disclosed in Note 35 ‘Fair value of financial assets and liabilities’.
In connection with the sale of ING Direct USA as disclosed in Note 31 ‘Companies acquired and companies disposed’, ING has reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF). This adjustment served to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State and became effective at the closing of the sale in February 2012. Under the terms of the original transaction ING Direct USA held on its balance the remaining 20% of the Alt-A portfolio, ensuring an alignment of interests between ING and the Dutch state regarding the performance of the portfolio.
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 Group’s share capital; accordingly they do not carry voting rights in the General Meeting of Shareholders.
ING has indicated that it remains its ambition to repay the remaining support as quickly as possible and ING intends to accelerate repayments if possible and prudent under the prevailing economic circumstances. All actual repayments are conditional upon the approval of Dutch central bank at the time ING decides to propose such payment.
The price leadership restrictions in Europe will be amended to reflect specific conditions in various local markets. Under the amendments, the constraint no longer applies in the Netherlands, and ING Direct in the EU will refrain from offering more favourable prices than its best priced direct competitor among the ten financial institutions having the largest market share in the respective countries.
The amended Restructuring Plan was formally approved by the European Commission, by decision of 16 November 2012. As a result, the Commission closed its formal investigations as announced on 11 May 2012 and ING also withdrew its appeal at the General Court of the European Union, filed in July 2012. For principal legal reasons, the European Commission has continued with its appeal against the General Court ruling of March 2012. However, ING, the Dutch State and the European Commission agreed that any outcome of this procedure will not affect the approval of the amended Restructuring Plan as announced in November 2012.
In the framework of the transactions with the Dutch State disclosed in this note, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Illiquid Assets Back-up Facility is in place (whichever expires last). These arrangements require that: • the Dutch State may recommend two candidates (the ‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Supervisory Board members; • ING Group must develop a sustainable remuneration policy for the Executive Board and Senior Management that is aligned to new international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for ‘rewards for failure’. This new remuneration policy must, amongst others, include objectives relating to corporate and social responsibility; • members of the Executive Board may not receive any performance-related payment - either in cash, options, shares or bearer depositary receipts - for the years 2008 and 2009 until the adoption of the new remuneration policy in 2010; • severance payments to Executive Board members are limited to a maximum of one year’s fixed salary, in line with the Tabaksblat Code; • ING has undertaken to support the growth of lending to corporates and consumers (including mortgages) for an amount of
EUR 25 billion, on market conforming terms; • ING agreed to pro-actively use EUR 10 billion of the Dutch Guarantee Scheme during 2009; • ING has committed itself to maintaining the Dutch payment system PIN on its payment debit cards as long as other market participants, representing a substantial market share, are still making use of this payment system; and • appointment of the Chief Executive Officer of the Executive Board requires approval of the State Nominees.
– designated as at fair value through profit and loss 4,760 5,437 4,760 5,437 Investments
Investment contracts for risk of company 4,624 6,717 4,561 6,259 Investment contracts for risk of policyholders 8,067 6,939 8,067 6,939 Amounts due to banks 39,628 72,687 38,704 72,233 Customer deposits and other funds on deposit 457,624 468,447 455,003 467,547 Financial liabilities at fair value through profit and loss
(1) Other assets do not include (deferred) tax assets, pension assets and property development and obtained from foreclosures. (2) Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions, prepayments received under property under development, share-based payment plans, other provisions and other taxation and social security contributions.
Investments for risk of policyholders 3 –1 2 Non-trading derivatives –378 3 –375 Financial assets designated as at fair value through profit and loss –204 –41 –245 Available-for-sale investments –93 43 –50
Fair value hierarchy of certain ABS bonds 2012 Level 1 Level 2 Level 3 Total
US Subprime RMBS 763 11 774 US Alt-A RMBS 495 7 502 188 ING Group Annual Report 2012
Interest income on available-for-sale securities 2,507 3,463 3,532 Interest income on held-to-maturity securities 297 400 549 Interest income on trading portfolio 24,616 27,480 32,692 Interest income on non-trading derivatives 1,578 1,536 1,709 Other interest income 6,165 5,294 4,870 Interest income banking operations 60,002 64,649 68,334
In 2011, the growth in average total assets led to an increase of the interest result of EUR 135 million and the decrease of the interest margin by 2 basis points led to a decrease of the interest result with EUR 139 million.
Reinsurance ceded –40 –39 –62 –1,642 –1,664 –1,821 –1,682 –1,703 –1,883
Fee and commission expenses Banking operations Insurance operations Total 41 VALUATION RESULTS ON NON-TRADING DERIVATIVES
Valuation results on non-trading derivatives are reflected in the consolidated statement of cash flows in the line ‘Result before tax - Adjusted for: other’.
Net operating lease income comprises income of EUR 2 million (2011: EUR 772 million; 2010: EUR 1,000 million) and depreciation of EUR 1 million (2011: EUR 596 million; 2010: EUR 787 million).
The investment income and valuation results regarding investments for risk of policyholders is EUR 11,246 million (2011: EUR –186 million; 2010: EUR 10,120 million). This amount is not recognised in Investment income and valuation results on assets and liabilities designated at fair value through profit and loss but in Underwriting expenditure. As a result it is shown together with the equal amount of change in insurance provisions for risk of policyholders.
Reinsurance recoveries –1,898 –1,751 –1,612 Change in life insurance provisions –5,317 –816 –632 Costs of acquiring insurance business 592 1,265 2,150 Other underwriting expenditure 621 499 464 Profit sharing and rebates 102 216 325
Distributions on account of interest or underwriting results –28 21 9 Bonuses added to policies 67 108 159 Deferred profit sharing expense 63 87 157
The total Cost of acquiring insurance business (life and non-life) and investment contracts amounted to EUR 857 million (2011: EUR 1,529 million; 2010: EUR 2,429 million). This includes amortisation and unlocking of DAC of EUR 1,066 million (2011: EUR 1,702 million; 2010: EUR 2,697 million) and the net amount of commissions paid of EUR 1,465 million (2011: EUR 1,414 million; 2010: EUR 1,294 million) and commissions capitalised in DAC of EUR 1,674 million (2011: EUR 1,587 million; 2010: EUR 1,562 million).
Software and other intangible assets 7 50 31 7 50 31
The 2012 impairments recognised 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 2010, impairments on Property development were recognised on a large number of Real Estate development projects in The Netherlands, Spain and the United States. The unfavourable economic circumstances in all regions resulted in lower expected sales prices.
Pension and other staff-related benefit costs –26 171 199 58 66 97 32 237 296
In 2012, the Dutch Government imposed an additional tax charge of 16% on the income in excess of EUR 150,000 of each employee who is subject to Dutch income tax. The tax is charged to the company and does not affect the remuneration of involved staff. The tax imposed on ING for relevant employees amounts to EUR 21.9 million, which is included in the figures in the table above.
Stock option and share plans ING Groep N.V. has granted option rights on ING Groep N.V. shares and conditional rights on depositary receipts (share awards) for ING shares to a number of senior executives (members of the Executive Board, general managers and other officers nominated by the Executive Board), and to a considerable number of employees of ING Group. The purpose of the option and share schemes, is to attract, retain and motivate senior executives and staff.
The fair value of options granted is recognised as an expense under staff expenses and is allocated over the vesting period of the options. The fair values of the option awards have been determined using a Monte Carlo simulation. This model takes the risk free interest rate into account (2.0% to 4.6%), as well as the expected life of the options granted (5 to 9 years), the exercise price, the current share price (EUR 2.90 – EUR 26.05), the expected volatility of the certificates of ING Groep N.V. shares (25% – 84%) and the expected dividends yield (0.94% to 8.99%). The source for implied volatilities used for the valuation of the stock options is ING’s trading system. The implied volatilities in this system are determined by ING’s traders and are based on market data implied volatilities not on historical volatilities.
As per 31 December 2012 the share awards consists of 43,632,814 share awards (2011: 41,150,790; 2010: 28,592,210) relating to equity-settled share-based payment arrangements and 5,783,818 share awards (2011: 6,872,096; 2010: 6,447,896) relating to cash-settled share-based payment arrangements.
The fair value of share awards granted is recognised as an expense under staff expenses and is allocated over the vesting period of the share awards. The fair values of share awards containing a market based performance condition have been determined using a Monte Carlo simulation based valuation model. The model takes into account the risk free interest rate, the current stock prices, expected volatilities and current dividend yields of the performance peer group used to determine ING’s Total Shareholder Return (TSR) ranking.
Result before tax from continuing operations 3,896 5,420 3,648 Weighted average statutory tax rate 32.0% 25.5% 23.9% Weighted average statutory tax amount 1,248 1,383 873
Unrealised revaluations –2,726 –873 –1,216 Realised gains/losses transferred to profit and loss (reclassifications from equity to profit and loss) 20 –291 8 Changes in cash flow hedge reserve –225 –373 –194 Transfer to insurance liabilities/DAC 912 847 719 Exchange rate differences –72 –39 8 Total income tax related to components of other comprehensive income –2,091 –729 –675 50 EARNINGS PER ORDINARY SHARE
Net result from discontinued operations 550 678 405 Net result from classification as discontinued operations –394 Net result from disposal of discontinued operations 752 995 Total net result from discontinued operations 908 1,673 405 3,796.1 3,783.7 3,781.5
Retail Banking Germany (previously part of ING Direct) is now a separate segment. The remainder of ING Direct is combined with Retail Central Europe and Retail Asia into one new segment Retail Rest of World. ING Real Estate is included in Commercial Banking.
The Executive Board of ING Groep N.V., the Management Board of ING Bank N.V., the Management Board of ING Insurance Eurasia N.V. and the Board of ING U.S., Inc. sets the performance targets, approve and monitor the budgets prepared by the business lines. Business lines formulate strategic, commercial and financial policy in conformity with the strategy and performance targets set by the Executive Board of ING Groep N.V., the Management Board of ING Bank N.V., the Management Board of ING Insurance Eurasia N.V. and the Board of ING U.S., Inc.
The accounting policies of the segments are the same as those described under Accounting policies for the consolidated annual accounts. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income, expenses and/or assets of the segment.
The following table specifies the main sources of income of each of the segments: Specification of the main sources of income of each of the segments Segment Main source of income
Segments ING Group total 2012 Total Banking Total Insurance Eliminations Total
Underlying income – Gross premium income 20,277 20,277 – Net interest result - banking operations 11,712 –85 11,626
– Other interest expenses 472 –147 326 – Additions to loan loss provision 2,122 2,122
Reconciliation between Underlying and IFRS-EU income, expenses and net result 2012 Income Expenses Net result
Divestments in 2012, includes the gain on sale of ING Direct Canada of EUR 1,135 million, the gain on sale of ING Direct USA of EUR 489 million and the loss of EUR 260 million related to the announced sale of ING Direct UK.
Underlying income – Gross premium income 20,279 20,279 – Net interest result - banking operations 11,975 –8 11,967
– Other interest expenses 531 –350 181 – Additions to loan loss provision 1,336 1,336
– Other interest expenses 519 –336 183 – Additions to loan loss provision 1,448 1,448
Special items –232 –13 –65 –30 –340 * Analysed as a part of operating expenses.
The operating result for the life insurance business is also broken down into expenses and the following sources of income: • Investment margin which includes the spread between investment income earned and interest credited to insurance liabilities (excluding market impacts but including dividends and coupons); • Fees and premium-based revenues which includes the portion of life insurance premiums available to cover expenses and profit, fees on deposits and fee income on assets under management (net of guaranteed benefit costs in the United States); • Technical margin which includes the margin between costs charged for benefits and incurred benefit costs and it includes mortality, morbidity and surrender results; and • Non-modelled which is not significant and includes parts of the business for which no margins are provided.
Fees and premium based revenues 593 430 1,188 100 824 3,135
Income non-modelled life business 20 20 Life & ING IM operating income 1,374 684 2,316 128 823 5,325
Divestments –9 –9 Special items –104 –77 –44 –8 11 –222 Net result (continuing operations) 562 –306 597 –1,052 119 –381 –461 Net result (discontinued operations) 678 Net result (disposal of discontinued operations) 995 Net result 1,212 212 ING Group Annual Report 2012
Fees and premium based revenues 578 501 1,060 121 741 3,002
Market & other impacts 24 –10 –177 –2,149 –2,311 Underlying result before tax 775 254 310 –2,075 126 –748 –1,358
Treasury bills and other eligible bills 518 2,611 4,441 Amounts due from/to banks 4,633 –4,505 3,227 Cash and balances with central banks 17,657 31,194 13,072 Cash and cash equivalents classified as Assets held for sale 1,342 4,980 28 Cash and cash equivalents at end of year 24,150 34,280 20,768
Mission and objectives 224 Risk governance 225 Business model and risk profile 228 Economic capital 231 Ongoing changes in the regulatory environment 233 Risk developments in 2012 233 Credit risk 234 Market risk 257 Liquidity risk 267 Non-financial risk 270 Business risk 273
The table below provides information on ING’s risk exposure with regard to Greece, Italy, Ireland, Portugal and Spain. Unless otherwise indicated, the amounts represent risk exposure values and exposures are included based on the country of residence of the direct Obligor to which ING has primary recourse of repayment of the obligations, except most RMBS, which exposures are based on country of risk. Cyprus is not included in the table below as the net credit risk linked to Cyprus is not material for ING Bank and ING Insurance/IM has no credit risk linked to Cyprus.
Greece, Italy, Ireland, Portugal and Spain - Total risk exposures (1)
Finance, which is reflected in Total Lending and Total Debt Securities. (4) Pre-settlement exposure is exposure to dealing room products such as options, swaps, and securities financing transactions. This exposure is based on the replacement value (Marked-To-Market) of each product plus potential future volatility.
Italy Total exposure to Italy decreased by EUR 1,985 million in 2012 mainly in the lending book by EUR 734 million to EUR 16,402 million and in debt securities by EUR 986 million to EUR 4,932 million.
Portugal Total exposure to Portugal declined by EUR 557 million in 2012 mainly in debt securities by EUR 555 million. The decrease was mainly in the ABS portfolio (EUR 252 million), government bonds (EUR 176 million) and financial institutions bonds (EUR 108 million).
Although ING Bank strives towards a reporting basis that is consistent over time, the risk management section is subject to enhancements and improvements. These are needed to reflect the continuous developments that take place in ING Bank’s risk function and on-going (macro-) economic developments that require additional disclosures. Also the continuing changes in the environment in which ING Bank operates like new regulations but also voluntary initiatives from the banks themselves need to be reflected. In October 2012, the Financial Stability Board (FSB) published the results of the ‘Enhanced Disclosure Task Force’ (EDTF). This taskforce consisted of a collaboration between users and preparers of financial reports, and the recommendations are therefore not only based on expertise from but also supported by global financial institutions (ING Bank included), investors, rating agencies and external auditors. The taskforce identified some fundamental principles for enhancing the bank’s risk disclosures and thereby contributing towards the further development of financial disclosures that communicate banks’ business models and the key risks arising from them.
As ING Bank’s risk disclosure has been striving to generate the same high-quality and transparent description of its risk, it embraces the EDTF principles and recommendations and used it to further fine-tune its practice on risk disclosures. ING Bank is of the opinion that disclosures should be clear, balanced and understandable by external observers, and that risk information is disclosed on a timely basis. The latter not only applies for the Annual Accounts and the risk management paragraph but also for the concurrent publication of the Pillar 3 section.
The risk management rection describes the ING Bank business model, and the key risks that arise from it. It also explains how the risk management function is embedded within the organisation based on the ‘three lines of defence’. This includes front office as ‘first line of defence’, risk management as independent observer in the ‘second line of defence’ and the internal audit function in the ‘third line’. The key risks resulting from the bank’s business model are managed by dedicated and specific risk management departments that each covers their own area of expertise. Each of these departments explains the respective governance framework, relevant risks and how they are expressed on a qualitative and quantitative basis within this report. Although ING Bank strives towards a reporting basis that is consistent over time, changes arise due to new regulations and on-going (macro-) economic developments that require additional disclosures.
With respect to comparability of risk disclosures, it is important to note that since the start of the financial crisis there has been much debate on the risk-weighted capitalisation of banks, and in specific whether internal models are appropriate for such purposes. ING Bank is of the opinion that internal models are very valuable since they better represent the bank’s business model, its customers and its credit quality than a standardised approach. However, we also acknowledge that interpretations between banks and also between regulators may differ. This stresses the importance of having a level playing field via a uniform banking supervision within the EU, but also includes improving and aligning risk disclosures as proposed by the EDTF as much as possible. To reflect this importance, ING Bank aligned its Risk Weighted Assets (RWA) disclosure as much as possible with the EDTF set-up to present RWAs on a detailed and granular level, and to make our risk profile more comparable with peers.
The results of all these improvements can be found within the below described sections that describe qualitative and quantitative elements of ING Bank’s risk practice. The set-up of the risk disclosure is as follows: • Mission and objective of ING Bank’s risk management. This is followed by a description of our risk governance where ING Bank’s risk culture is described – including how risk is embedded throughout the organisation based on the three lines of defence model. • ING Bank’s business model and the resulting key financial and non-financial risks. This section includes the functioning of our Risk
• Additional information on ING Bank’s credit portfolio, in terms of composition, credit quality and modelling approaches, can be found in the Pillar 3 section.
Risk management benefits ING Bank and its stakeholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital is reduced by working closely with rating agencies and regulators to align capital requirements to risks. Risk Management helps business units to lower funding costs, make use of the latest risk management tools and skills, and lower strategic risk. This enables them to focus on their customers with excellent service, fair and transparent products and pricing. Thus maintaining a loyal customer base and a leadership position in our key markets and product franchises.
Risk policies ING Bank has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to define minimum requirements that are binding to all business units. The governance framework of the business units aligns with the Bank’s level framework and meets local (regulatory) requirements. Senior management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and emerging best practices.
Financial risks: • Credit risk: the risk of potential loss due to default by ING Bank’s debtors (including bond issuers) or trading counterparties; • Market risk: the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, equity, real estate, implied volatility, credit spread, and foreign exchange risks; • Liquidity risk: the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; and • Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as customer behaviour risk. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency, and as such strategic risk is included in business risk.
Risk Appetite Framework ING Bank uses an integrated risk management approach for its banking activities. The Management Board Bank (MBB) uses the bank risk appetite framework both to set boundaries for the budget process (MTP) monitor and manage the actual risk profile in relation to the risk appetite.
Non-financial risks To ensure robust non-financial risk management, ING Bank monitors the implementation of ING Bank’s Risk Policies and Minimum Standards. Business units have to demonstrate that the appropriate steps have been taken to control their operational, compliance and legal risks. ING Bank applies Key Control testing scorecards to measure the quality of the internal controls within a business unit, which are based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
The non-financial risk appetite framework that is described under the previous step is cascaded down within the organisation without any need to make specific adjustments for each of the reporting solo entity.
Step 4. Monitoring and management of underlying risk limits In order to verify that it remains within the risk appetite framework as it is executing its budget, ING reports monthly through regular reporting towards senior management committees as ALCO Bank. The Risk Management Report reflecting the exposure of ING Bank against the Risk Appetite targets is submitted to the MBB and to the (Risk Committee of the) Supervisory Board.
Stress testing Stress testing is a key tool of risk management that involves consideration of the impact of adverse movements in one or more risk factors. Its importance and awareness has been substantially increased as a result of the recent financial crisis. For ING Bank, stress testing evaluates the bank’s financial stability under severe but plausible stress scenarios and assists in decision-making that assures that the bank remains a financially-healthy on-going concern after a severe event occurs. Stress testing is used to understand what happens to ING Bank’s ability to meet its external and internal capital as well as liquidity requirements, if external conditions change for the worse over a period of time and is expressed in increased RWA, risk costs and losses. The scope of stress testing can include the whole balance sheet of ING Bank, but it can also be used to analyse the potential impact on certain asset classes or certain activities. Stress testing helps ensure the risks we take remain within our Risk Appetite, and is a key component of our capital management and internal capital adequacy assessment processes (ICAAP). Stress testing outcomes are regularly reviewed by senior management, including the Finance & Risk Committee.
ING Bank regularly performs ad-hoc stress testing which has become a very important risk management tool during the past couple of years. Although stress testing is not formally part of the Bank Risk Appetite Statements, it is an integral part of ING Bank’s risk management practice. Bank-wide stress tests are conducted under the governance of the Stress Test 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 ensures a solid stress test process and submits the stress test results to the Finance & Risk Committee for formal approval.
Internal stress testing Our internal stress testing program utilises stress scenarios featuring a range of severities based on exceptional, but plausible adverse market and economic events. These stress scenarios are evaluated across the organisation, and results are integrated to develop an enterprise-wide view of the impacts on our financial results and capital requirements. This program uses situation specific macroeconomic projections that are then transformed into stress impacts on various types of risk across the organisation. Our evaluations indicate whether the resulting capital and financial impacts of these stress scenarios are within our ability to manage.
ECONOMIC CAPITAL Model Disclosure This model disclosure section explains the methodologies and models used to determine Economic Capital (EC) the disclosed metrics. The risk models for the EC calculations are reviewed on a periodic basis and validated by the internal Model Validation department. The Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the Dutch Central Bank.
The Economic Capital for ING Bank involves the aggregation of the underlying EC of five risk types, namely credit, transfer, market, operational and business risks. Model disclosures are given in the respective risk sections. These risk types are aggregated to provide a total diversified ING Bank Economic Capital by applying the variance-covariance approach with a 5 x 5 inter-risk correlation matrix.
(1) Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by Capital Management.
RC no diversification is taken into account. • The credit risk EC is lower than RC due to the fact that Economic Capital (EC) is defined as ING’s own methodology for credit risk. It is the amount of capital that is needed at a minimum to cover for Unexpected Losses within a certain confidence level and a certain time horizon. Further credit risk EC includes transfer risk while RC does not; • The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking books in Economic Capital. The market risk RC includes a stressed VaR charge, while EC does not; the EC figures take the diversification across risk types into account; • The EC figures include Business risk, while RC does not; • The operational risk Economic Capital is lower than the Regulatory Capital mainly due to the application of inter-risk diversification, whilst Regulatory Capital does not encompass inter-risk diversification; and • A 99.95% confidence level is used for EC, while the confidence level is 99.9% for RC. Correcting for the difference in confidence level will lead to an EC figure that is lower than the RC figure.
Recovery and Resolution plans As a consequence of the global financial crisis ING Bank has set up an all-encompassing recovery planning process to enhance the bank’s readiness and decisiveness to tackle financial crises on its own strength. Furthermore in the course of 2012, DNB has requested ING Bank to prepare and submit information on the basis of which the Dutch Resolution Authorities will be able to develop a Resolution Plan. ING is diligently working towards providing this information and meeting the deadlines provided by DNB.
Credit risk management has evolved into a multifactorial discipline and CRM has a responsibility to ensure a common understanding of the contribution of credit risk to ING Bank’s strategy and the diverse aspects of credit risk throughout ING Bank. To accommodate this CRM actively involves stakeholders from the business and other risk departments, but in addition CRM promotes assignments and exchange of employees to facilitate a shared understanding and create an environment of co-operation. CRM informs the ING Bank community about new developments and insights in multiple manners, ranging from presentations, workshops and news alerts.
CRM uses risk categories to differentiate between the different types of credit risk exposures. All products within ING Bank are aggregated to one of the following risk categories: • Pre-settlement risk: arises when a counterparty defaults on a transaction before settlement and ING Bank has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING Bank replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using a 3-7 year historical time horizon and a 97.5% confidence level.
Within ING Bank, the ultimate authority to set the risk appetite and approve or decline credit proposals resides with the executive board. The executive board has further delegated authorities, based on amounts and tenors to lower levels of the organisation. Transactions are approved via a dual signatory approval system that requires an individual sign off from both front office and credit risk management. For larger and higher risk credits a committee structure exists whereby the credit risk chair takes the final decision with support of the respective committee members, thereby ensuring accountability. Retail business units have delegated authority to decide within policies and mandates approved by CRM and any decisions outside those policies or above the delegated mandate require a specific credit risk approval.
M easu red th ro u g h vario u s m etrics: Exp ected
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.
Next to the periodical pre-determined stress test related to CRWA@Risk, CRM performs ad-hoc stress tests based on severe but plausible scenarios. These stress tests can be for internal purposes or at the request of the regulators and are input for future Credit Risk Appetite setting. Stress testing is used as an additional safety net within CRM. Through stress tests the impact of severe but plausible downturn scenarios are determined, which might not be captured in the regular rating models (Probability of Default, Loss Given Default and Exposure at Default). Therefore, next to the Pillar 1 and Pillar 2 capital calculations, based on the results of various stress test, ING Bank ensures that adequate levels of capital (and liquidity) are available to sustain such severe but plausible scenarios.
Risk Programs Within ING we distinguish between risk programs for retail lending and risk programs for commercial lending business.
The retail risk portfolio program is defined as a set of policies and processes, which are laid down to manage a retail risk portfolio within a predefined risk appetite statement. A retail risk portfolio is defined as a group of sufficiently homogeneous credit assets, where: • A consistent set of credit policies and processes for approving a high volume of counterparties and transactions could be applied, • Exposures could be pooled and managed through a set of standard policies and procedures over its entire life cycle. A risk appetite statement in the context of a retail risk portfolio program is a pre-defined set of minimum performance criteria required to be achieved for ING Bank business labels conducting retail risk portfolio program.
Reference Benchmarks A reference benchmark defines the maximum appetite for credit risk per counterparty group. It is expressed as an EAD Exposure at the concentration risk level, which corresponds to an (maximum) internal capital consumption for credit risk. It is used as a tool in the credit approval process.
Credit Approval Process The credit approval process ensures that individual transactions are assessed on a name-by-name basis. For each type of counterparty (corporate, banks/financial institution, structured products clients) there is a separate process. The line credit risk managers are organised along the business lines of ING Bank and are specialised in the relevant area of expertise. The credit approval process is supported by, amongst others, a credit approval system which ensures consistency and completeness; a risk rating (PD) system which contains all the risk rating models to ensure a proper rating is given to a counterparty and a limit and exposure monitoring system which subsequently feeds into the credit approval system. The rating model is used to indicate a counterparty’s creditworthiness, and to determine the maximum risk appetite that ING Bank may have for a given type of counterparty (reference benchmark). The determination of the delegated authority (the amount that can be approved at various levels of the organisation) also depends on the risk rating. ING Bank has a rating system with in total 22 grades (1=highest rating; 22=lowest rating) and are split in the following categories: • Investment grade (Risk Rating 1-10); • Non-investment grade (Risk Rating 11-17); • Problem Loan grade (Risk Rating 18-22); – Restructuring (Risk Rating 18-19) – Default (Risk Rating 20-22).
Risk based drivers, practice based drivers and regulatory environment can have a substantial impact on the regulatory capital/ RWA of a financial institution. These factors make it challenging to compare capital levels across banks. ING Bank continues to work with industry groups including EDTF to improve the transparent reporting of our capital calculations.
EC is calculated for all Sovereigns based on the economic PD, LGD, EAD and remaining maturity
CRWA for SA portfolios are based on Regulatory SA rules For SA and AIRB portfolios the same INCAP methodology apply
ING Bank also proposes several credit economic capital additions based on elements such as concentration and model risk. In 2012, EUR 4.2 billion of additional credit risk economic capital was proposed.
Additionally, ING Bank must also maintain a capital buffer against unexpected losses in order to protect itself against credit losses associated with unusual market events outside of the statistical norms.
There are three types of modelling which form the foundation of these PD, EAD and LGD models used throughout the bank. • Statistical models are created where a large set of default or detailed loss data is available. They are characterised by a sufficient number of data points that facilitate meaningful statistical estimation of the model parameters. The model parameters are estimated with statistical techniques based on the data set available.
• Hybrid models contain characteristics of both expert and statistical models.
Pre Settlement (PS) measurement models. For regulatory capital the Pre-Settlement (PS) exposure is calculated using a Marked to market (MtM) plus regulatory-based add-on tables. For internal capital purposes ING Bank uses two methodologies to calculate its Pre-Settlement (PS) exposures. Ideally, all parts of ING Bank would apply identical methodologies at all times. However, it is recognised that the ability to implement risk measurement methodologies is highly dependent on systems capabilities, and in certain cases the benefits of implementing a methodology may not be justified by the costs. Therefore more than one methodology is presently in use at ING Bank. • MtM plus model based add-on approach: In this approach, the PS risk is calculated as the sum between the MtM of the trade and the model-based Add-on. The MtM fluctuates through the life of the contract. The model-based Add-on is product-specific, and takes into account remaining time to maturity, profiling per time-buckets etc. Add-ons are updated with a frequency that takes into account the major market changes. This methodology is used for pre-deal exposure assessment of all ING Bank financial markets products and for post-deal risk calculations for financial markets portfolios for which computational efforts and costs associated with implementation of Scenario Simulation approach are not justifiable; • Scenario Simulation approach (Monte Carlo approach): Scenario Simulation approach is the most complex of the methods for PS risk calculations. This approach is the only approach that fully takes into account the daily market conditions, including correlations between the risk factors and portfolio benefits. This approach is also referred to as Monte Carlo (MC) approach and is currently used for the largest volume of derivative products such as FX and interest rate derivatives. ING Bank is in the process of implementing this approach for more products. The monitoring of the PS exposures and the limit setting for the products within the scope of the MC approach are based on the exposures resulting from the MC approach, the pre-deal check exposure assessment is based on the MtM plus model add-on approach.
Credit risk rating process In principle all risk ratings are based on a Risk Rating (PD) Model that complies with the minimum requirements detailed in the CRD, the DNB Supervisory Rules and EBA guidelines. This concerns all counterparty types and segments, including countries.
ING Bank as Originator ING Bank originates own securitisation transactions for economic and regulatory capital purposes, as well as liquidity and funding purposes. Securitisations originated by a company may only be considered for balance sheet de-recognition when the requirements for significant credit risk transfer have been fulfilled. However, for a securitisation transaction to be recognised as for RWA reduction, risk transfer alone may be insufficient due to the increasing impact of the maturity mismatch formula. As a consequence, the RWA of the retained tranches for one of the transactions would be higher than the total RWA of the underlying pool before securitisation. In such cases the RWA calculation for the transaction is performed as if it was not securitised.
The Financial Statements module provides the user with the ability not only to register a company’s financial statements in a common (IFRS-based) format, but also to project the company’s future financial position as a result of the transactions contemplated. This allows the common view on the company’s financial status to be communicated throughout ING and to form a consistent basis on decision making processes relying on financial information. This data is then aggregated and presented on the (read-only) browser-based Financial Statements component of STARpro. Financial Statements data is automatically forwarded to Risk Rater, where it is incorporated into one of the various probability of default rating models. Risk Rater contains two kinds of rating models: • Automated, whereby the data for a large number of counterparties is automatically processed from the source systems on a periodic
(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 subjective questions in order to create a rating.
The relative shifts in rating classes 1 and 17 – 22 for Corporate Line are the results of the run off of certain ING securitisation programs and the inclusion of parts of the ING Direct ALT-A portfolio in the Corporate Line after the sale of ING Direct US, respectively. On a total portfolio level, in absolute numbers, these changes are negligible.
(1) Geographic areas are organisation based and for private individuals based on country of residence.
As part of its securities financing business, ING Bank entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements, and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Bank held as collateral under these types of agreements was EUR 88.4 billion at 31 December 2012 and EUR 74.0 billion at 31 December 2011. Overall open securities financing trades showed a small increase at year end 2012 compared to year end 2011. These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the underlying is not directly pledged to or owned by ING Bank). As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or repledged in other (similar) transactions. ING Bank is obliged to return equivalent securities in such cases.
The following table shows the regulatory credit risk exposures at default and cover values per line of business: Retail Banking (comprising both Benelux, Direct & International) and Commercial Banking. Exposures for Retail Banking are reported for the most relevant retail product being Residential Mortgages while the remaining regulatory exposures at default are classified as Retail SME Retail.
In 2012, ING Bank changed the way it allocated guarantees at the request of DNB. The goal was to ensure that no guaranteed risk weight is lower than the risk weight of the guarantor on an unsecured basis. In order to ensure this calculation, ING removed two conservative cover allocation methods related to guarantees. Previously, guarantees were allocated by borrower group instead of facility and a maximum of 100% of the facility was used for guarantees. These two elements have been eliminated in 2012. In addition, ING Lease has begun classifying certain purchase obligations as guarantees. The net effect of these changes is that the amount of guarantees in 2012 is not directly comparable with the 2011 level.
Therefore, the figures shown in the table should not be used for netting calculation purposes.
When available, indexation is applied to re-evaluate the collateral to the present value. In the LTV calculation the following property covers are included: residential and industrial/commercial properties, land and applicable other fixed assets. All other covers are excluded.
Retail Residential Mortgages Performing Assets 11,334 10,528 26,216 25,342 Residential Mortgages Problems Assets 26 16 93 106 * Regulatory Exposure At Default based on Basel II Accord ** Based on original cover value
Forbearance Forbearance activities are activities that are employed in order to maximise collection opportunities and, if possible, avoid default, foreclosure or repossession. Such arrangements include extended payment terms, a reduction in interest and/or principal repayments, approved external debt management plans, debt consolidations, the deferral of foreclosures and other modifications. Forbearance may be an effective measure to avoid default, foreclosure or repossession, but there remains a risk that default, foreclosure or repossession may still occur, despite forbearance being offered.
ING Bank does not have a wide spread forbearance practice leading to financial losses in its business units. Most of the renegotiated loans are typically not impaired – which is valid for all loans where the renegotiated terms are (still) based on current market rates and contractual agreed cash flows are expected to be collected in full during the life of the loan. Modifications of loans which do not affect payment agreements, such as restructuring in relation to loan elements including collateral, structure and (waivers of) covenant rights, are not seen as sufficient indicators of impairment in themselves.
In Retail Banking, the (re)modified loans are segregated from the other parts of the loan portfolio for collective impairment assessment to reflect the possibility of higher losses in this segment and to recognise the financial loss that already has occurred – e.g. the contractual agreed interest rate reduction for a period of time. The applicable Model PD’s and LGD’s for these loan portfolios are – also on a quarterly basis - monitored whether they still reflect the historical and also latest loss observations – and will be adjusted when this is no longer the case.
• Corporate Banking: Troubled Debt Restructuring (risk rating 20) • Corporate Banking: Fair Value Adjustment (risk rating better than 20) • Retail Banking: (re)Modified Loans to Private Individuals (mostly Mortgages)
Corporate Banking: Troubled Debt Restructurings The total portfolio of loans classified as TDR amounted to EUR 1.2billion in 2012.
Romania Consumer Lending & Mortgages 5 12 316 566 Poland Consumer Lending & Mortgages 2 1 327 173
Impaired loans The credit portfolio is under constant review. Generally, all loans with past due financial obligations of more than 90 days are automatically reclassified as impaired. For the wholesale lending portfolios and securities obligations, there are generally reasons for declaring a loan impaired prior to being 90 days past due. These include, but are not limited to, ING Bank’s assessment of the customer’s perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the impaired category. ING Bank identifies as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
• Individually Not Significant Financial Asset (INSFA) Provisions: are made for acknowledged problem loans (ratings 20-22) that are below the threshold amount. Due to their small size, the IFRS-EU rules permit a statistical approach to measuring these provisions. Therefore, the calculation is based on the same statistical formula that is used to determine IBNR Provisions and is also calculated centrally using a common tool across ING Bank.
A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the ING Provisioning Committee (IPC) Bank, which advises the Management Banking Board on specific provisioning levels.
(1) The 2011 figures are excluding ING Direct USA. The 2012 figures are excluding ING Direct UK held for sale.
The economic distress had its impact on the development of the risk costs in 2012. Since 4Q11, risk costs have remained at elevated levels.
Credit Covers Problem Assets The table hereunder shows the cover values per credit risk category classified based on Retail and Commercial Banking products. In the ING Bank master scale which ranges from 1 being the best rating to 22 being the worst rating, Problem Assets are the Assets with ratings in the range 20–22. All other are called Performing Assets and are shown in the table below.
Central Governments and Central Banks 1 1 Total Commercial 9,912 8,278 8,816 6,198 4,627 3,320 353 485 1,131 401 2,704 1,990 * Regulatory Exposure At Default based on Basel II Accord.
** Excluding intercompany positions. *** Guarantees received can be additional to pledges and not necessarily replace collaterals. **** The used valuations methods for the underlying collaterals may vary per collateral. ***** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers.
Please see above analysis regarding collateral and other covers for analysis.
MARKET RISK Market risk is the risk that movements in market variables, such as interest rates, equity prices, foreign exchange rates, credit spreads and real estate prices, negatively impact the bank’s earnings, market value or liquidity position. Market risk either arises through positions in trading books or through the banking (non-trading) book positions. The trading positions are typically held short-term, while the banking book positions are intended to be held in the long-term (or until maturity) or for the purpose of hedging other banking book positions.
Model Disclosure: Economic Capital for Market Risk Economic Capital for market risk is the Economic Capital necessary to withstand unexpected value movements due to changes in market variables. Economic Capital for market risk is calculated for exposures both in trading portfolios and non-trading portfolios and includes real estate risk, foreign exchange rate risk, equity price risk, interest rate risk and model risks. Economic capital for market risk is calculated using internally developed methodologies with a 99.95% confidence interval and a horizon of one year, which represents extreme events and ING’s target rating.
Economic and Regulatory Capital (Bank diversified only) by risk type Economic Capital (1) Regulatory Capital
With respect to the trading portfolios, MRM focuses on the management of market risks of Commercial Banking (mainly Financial Markets) as this is the only business line where trading activities take place. Trading activities include facilitation of client business, market making and proprietary position taking in cash and derivatives markets. MRM is responsible for the development and implementation of trading risk policies and risk measurement methodologies, the reporting and monitoring of risk exposures against approved trading limits and the validation of pricing models. MRM also reviews trading mandates and limits, and performs the gatekeeper role in the product review process. The management of trading market risk is performed at various organisational levels, from MRM overall down to specific business areas and trading offices.
In this context, a global and local parameter committee have been set up. Finance, Market Risk Management Product Control and Front Office are represented in these committees and discuss numerous topics regarding the product valuation and decide on the outcome of price testing as well as valuation adjustments.
Reference is made to Note 30 ‘Fair value of financial assets and liabilities’ for the basis of the determination of the fair values of the financial instruments and related sensitivities.
Basel 2.5 / CRD III As of 31 December 2011 the Basel requirements on Stressed VaR and the Incremental Risk Charge (Basel 2.5) have come into force in European legislation (CRD III), complementing the use of VaR. ING follows this framework for its regulatory capital calculations since Q4 2011.
Stressed VaR The Stressed VaR (SVaR) is intended to replicate a VaR calculation that would be generated on the bank’s current portfolio with inputs calibrated to the historical data from a continuous 12-month period of significant financial stress relevant to the bank’s portfolio. To calculate SVaR, ING Bank uses the same model that is used for VaR (historical simulation). The historical data period used includes the height of the credit crisis around the fall of Lehman brothers, and is reviewed regularly.
The liquidity horizon has been set to the regulatory minimum of three months for all positions in scope. Given the types of products in ING Bank’s trading portfolio ING considers this horizon to be conservative. We have demonstrated that ING Bank could still actively trade its positions that are significant for IRC under stressed market circumstances, allowing ING Bank to fully redeem its positions within three months.
Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Dec 12
Regulatory Capital According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach or an internal model approach. ING Bank received approval from the DNB to use an internal Value-at-Risk (VAR) model to determine the regulatory capital for the market risk in most trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the Basel 2.5 framework, using an internal Value at Risk (VaR), Stressed VaR (SVaR) and Incremental Risk Charge (IRC) model, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using standardised fixed risk weights. In 2012, capital on all trading books is performed under the Internal Model Approach, except for securitisations which are calculated under the Standardised Approach. Mismatches in FX risk from the banking books are also incorporated under the Standardised Approach.
Incremental Risk Charge 360 437 Total Internal Model Approach 744 1,090
Interest Rate (BPV (1)) Interest Rate (BPV (1)) United States –124 Eurozone 482 South Korea –122 Mexico –98 Russia –84 South Korea –82 Taiwan 80 Czech Republic 76 Eurozone 64 Russia –71
Credit Spread (CSO1 (2)) Credit Spread (CSO1 (2)) Finland –278 Germany –903 Korea –192 Netherlands 774 Netherlands 126 Korea –231 Russia –119 Mexico –226 Norway –100 Finland –125
(1) Basis Point Value (BPV) measures the impact on value of a 1 basis point increase in interest rates or credit spreads. (2) Credit Spread Sensitivity (CS01) measures the impact on value of a 1 basis point increase in credit spreads. (3) 2011 Interest Rate BPV figures are restated due to the exclusion of CAD3 books formerly under the trading governance.
Market risk in Banking Books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in banking books can originate from the market risks inherent in commercial products that are sold to clients. Both the commercial products, and the products used to hedge market risk exposures in these products are intended to be held until maturity, or at least for the long-term. ING Bank distinguishes the following types of market risk in banking books: • Interest Rate Risk; • Foreign Exchange (FX) Risk; • Equity Price Risk; and • Real Estate Price Risk.
FX, Interest and Liquity Risk Equity and Structural FX Risks 263ING Group Annual Report 2012 1 W h o w e are 2 R
Risk Profile In the following sections, the interest rate risk exposures in the banking books are presented. Previous year figures have been adjusted to include all banking book exposures. ING Bank uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-at-Risk and Basis Point Value (BPV) figures provide the value perspective.
Earnings Sensitivity (ES) ES measures the impact of changing interest rates on (pre-tax) IFRS-EU earnings. The ES figures in the table below reflect an instantaneous shock up of 1% and a time horizon of one year. Management interventions are not incorporated in these calculations.
NPV-at-Risk increased during 2012. An overall increase of 104 million is shown. This results on one hand from an increase in the duration of the investment of capital as a result of a larger capital base and the lower interest rate environment. Furthermore, in the on-going Eurozone crisis, savings are expected to more closely track the development in market rates, resulting in lower liability durations and therefore lower (positive) NPV-at-Risk for savings exposures, specifically in Germany.
By currency Euro –18,824 –16,127 US Dollar –656 –848 Pound Sterling 382 –164 Other 1 –230 Total –19,097 –17,369
In line with the increase in NPV-at-Risk, the overall bpv increased with EUR 1.7 million. As for NPV-at-Risk this results from the increase in the duration of the investment of capital and the higher tracking rate between the client savings rates and market rates.
In order to measure the remaining sensitivity of the target core Tier 1 ratio against FX rate fluctuations, the core Tier 1 ratio at Risk (cTaR) measure is used. It measures the drop in the core Tier 1 ratio from the target when stressing a certain FX rate. The stress scenarios for the FX rates that are used for calculating the cTaR, are presented in the last two columns. Only the scenarios that negatively impact the target core Tier 1 ratio are presented: depending on whether the actual foreign currency position is above or below the target position, the worst case scenario is either a negative or positive movement. A positive stress scenario means that the foreign currency appreciates against the Euro. For the US dollar this means that at the end of 2012 the target core Tier 1 ratio would decrease by 0.08% in absolute terms (e.g. from 10.08% to 10.00%) if the US dollar appreciates by 15%. Back testing shows that the strategy was effective in 2012; the core Tier 1 ratio was hardly affected by changing FX rates.
Equity price risk in banking books Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments whose value reacts similarly to a particular security, a defined basket of securities, or a securities index. ING Bank maintains a strategic portfolio with substantial equity exposure in its banking books. This equity exposure mainly consists of the investments in associates of EUR 841 million (2011: EUR 827 million) and equity securities held in the available-for-sale (AFS) portfolio of EUR 2,634 million (2011: EUR 2,466 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised (except in the case of impairment) in the revaluation reserve. During the year ended 31 December 2012 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a monthend low amount of EUR 1,082 million (2011: EUR 1,226 million) and a high amount of EUR 1,643 million (2011: EUR 1,706 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
Governance As with other bank market risks, liquidity risk falls under the supervision of the ALCO function within ING Bank, with ALCO Bank as the highest approval authority. ALCO Bank determines the liquidity risk (limit) framework and appetite after which this is cascaded down in the organisation under the responsibility of the regional and local ALCOs. The main objective of ING Bank’s liquidity risk framework is to ascertain – by means of proper risk appetite limits – that sufficient liquidity is maintained in order to ensure safe and sound operations under a variety of circumstances.
In line with market practice and regulatory guidance, ING Bank’s liquidity risk framework is a reflection of a multi-tiered approach, whereby risk principles are implemented, monitored and controlled in conjunction with both first and second line functions within the Bank. In line with this approach liquidity risk is measured, managed and controlled from three different angles, namely a structural, a tactical and a contingency point of view.
Liquidity Risk Management MRM is responsible for determining adequate policies and procedures for managing liquidity risk and for monitoring the compliance with these guidelines.
Risk framework In 2012, in continuation of the development of an enhanced liquidity risk framework in 2011, activities were undertaken in order to further implement and embed the liquidity risk framework in the organisation, in line with CRD II and ILAAP regulatory requirements.
For the purpose of managing structural liquidity risk, a specific advisory committee to ALCO Bank exists. This committee which consists of key representatives from Bank Treasury, Finance, MRM and Capital Management focuses on all liquidity risk aspects from a going concern perspective. The main objective of the committee is to maintain a sound liquidity profile through: • Maintaining a well-diversified mix of funding sources in terms of instrument types (e.g. unsecured deposits, commercial paper, long term bonds or repurchase agreements), fund providers (e.g. professional money market players, wholesale and retail clients), geographic markets and currencies; the structural mismatch in expected liquidity tenors of ING Bank’s assets and liabilities per significant currency is capped. Funding concentrations are monitored monthly by ALCO Bank; • Actively managing access to the capital markets by regularly issuing public debt in all material markets and the maintenance of investor relations; • Holding a broad portfolio of eligible assets that can be utilised to obtain secured funding, e.g. from the repo market or Central Bank; in this respect the total marketable/Central Bank eligible collateral position (including cash) amounts to EUR 199 billion (MtM); 268 ING Group Annual Report 2012
Funding type Retail deposits 45% 42% Corporate & other deposits 22% 20% Interbank (incl. central bank) 6% 9% Lending/repurchase agreement 3% 7% Public debt 21% 19% Subordinated debt 3% 3%
Tactical liquidity risk Liquidity risk which is resulting from short-term cash and collateral positions is managed in the risk framework from a tactical liquidity risk perspective. The day-to-day management of the overall short-term liquidity risk of ING Bank is delegated to Bank Treasury Amsterdam, while regional and local Bank Treasury departments manage liquidity in their respective regions and locations. Within Bank Treasury, the focus is on the daily and intraday cash and collateral positions and the policy is to manage and sufficiently spread day-to-day funding requirements.
On ad-hoc basis ING Bank has performed additional stress tests related to the funding and liquidity position. Overall stress testing is an integral part of the liquidity and funding risk management framework and serves as input for the risk appetite statements as well as for the contingency funding plan.
Compliance Risk Compliance risk is defined as the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards and the ING Bank Business Principles. In addition to reputational damage, failure to effectively manage compliance risks could expose ING Bank to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff, shareholders and other shareholders of ING. Clear and practical policies and procedures are embedded in ING Bank business processes in all Business Lines. Systems are in place to enable management to track current and emerging compliance risk issues, to communicate these to internal and external stakeholders, and to drive continuous improvement. ING Bank appreciates that good compliance risk management involves understanding and delivering on the expectations of customers, staff, shareholders and other stakeholders, thereby strengthening the quality of key relationships.
ING Bank uses a functional approach to ensure systematic and consistent implementation of the Bank-wide Charter & Framework, policies, Minimum Standards and related procedures. The Local Compliance Officer has the responsibility to assist local management in managing local Compliance Risk. The Regional or Universal Bank Compliance Officer has a management and supervisory role over all functional activities of the Compliance Officers in the respective region or Universal Bank. The CCO and the Bank Compliance Risk Management Team provide overall direction to the Regional or Universal Bank Compliance Officers.
ING Bank categorises compliance risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as financial conduct. ING Bank has a Whistleblower Procedure which encourages staff to speak up if they know or suspect a breach of external regulations, internal policies or Business Principles.
ING is fully committed to complying with all applicable sanction legislation and with all obligations and requirements under those applicable laws including freezing and reporting obligations with regard to transactions involving a US, EU or UN Sanction Targets. In addition ING designates specific countries as Ultra High Risk and prohibits client engagements and transactions (including payments or facilitation) involving those countries. Certain exceptions on this policy are allowed after express and case-specific consent, and provided that the applicable sanctions laws and regulations are met. At present, the specified countries are Myanmar, North Korea, Sudan (North Sudan and South Sudan), Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, US and other sanctions regimes. Cuba, Iran, Sudan, and Syria are identified by the US as state sponsors of terrorism and are subject to US economic sanctions and export controls.
Furthermore ING has an on-going objective to continuously strengthen the Financial Economic Crime (FEC) controls related to: Managing Anti-Money Laundering (AML), Combat Terrorist Financing (CTF); and Export Trade and Sanction risks. Hence ING implemented Policies on Financial Economic Crime that provide a clear statement on Financial Economic Crime in order to guard against any involvement in criminal activity, and to participate in international efforts to combat money laundering and the funding of terrorist and criminal activities.
Promoting Integrity Programme Bank Compliance Risk Management, together with Human Resources and Corporate Communications & Affairs, continued with the roll-out of the Promoting Integrity Programme (PIP), a global employee education programme focusing on ING Bank’s values (including the ING Bank Business Principles) and the role they play in the business and workplace. Short e-modules were developed on Financial Economic Crime, Information Technology, Business Continuity and Gifts, Entertainment and Anti-Bribery, and were followed by managerled dialogue sessions, where employees discussed what integrity means for them and how the Business Principles and ING Bank Policies and standards can be applied in their daily work.
Gifts, Entertainment and Anti-Bribery Policy ING Bank issued a revised Gifts, Entertainment and Anti-Bribery Policy to reinforce its importance, taking into account the changing regulatory landscape (e.g. recent interpretations of the US Foreign Corrupt practices Act) as well as the associated increase of focus by regulators and other interested parties on this topic. Guidance documents, briefings and training were also developed to ensure the appropriate level of understanding across the business.
Learning Continuous global education and awareness training was provided in face to face sessions and e-learn modules and new resources on topics such as Continuity Risk (covering business continuity, crisis management and disaster recovery), Gifts, Entertainment and AntiBribery, FEC (Financial and Economic Crime and Customer Suitability were added to the library. Compliance Risk Management also continued its mandatory global Compliance Officer Training programme for all new compliance officers in ING Bank.
ING’s approach to risk management is facilitated by a risk appetite framework that establishes the risks the company wishes to acquire, avoid, retain and/or remove in its pursuit of its strategic objectives. The risk appetite framework combined with the risk measurement framework is the basis for our day to day risk management execution. Business units report regularly on their risk profile.
Board level risk oversight ING Insurance EurAsia has a two-tier board structure consisting of the MBE, including the Executive Board members of ING Group and the Supervisory Board Insurance EurAsia.
Risk Management Function The CRO bears primary and overall responsibility for the risk management function within ING Insurance EurAsia, which identifies, measures, monitors and reports risk within ING Insurance EurAsia. The risk function maintains and updates the policy framework, develops risk methodologies and advises on the risk tolerance and risk profile. The CRO assures that both the Supervisory Board and MBE are well informed and understand the material risks within ING Insurance EurAsia at all times.
Product Approval and Review Process A critical aspect of risk management is that all products are designed, underwritten and priced effectively. Within ING Insurance EurAsia this is safeguarded by the Product Approval and Review Process (PARP). This standard includes requirements to risk profile, value-oriented pricing metrics, targets and documentation. The PARP includes requirements to assess market risks, credit risk, insurance risk, compliance risk, legal risk, operational risk as well as the assessment of the administration and accounting aspects of the product. Requirements with respect to the customer suitability of insurance products are an integral part of the PARP.