We’re all busier than ever before. The pace of change is increasing. This creates challenges for people but also offers new opportunities to serve them better. New trends are re-defining the customer experience. As leaders in digital banking, we are stepping up our own transformation to ensure we stay relevant to customers in this changing environment. Now is the time to accelerate.
• the Corporate Governance section detailing the activities of ING’s Supervisory Board and various corporate governance issues.
Facts and key figures 2 CEO statement 5 The world around us 8 Our strategy and how we create value 19 Retail Banking 28 Wholesale Banking 36 People 45 Improving the customer experience 50 Risk and capital management 54 Composition of the Executive Board and Management Board Banking 62 ING shares 63 About this report 66 Assurance report of the independent auditor 68
Independent auditor’s report 337 Articles of Association – Appropriation of results 344 Risk factors 345 Additional Pillar III information 366 Non-financial appendix 426 Non-GAAP measures 444 Glossary 445 General information 456
We are a global financial institution with a strong European base offering banking services. Our customers are at the heart of what we do.
• Capital base strengthened, with ING Group’s CET1 ratio rising to a robust 14.2% at year-end 2016; underlying return on equity rose to 10.1%.
Our brand value Number 27 most valuable bank brand in the world ((EUR 7.7 billion, 1 January 2017). 1 1 Source: Brand Finance plc, February 2017. The valuation date is each year on the 1st of January.
Consolidated result 2 in EUR million 2016 2015 2014 Net result attributable to ING Group's shareholders 4,651 4,010 1,251 Underlying net result Banking 4,976 4,219 3,424 Underlying result before taxation Banking 7,028 5,959 4,724 of which underlying income 17,458 16,552 15,296 of which underlying operating expenses 9,456 9,246 8,979 of which underlying addition to loan loss provision 974 1,347 1,594
Effective underlying tax rate (in %) Banking 28.1 28.0 25.8 Risk-weighted assets ING Bank (EUR billion, year-end) 312 318 296 Underlying risk costs in bps of average RWA 31 44 55
Net Promoter Score Retail Banking (number of countries with number one ranking, rolling average) 7 7 9 Total number of Retail Banking primary relationships (in million, as of year-end) 9.7 9.0 8.4 Sustainable transitions financed (in EUR billion, as of year-end) 7 34.3 23.8 19.5 Sustainable assets under management (in EUR million, as of year-end) 3,306 2,573 1,538 Number of customers that felt financially empowered (in million, as of year-end) 23.9 20.5 Total extrapolated CO2e emissions (in kilotonne) 74 94 101 Human Capital Return on Investment indicator 2.59 2.48 2.30 System availability in the Netherlands and Belgium (in percentage) 99.75 99.6 99.3 1 The leverage ratio of ING Bank/ING Group according to the Delegated Act (including grandfathered securities) takes into account the impact of grossing up the notional cash pool activities. 2 For further explanation of non-GAAP measures, see ‘‘Additional Information” section of the Annual Accounts, page 345. 3 ING changed its accounting policy for the netting of cash pooling arrangements in 2Q 2016. In accordance with IFRS, the comparable amounts were adjusted. 4 Customer lending is defined as: loans & advances to customers -/- securities at amortised costs -/- provision for loan losses. 5 The comparable cash pool balances in Customer lending and Customer deposits are still presented on a net basis in order to provide consistent information. 6 Based on the share price at year-end and the earnings per ordinary share for the financial year.
Our customer centric focus helped us achieve a first place ranking in seven countries, compared with two or more selected local peers. NPS surveys were held in 13 countries with retail banking activities.
We measure and report on our human capital investments to ensure we do the right things to support our employees’ performance. The Human Capital Return on Investment indicator helps us identify the influence of HR inputs on the organisation’s productivity. This ratio of profitability divided by employee costs was 2.59 in 2016, up from 2.48 in 2015.
It is a compliment to our staff that their hard work and focus on helping our customers has received important external recognition. This included ING being cited by The Banker as 2016’s Best Global Bank, Best Bank in Western Europe, Best Bank Netherlands and Best Bank Belgium.
These included the development of more tools that make financial planning and decision-making easier. My Money Coach, launched last year by ING in Spain, is a free digital adviser that helps customers create a personalised plan to achieve their savings, investment and retirement goals. Similar tools are part of our offering or are being developed in Belgium, France, the Netherlands and Poland.
We also introduced new tools to improve the customer experience on mobile devices, which are fast becoming the main interface between us and our customers. One of these was Kijk Vooruit (“Look Ahead”), a mobile app feature in the Netherlands. It helps improve customers’ grip on their daily finances by giving them insights into future planned and predicted transactions. And we continued to develop instant lending platforms for both consumer and SME lending, two priority areas to diversify lending.
In Wholesale Banking, we expanded the reach of InsideBusiness, our digital, cross-border banking platform. It gives clients real-time insights and a single point of access to manage financial transactions from any device. The platform is now available to clients in 17 countries. We plan to complete its global roll-out by the end of 2017. We aim for Inside Business to become an all-in-one business banking platform for clients’ needs.
Accelerating Think Forward With our Think Forward strategy we have been able to successfully respond to changing customer needs. This has been helped by our focus on innovation and its role in our business as a driver for improving the customer experience.
Though we will still be operating several platforms, all new elements of these platforms will be built to meet the requirements of the future single platform. This will give us efficiencies of scale and speed up our pace of innovation by allowing us to rapidly share new products and services. These steps will make it possible to deliver a superior customer experience, enhanced
A particular focus for our sustainable financing is the circular economy, which seeks to create a zero-waste world by making new products out of waste. We served as advisor and underwriter in a notable merger of Shanks Plc of the UK with Dutch waste processor Van Gansewinkel Groep. When finalised it will create one of Europe’s leading players in recycling.
Report of the Executive Board in the second half of the year, expectations about a more expansionary fiscal policy in the US following the presidential election victory of Donald Trump, an interest rate increase by the Federal Reserve, and an increase in oil prices pushed up capital market interest rates again.
ECB policies also resulted in a further decline in the cost of borrowing for eurozone households and businesses and contributed to a modest increase in credit demand. Marked differences between countries remain, with credit growth generally more positive in northern European countries, while low or negative in southern ones.
Low interest rate environment Persistent low interest rates will, over time, put banks’ net interest income under pressure. On mortgages for instance, ING could be confronted with higher than expected prepayment rates as the difference between rates on existing mortgages and the prevailing market rate lead customers to refinance.
On savings, net interest income may decrease as savings rates approach zero and options to further reduce client rates on savings deposits diminish. ING actively manages its interest rate risk exposure and successfully maintained the net interest margin on its core lending in 2016. To address the challenge of interest-income erosion, containing costs remains an important goal. We are also putting more emphasis on generating fee-based income and are reassessing our product characteristics.
Progress on relevant regulatory initiatives The Single Supervisory Mechanism (SSM), the system of banking supervision for Europe, was in effect for the second full year in 2016. In this second year, the daily interactions on supervision between the European Central Bank (ECB), national competent authorities like the Dutch Central Bank in the Netherlands and banks were streamlined further.
The ECB in particular took important steps to communicate its expectations to the banking sector and public at large. For example, the ECB provided detailed information about its annual Supervisory Review and Evaluation Process (SREP) and its findings based on its sector-wide thematic review on risk governance and appetite. Such transparency helps support the banking union in coming together, as well as the efficiency and effectiveness of the ECB’s supervision.
Global economic developments Similar to 2015, 2016 was not a strong year for the global economy. Growth in the US regained momentum, but the recovery in the eurozone was not able to shift into higher gear and the Chinese economy continued to slow. Uncertainty about the global economic outlook and (geo)political uncertainty led to flares of financial market volatility, but the global economy held up relatively well.
Other uncertainties concern loss-absorption requirements, which haven’t yet been finalised in the EU. The Financial Stability Board’s total loss-absorbing capacity term sheet still has to be transposed into EU law before it is clear how to calculate the minimum requirement for own funds and eligible liabilities (MREL).
The range and complexity of non-prudential regulation is increasing. Regulation is becoming more stringent in areas like customer due diligence (CDD) and transaction monitoring to prevent and report money laundering (AML), terrorist financing, and fraud. Regulations such as the Common Reporting Standard (CRS) and FATCA, which require financial institutions to report detailed client-related information to competent authorities, are also adding to banks’ regulatory burden. There are a number of risks in areas where applicable regulations are unclear, subject to multiple interpretations or under development, are in conflict with each other, or where regulators revise their guidance or courts overturn previous rulings. Meeting all these requirements within the strict timelines that have been set poses a significant operational challenge for banks. Regulations also need to strike a proper balance between consumer protection and innovation to allow banks to compete in the new competitive environment.
ING expects benefits from harmonised supervision to materialise over the coming years with converging supervisory practices, stress testing, streamlined reporting, and the cross-border flow of capital and liquidity.
The last remaining pillar, mutualisation of deposit guarantee schemes, is progressing at a much slower pace than the first two pillars. Lack of a common European deposit guarantee scheme leaves the eurozone potentially vulnerable to interdependence between banks and governments, despite the existence of the SSM and SRM.
In November 2016 the EC launched the review of the existing Capital Requirements Regulation (CRR) and Directive (CRD), and Bank Recovery and Resolution Directive (BRRD) regulation. These draft EC proposals are subject to approval by the European Parliament and Council. They consist of important new regulatory requirements for banks, including the Net Stable Funding Ratio (NSFR), the leverage ratio, review of the trading book and counterparty credit risk. The proposal also includes changes to transpose the FSB TLAC term sheet into EU law and introduces a harmonised approach for creditor hierarchy in Europe.
• Financial sector has an unfavourable public image in many countries
Our long track record and strong brand place us well to seize these opportunities and become a better company for all of our stakeholders. We are a leader in digital banking, and we have scale combined with local market expertise. We are investing in building profitable, mutually beneficial relationships with our customers based on the quality of our service and the differentiating experience we offer them. We intend to continue working hard to win their hearts and minds, demonstrating our concern for them and all our stakeholders. We intend to be even clearer about the strategic choices we make. The diagram below shows what we perceive to be our strengths, weaknesses, opportunities and threats based on assessments by management.
In 2015 we conducted a quantitative survey with input from more than 1,500 respondents across five countries, covering six stakeholder groups. In 2016 we built on these results, adding a qualitative element to delve deeper.
A media, trend and peer analysis was performed to capture new emerging topics and to ensure the topics reported in 2015 were still relevant. Results were used as input in detailed discussions with stakeholders including customers, NGOs, academics, shareholders, employees and regulators. They were asked to rate the material topic on importance and to choose one or two recommendations for ING to focus on, including emerging topics. This qualitative approach increases our understanding of our stakeholders’ priorities and confirms that we are truly aligned with them.
Read more in the “Non-financial appendix” for a detailed process description on the 2016 materiality assessment and the matrix.
We learned, for example, that both stakeholders and ING regard innovative business developments as one of the most important topics, considering factors such as disruptive technologies across industries, the threat from both small fintechs and giants such as Facebook and Google and the opportunities that advanced data analytics provide in serving our customers. Innovation is a strategic priority for ING.
Sustainable finance and investment policies gained awareness across all stakeholder groups – from NGOs and governments to investors and customers. All expect ING to have a long-term vision and to set measurable environmental and social targets. We strive to use our position as a global bank to spur environmental and social progress.
We conduct a materiality assessment every year, where we gather input from stakeholders and ING’s management to assess what matters the most to them
Economic contribution Financial performance Pricing of products and services Managing risks
Customer centricity vs negative interest rates vs profitability In traditional banking, banks attract customers’ savings and then either invest them or loan that money to others. They do this while managing accompanying risks (like payment default) and earning income on the loans and investments. The idea has always been that customers who save money with a bank earn a certain interest. This is deducted from the bank’s investment and loan revenue to get net interest margin. But what happens when negative interest rates come into play? And how does that impact a bank’s ability to make a profit?
Like it or not, negative interest rates are a reality. The monetary policy behind them aims to encourage households to spend, rather than save. However it is not yet clear that this works, and ING is working hard to avoid being forced to implement negative rates on retail deposits.
We are currently partnering with more than 65 fintechs. In Germany, for example, we are cooperating with several young financial tech companies on video identification (Web-ID), photo transfers (Gini Pay) and verifying payments by fingerprint (SmartSecure App by kobil).
Read more in the “Our strategy and how we create value” chapter.
A more detailed overview of the opportunities and risks related to the material topics and our approach and performance is summarised in the table on pages 15 to 18. The table serves as a summary to the content within different chapters, covering future outlook, objectives, indicators and results.
Innovation vs data protection Capturing and analysing data helps us understand our customers’ needs and preferences, allowing us to offer them more tailored products and improved service.
However, change is a constant and we – like all companies – must periodically adapt to evolving business requirements. This can lead to job losses. ING is committed to helping employees to find new roles and/ or supporting them in learning new skills to better equip them for their next role.
ING believes that innovative businesses are built on a culture of innovation.
Providing a differentiating customer experience section in the “Retail Banking” chapter.
All business units have adopted Global Data Protection Policies (GDPPs) that qualify as Binding Corporate Rules. In each business unit and at bank level, a data protection executive is responsible for maintaining GDPP compliance.
The GDPP is currently being revised to comply with new EU General Data Protection Regulation 2016/679 which must be adhered to by May 2018.
The Focused Reliability Initiative was launched in 2015 to find permanent solutions for system reliability issues in the Netherlands and Belgium. Continuing the programme in 2016, ING’s channel availability improved to 99.75% on average in the Netherlands, Belgium and Wholesale Banking.
ING’s customers are already digital and increasingly mobile. Digital channels now account for 98% of contact with retail customers and mobile interactions increased by more than 50% during 2016. ING’s promise to deliver services anytime, anywhere implies a commitment to make these products and services accessible and inclusive to all sections of society. ING in Poland, for instance, makes use of technology to help deaf customers who have previously had to bring an interpreter with them to do their banking. And in 2016, there was a strategic shift from traditional microfinance portfolios in India and Turkey to a more diversified portfolio, both in location and the mix of financial services offered.
Financial empowerment and Financial inclusion sections in the “Retail Banking” chapter.
Customers prefer a trusted institution acting as a store of value, as a source of finance and as a facilitator of transactions, providing traditional (well-established) banks with an advantage over the new entrants and fintechs.
H Financial performance* Being a financially healthy and stable company is important to us and our stakeholders.
Delivering a differentiating customer experience section in the “Wholesale Banking” chapter.
ING believes financially empowered people contribute to a healthy economy and this helps drive social progress. We offer all kinds of activities to prevent customers from going into financial distress and to ensure responsible lending.
* The material topics with asterix (*) are not part of the KPMG assurance engagement in relation to the non-financial information. Financial risks are an integral part of the audited consolidated annual accounts.
ING’s role and activities in preventing anti-competitive behaviour, anti-trust and monopoly practices.
Anti-competitive behaviour undermines ING’s values and vision to see customers empowered as it limits choices and restricts the market. It is ING’s policy to fully comply with all competition laws applicable to its entire range of activities.
M Corruption prevention* ING’s role and activities in preventing corruption practices.
Being transparent and open about our investments, products and services, and other topics is helping the business move forward and earning the trust of our stakeholders. We aim to find the right balance between providing the transparency and openness that society and NGOs ask of us, while respecting our customers’ privacy.
Human capital Opportunities: More diverse companies are more successful in attracting and retaining talent, relate to customers better, have higher employee engagement and are better at decisionmaking. Also, motivated, enabled and energised employees, being the primary resource and ambassadors of a bank, enhance the business performance of banks.
Risks: Employees are the primary resource and ambassadors of the company. Losing our employees, or not having a diverse group of employees, could lead to sub-optimal performance/results (financial risks) as well as a reputational risk.
Ensuring ING’s employees are diverse and have equal career opportunities. Also, striving to create an inclusive corporate culture that welcomes, acknowledges, respects and benefits from each other’s differences.
The Bloomberg Financial Services Gender-Equality Index was published for the first time in May 2016. ING was ranked as one of the most transparent financial sector companies for diversity and social equality.
Fit planning tools in the Netherlands. Similar digital advisers are part of our offering or are being developed In Belgium, France, Poland and Spain.
ING believes that banking can play a significant role in creating a fairer and greener economy. This includes helping our clients to develop more sustainable business models, supporting clients who develop solutions to environmental and social challenges and also clients who are environmental outperformers in their sectors. ING’s sustainable transitions financed (STF) came to more than EUR 34 billion in 2016. One notable deal we were involved in was UK waste operator Shanks Plc’s merger with the leading Dutch waste processor Van Gansewinkel Groep. ING served as advisor and underwriter for this deal that will create one of Europe’s leading players in recycling and illustrates ING’s commitment to the circular economy.
Accelerating Think Forward While we are achieving successes with our strategy, rapid developments in technology, customer behaviour and the competitive landscape mean we need to speed up our pace of transformation in order to offer customers a differentiating experience in the future. These trends are evident in a number of ways. We see the continuing digitalisation of banking - especially the rapid growth of mobile devices as the main customer interface. We also see that technology is reducing barriers to enter the financial services markets, resulting in a wave of newcomers targeting segments underserved by traditional banks. In addition, new regulations are opening up Europe’s payment market to non-banks and we are seeing the development of digital ecosystems that allow users to access social media, online purchases, services and payments all in one app.
Our strategy and progress ING continued in 2016 to successfully implement the Think Forward strategy based on our purpose to empower people to stay a step ahead in life and in business. We further improved the value proposition for customers that aims to provide them with a differentiating customer experience. And we accelerated our transformation to address the increasing pace of digitalisation and disruption in the financial services industry.
In 2016, the number of retail primary relationships grew by more than eight percent to 9.7 million, putting us well on track to reach our ambition of 10 million primary retail customers in 2017. We have now increased our ambition to 14 million primary customers by 2020.
2. Develop data analytics The relationship between banks and their customers, as in other industries, is increasingly a digital one. Digitalisation challenges banks to maintain intimacy with a customer who they rarely meet face to face. But the digital interface also provides a wealth of data on customers’ preferences and needs that gives banks important insights they can use to provide the kind of experience customers now expect from businesses they interact with online. Developing analytic skills is essential to serving customers in a digital world. This is not only important for improving customer services, but also for preventing fraud, improving operational processes, reducing risks and generating services that go beyond traditional banking so we can stay relevant for customers.
In this intermediate state we are also laying the bankwide, shared foundation that will allow us to develop into a single, integrated platform in the future. This comprises global process management, global data management, modular architecture, bank-wide shared services and cloud-based services.
To make this happen, an international Advanced Analytics team based in Frankfurt and Amsterdam acts as a centre of excellence and supports all business units. At the same time, local advanced analytics teams have been established in Belgium, the Netherlands, Poland, Spain, Turkey and in Wholesale Banking.
Our Chief Data Management Officer oversees the implementation of global data management together with local data officers.
Material topics: customer privacy and data security, managing risks 3. Increase the pace of innovation to serve changing customer needs Customer expectations, new technologies and new competitors are transforming banking. Through innovation, we can increase efficiency, improve the customer experience and gain competitive advantage. Our PACE methodology is designed to encourage fast experimentation and turn ideas quickly into new products and services for customers. We also promote an internal culture of innovation through our employeedriven Innovation Bootcamps. To speed up the pace of innovation we also partner with outside parties, including fintechs. As of the end of 2016, we were partnering and in some cases also investing in more than 65 fintechs in various areas, like instant lending, factoring and customer loyalty.
Geographical presence and strategic approach ING has a presence in over 40 countries. Though our local businesses vary in terms of their market positions all are guided by our purpose of empowerment and strategy to provide customers with a differentiating customer experience.
Challengers These are businesses in markets where we offer both retail and wholesale banking services. Our retail activities are mainly direct-banking offered online with a significant cost advantage over traditional banks. Our strategy is to leverage our strong savings franchises in these markets to expand into payments accounts and increase the number of primary customer relationships. We are also using our direct banking experience to grow the lending business at low cost in areas like consumer and SME lending. And we are using our strong savings businesses to fund expansion of Wholesale Banking, particularly to support clients in Industry Lending and working capital solutions.
Growth Markets These are businesses with a full range of retail and wholesale banking services in markets with expanding economies and strong growth potential. We are investing to achieve sustainable franchises and will focus on digital leadership by converging to the direct-first model and by prioritising innovation.
Our performance The good progress we made in 2016 implementing the Think Forward strategy and providing a differentiating banking experience for customers resulted in strong commercial and financial performance. ING Group net result of EUR 4.7 billion and underlying net result Banking of just under EUR 5 billion were driven by robust commercial growth at resilient margins and declining risk costs and achieved despite increasing regulatory costs.
As of year-end 2016, we were on track to meet all of our Ambition 2020 targets. Our CET1 ratio of 14.2% was well ahead of regulatory requirements and the leverage ratio rose to 4.8%. The Board proposes to pay a total 2016 dividend of EUR 2,560 million, or EUR 0.66 per ordinary share, subject to the approval of shareholders at the Annual General Meeting in May 2017. This comprises the previously announced interim dividend of EUR 0.24 paid in August 2016 and a final dividend of EUR 0.42 per ordinary share. We aim to pay a progressive dividend over time.
Social and network We add value for our customers by making banking more accessible guided by our Customer Promise: clear and easy, anytime and anywhere, empower, keep getting better. Many consumers feel challenged when making financial decisions. We see an important role we can play in empowering customers with products, services and tools that make it easier for them to handle their money matters and make sounder financial decisions. We also contribute our expertise in public forums to raise awareness of consumer behaviour, to contribute to improved products and services for consumers and to promote sounder public policy.
Responsible consumption and production consistent with UN’s Sustainable Development Goal 12.
Direct environmental and social impact through our reduced operational footprint, respectively human rights focus.
Sustainable and inclusive economic growth consistent with UN’s Sustainable Development Goal 8.
Economic development and job creation in emerging countries through impact finance.
• Innovation Fund to finance initiatives. • Data analytics to identify customer needs and tailor services and products accordingly. Innovation to improve operational excellence • Target Operating Models (TOMs) to streamline Finance, HR, Procurement and Risk functions. • PACE methodology to experiment and quickly turn ideas into new products and services. • Cybercrime programme to mitigate any security threat. Developing thought leadership • Developed thought leadership on blockchain.
Sustainable procurement • Global supplier qualification (SQ) process. ING supports UN Sustainable Development Goals • ING focuses in particular on SDG 8 and 12. Developing thought leadership • Creating thought leadership on Circular Economy e.g. by joining the Ellen MacArthur Foundation as a CE100 member. • Adherence to Dutch Sector Agreement on
• The Top Employer Institute gave several ING operations in Europe the highest classification.
Innovation Move fast and fail fast innovations • Innovation Fund financed 20 initiatives in 2016. External collaborations • More than 65 fintech partners. • 11 investments.
Environmental Support progress • EUR 34.3 billion sustainable transitions financed. • EUR 3.31 billion sustainable assets under management. Responsible lending • ESR is applied to 100% of our corporate loans. Own environmental footprint • CO2 emissions decreased by 27%.
Overall, there were many different challenges and trends impacting our retail businesses in 2016. For instance, in the Netherlands we saw a major shift in the mortgage market to non-bank suppliers (especially insurance companies and pension funds). Also in the Netherlands as well as Belgium, there was more prepayment financing of mortgages brought on by low interest rates. Demand for SME lending was also low, particularly in the Netherlands, brought on by a slow recovery in some sectors. Each of our retail businesses in their own competitive environment have had to overcome both local and global challenges.
Technology and advanced analytics allow ING to use data it already has rather than asking the customer to provide it. Customers in many countries can apply for a loan anytime, anywhere – a significant improvement on having to supply large amounts of paperwork when applying for a loan.
Challengers are businesses in Australia, Austria, the Czech Republic, France, Germany, Italy and Spain where we aim to build a full bank relationship, digitally distributed at low cost.
Challenges Regulatory costs have continued to increase and weigh heavily on the bank’s expenses. In 2013, regulatory costs made up four percent of total underlying expenses. In 2016 they accounted for nine percent.
Twyp (The Way You Pay), ING´s new social payments app, allows users (not just ING customers) to send and receive money instantly. Instead of lengthy and difficult to remember IBANs, users can access mobile phone numbers in their contact list to transfer money. It is as easy as sending a text and useful for paying back small amounts to friends, for instance. There are currently 300,000 registered users in Spain.
To ensure fair pricing and communication on our products and services, we have a Product Approval and Review Process (PARP). Customers are able to provide feedback on products and services through ratings and online communities via ING websites.
Bank customers regularly overdraw their account despite many of them having enough savings to balance their overdraft. With higher interest rates on overdrafts and a low interest rate on savings, this is costly for them. While for some this is a conscious decision, others are simply unaware. To address this, ING in the Netherlands proactively sent messages to a group of customers in a pilot, alerting them of their overdraft and how to balance their account using their savings. Around 16 percent of those informed took action, this saves them money and keeps them a step ahead in managing their finances.
• Effective data management builds the foundation for analytics. Local chief data officers have been appointed for our Market Leaders segment, Wholesale Banking, Finance, Risk, Procurement and HR.
Thinking beyond traditional banking With new regulation opening up financial services to competitors from beyond the sector and low economic growth putting pressure on traditional sources of income, it is important that Retail Banking develops new products and services that are distinct from those traditionally offered by banks.
To see if we are making improvements in the financial behaviour of customers and society, we measure our performance. That is why in 2016 we announced our ambition to make 25 million people feel financially empowered by 2020. In 2016, 23.9 million people felt financially empowered and we had more than 101.9 million interactions with customers and non-customers through financial empowerment initiatives.
The first new product of ING in Austria is a current account, the ING-DiBa Giro and Gehaltskonto. It features instant opening online, no fees, free debit/ credit card, plus a feature that ensures those that shop over their limit (up to EUR 50) won’t be charged with debit interest.
Apart from a new current account, the pipeline for new customer features and services will expand further in 2017.
Socially responsible investment ING has been providing socially responsible investment (SRI) strategies for customers in select retail countries since 1999. SRI strategies consist of dedicated portfolios of sustainable investment funds, or of bonds and equity of individual sustainable companies.
Retail customers in Belgium, Luxembourg, Germany and the Netherlands are given the opportunity to invest in SRI investments. In the Netherlands the Bank applies a robust assessment and excludes companies in specific sectors, such as tobacco or coal mining, as well as companies that exhibit controversial behaviour, such as violations of human rights. In other countries, it is only possible to invest in sustainable funds that use these screening methods.
Financial inclusion In addition to its lending services for green investments, ING Groenbank also directs up to 10 percent of its balance sheet towards impact activities, including education and research. In 2016, there was a strategic shift from traditional microfinance portfolios in India and Turkey to a more diversified portfolio, both in location and the mix of financial services offered. Groenbank now acts as a catalytic fund to initiate impact investments in, and outside, ING. ING Groenbank research supported the finance sector’s appetite for more SME finance. “A Billion to Gain 2016” looked at the role technological innovation can play in unlocking micro/SME finance opportunities.
• ING in Spain was voted the “best bank for customer experience” for the second year running by Spain’s Customer Experience Measurement Index (IMEX).
• First prize in Mortgage Banking at “friendly banks” ranking in Poland.
Operating expenses increased by EUR 129 million, or 8.1 percent, to EUR 1,723 million. This increase was mainly due to increased regulatory costs as well as higher IT and professional-services expenses related to strategic projects. The cost/income ratio improved to 60.3 percent from 66.2 percent in 2015.
Industry Lending this means becoming the lead lender, in Debt Capital Markets the lead financing bank and in Transaction Services and Financial Markets increasing the volume of flow products. In 2016, we continued to implement the Think Forward strategy and deliver on our priorities. We have successfully grown the business while maintaining a prudent risk profile. We grew net core lending by EUR 22.6 billion and risk costs decreased to 24 bps of average risk-weighted assets (RWA) in 2016. We continued to grow lending in Germany, redeploying the liabilities created in our low-cost German bank. We are selective and grow in market segments that show healthy growth, while aiming to ensure that our portfolio remains appropriately diversified and within our risk appetite.
International network We facilitate clients’ business through our international network of offices in over 40 countries across Europe, the Americas, Asia and Australia. This extensive international network is a key element of our value proposition to clients. We continuously invest in our network to serve clients better and to seize growth opportunities in different regions. This included in 2016 the launch of trade commodity finance services in New York. We also expanded and strengthened our network and presence to support clients in China, Sweden and India. We extended our network in 2016 with the opening of a new securities branch in Seoul. This offers capital market products to both local and international corporate clients and financial institutions in South Korea. We have been active in Seoul for 25 years and became one of the leading international banks in the country offering a full range of corporate and investment banking products. In 2016, we also applied to the Colombian Finance Superintendence for a licence to operate as a Representative Office in Colombia.
Delivering a differentiating customer experience WB aims to be the bank of choice for its clients. In
Wholesale Banking performed well in 2016. We continued to implement the Think Forward strategy and to take initiatives to enhance the customer experience. We have successfully grown the business while maintaining a prudent risk profile. We are strongly committed to sustainability. We try to minimalise our own environmental footprint and we support clients with their own transition to more sustainable business. We will continue accelerating our strategy and transforming the way we do business to serve clients better, easier and faster.
We also recognise the need to tighten sustainability assessments and ensure that the financing we label as sustainable is truly significant in its contribution to the environment and society. For this purpose, the different sustainability teams within ING are currently working on refining and strengthening our client and transaction assessment criteria. Furthermore, we are working to continuously improve our assessment scope and screen our entire loan book against the STF criteria (for detailed STF definition, see glossary page 445). The graph below shows the growth of our STF portfolio in 2016 attributable to new business and due to improved assessment scope.
Accelerating the financing of sustainable transitions ING is committed to helping facilitate the transition to a fairer, greener economy by financing clients who are environmental outperformers compared to industry peers, and projects that address environmental and social challenges. We measure the above with our sustainable transitions financed (STF).
Sustainable transitions financed in EUR million at year-end 1 Growth (new business) 2016: EUR 7,030 million. 2 Growth (improved assessment) 2016: EUR 3,434 million; growth attributed to improved processes, methodology and assessment scope for identifying STF within our existing portfolio
ING’s highly experienced team has been actively involved in a series of landmark green bond transactions for a wide range of clients: French utility EDF, Bank of China, Turkish development bank Türkiye Sınai Kalkınma Bankası A.Ş. (“TSKB”) and Spanish utility Iberdrola. Furthermore, we supported the Dutch dairy company Royal Friesland Campina, Dutch utility Tennet and Swiss utility Repower with their inaugural Green Schuldscheins and helped Dutch utility Alliander raise green funding from investors.
We are also working on the challenge of defining our role as a financier in this pioneering area. There is as yet no blueprint for how banks can service clients’ circular business needs. To address that, we are working to co-create a way ahead with clients and platforms like the Ellen MacArthur Foundation. We joined the Ellen MacArthur Foundation as a CE100 member to share and further broaden our knowledge on the topic and drive the development of new business models to support more clients in circular business. We are currently supporting companies that want to grow their business in the circular economy with strategic investments, equity and subordinated debt.
3 Includes biomass, geothermal, hydro, solar, offshore and onshore wind power generation. In 2016, we improved the process for extracting renewables data from our system, which gives a more complete overview of our exposure.
The table demonstrates our inclusive approach to sustainability throughout our entire global lending portfolio. On the one hand, we finance projects in specific sustainable areas, including renewable energy, sustainable real estate, public transport, water and waste management. At the same time, through our client and transaction assessments, we identify those clients with the best environmental record in their sector (outperformers). We focus on those outperforming clients in all sectors, which we finance based on our Environmental and Social Risk (ESR) framework.
Wholesale Banking – continued discontinued, including the equity derivatives offering to financial institutions. These changes will not reduce our continued commitment to Benelux cash equities, global commodity derivatives and linear equity derivative financing franchises.
Putting our strategy into practice – our business activities in 2016 Industry Lending Industry Lending is a high value-added product for clients and ING. Our Industry Lending teams provide financing to clients in selected markets based on specialist industry knowledge and expertise. Industry Lending is broadly diversified across sectors and geographies. Its activities are grouped into the Energy, Transport & Infrastructure Group, the Specialised Financing Group, the International Trade and Export Finance Group, and Real Estate Finance. Risks are controlled in a number of ways. These include careful selection by industry and sub-sector, country and client, transactional structure and collateral value of assets. Industry Lending has a track record of disciplined growth. It continues to grow in selected industries and markets whose underlying dynamics create attractive opportunities for our clients. This lending asset growth also supports ING Bank’s balance sheet optimisation, whilst delivering a solid return on equity.
Accelerating Think Forward – moving towards 2020 The Think Forward strategy empowers us to achieve our WB ambitions and fulfil our purpose. Given the challenging macroeconomic environment, the fastmoving changes in our industry and the fact that technology and digitalisation are moving faster than expected, we need to accelerate our strategy.
Wholesale TOM aims to enhance the client experience across products and countries. It does this by standardising our products and channels, harmonising our client services and improving our mobile and online offering. In 2016, we continued to concentrate on decommissioning legacy systems and on migrating services to global operating hubs in Manila and Bratislava that provide services directly to our clients across different businesses, locations and time zones. Wholesale TOM has increased efficiency and reduced complexity for our clients. With EUR 305 million in cost savings as per the end of December 2016, we expect to meet our cost savings target of EUR 340 million by the end of 2017. These cost savings are partly being reinvested in our business, and we will continue to drive simplification, business growth and innovation through extensions of the programme. In 2016, we announced an additional restructuring provision of EUR 70 million.
Nagi PV GK, a Japanese incorporated company, a subsidiary of BCPG Japan (BCPGJ), is developing a 14 MW solar photovoltaic farm in the Okayama Prefecture, on Honshu island, in Japan. The solar PV farm is expected to produce up to 16,300 MWh of electricity per year, the equivalent of powering over 4,500 homes. Nagi PV GK can prevent up to 12,500 tonnes of CO2 emissions per year. The project will help Japan to reach its goal to meet a 25 percent renewable energy target by 2030. ING acted as sole Mandated Lead Arranger, IRS Swap Arranger, Facility and Security Agent and Account Bank in the JPY 3.86 billion project financing. For ING, being involved in this project means that we can build upon our experience and best practices with financing green projects.
Working Capital Solutions (WCS) combines ING’s Supply Chain Finance and Trade Receivables activities and is a key growth area for WB, offering substantial opportunities for our clients to achieve efficiency benefits. We believe the underlying short-term and capital-efficient nature of this asset class makes it an attractive area for us to expand. This year, despite fierce pricing competition and unfavourable market circumstances in the steel and oil sectors, WCS’s business continued to grow.
Collaboration between Industry Lending teams continued with increased cross-buy, flow and tailored solutions for specific financial needs. However, the continuing low interest rate environment and negative Euribor fixings have made derivative hedging less attractive. This impacted volumes in the first quarter. Volumes returned to anticipated levels towards the end of the year, but were not strong enough to make up for the early year shortfall.
Lending credit outstanding to the metals and mining industry was EUR 14.9 billion at the end of 2016. We have a conservative and selective approach to new deals, renewals and refinancing, and we maintain focus on high-credit quality names, low-cost producers and industry leaders.
Read more on the challenges and opportunities related to CO2 impact measurement, including next steps, in the “Non-financial appendix”.
Conclusion Wholesale Banking performed well in 2016, maintaining a prudent risk profile. Clients are at the heart of our strategy. We serve them across the globe with a range of products and services, helping them to meet their ambitions. We will continue to broaden our international network.
Wholesale Banking plays an important part in ING’s strategy. We will continue to accelerate our Think Forward strategy. ING is on a path of convergence towards one digital banking platform. We are proud that our transformation programme, Wholesale TOM, is leading the way within ING, resulting in an improved and more uniform experience for clients. In 2017, we will continue with our transformation programme. We will also continue to innovate to meet the changing needs and expectations of clients and support their business.
With the support of our Leadership Council, ING has introduced a range of initiatives to promote the inclusion of women in leadership positions. These include: • Diverse interview and decision panels in the recruitment process. • Inclusion of more female candidates on succession lists.
We have a distinctive culture: entrepreneurial, open, collaborative, innovative and energetic. But we also recognise that there are areas where we can improve – such as diversity – and that from a people perspective, working in a changing environment can bring challenges.
Why diversity is important and what we are doing in this area We value diversity. Our success depends on it. That is why we introduced a diversity manifesto, “Success through difference”, in January 2016 that applies to all employees worldwide. This official bank policy sets out what diversity means at ING, why it is important, and what employees can do.
ING is committed to accelerating the development of diversity, including in areas such as gender, age, background, sexual orientation, physical ability and religious beliefs.
Banker’s Oath Since April 2015, all new employees working for ING in the Netherlands take the Banker’s Oath routinely. The oath contains a set of principles affirming the banking industry’s commitment to maintain high standards of ethical behaviour. A disciplinary sanction mechanism is linked to breaches of these principles.
The labour market is a global marketplace and the bank has recruitment challenges in some areas. To ensure we have the resources we need at the right place and time, we have to be able to identify talent, internally and externally.
Since March 2016, Turkey has supported the UN’s HeforShe initiative, a programme that aims to create a gender equal world. ING in Turkey regularly organises HeforShe dinners for mothers working at the bank. Colleagues share their experiences, hold discussions and create communities so they can develop practical solutions for the advancement of women, including special leave, increased networking opportunities for female colleagues and monitoring of women in leadership positions.
ING recognises that being fit to lead is not just about expertise and experience. The programme takes an all-inclusive approach to developing leadership. It targets specific proficiencies, but also encourages and equips participants to reflect on and develop their mental, spiritual and physical wellbeing.
• Competitive: While these promises might not set us apart, they are still important as they represent what the bank needs to offer to attract and retain good people. They include work-life balance, emphasis on good performance and the importance of respecting one another.
The starting point in formulating the EVP was an extensive global research project to identify the benefits of working at ING. Input came from external surveys held across 12 different markets, with responses from students, professionals and employees.
ING’s Winning Performance Culture (WPC) survey looks at how engaged, enabled and energised employees are. A WPC survey was conducted in September 2016. Around 70 percent of employees responded. ING achieved an overall engagement score of 77 percent exceeding the 70 percent target it had set. The survey identified a range of improvement areas on a global and local level.
• Validation sessions: objectives and outcomes of midyear review and year-end evaluations are validated in management team discussions and against peers to ensure relevance and consistency.
• Continuous improvement conversations: informal coffee-corner conversations designed to provide instant, meaningful feedback that immediately improves performance.
Remuneration ING has compensation and reward packages in place to attract, recruit and retain highly qualified employees. Our Employee Value Proposition (EVP) sets out the various rewards and benefits received by employees in return for their performance. Remuneration is just one of these. Our promise includes personal growth opportunities, an open and dynamic environment as well as a forward-thinking mentality.
ING is developing its HR analytics and HR intelligence capabilities to aid business performance and employee well-being. The goal is to understand what most makes a difference to employees so investments can be made in the right places.
ING upholds freedom of association for all employees and recognises the right to collective bargaining as laid down by International Labour Organization convention Numbers 87 and 98. We seek to judge employees only on their merit and skills. Our policy is not to discriminate by social origin, gender, age, background, sexual orientation, physical ability or religious beliefs.
• Mobility events for secretaries at a specialist secretarial agency in which 86 colleagues participated.
Technology In 2016, we started developing TouchPoint Architecture (TPA), our own modular architecture that will enable our strategy. With TPA we can build generic components that can be used across businesses and countries to create a consistent customer experience. This unlocks our global scalability, speeds up innovation so we can bring new experiences to more customers faster, and makes it easier to integrate our systems with those of third parties.
ING’s customers are already digital and increasingly mobile. Across ING, digital channels now account for 98 percent of contact with retail customers and mobile interactions increased by more than 50 percent during 2016.
We intend to invest EUR 800 million in our digital transformation to deliver a consistent, first-class experience for our customers everywhere. To drive the execution of this strategic priority, COO Roel Louwhoff was appointed as Chief Transformation Officer in 2016. We also set up a robust transformation governance model to ensure we achieve our intermediate goals for 2020.
To keep pace with customers’ evolving needs and continue delivering on our Customer Promise we have to be innovative and move fast to turn ideas into products and services that create differentiating customer experiences. This requires an innovative culture and a willingness to connect and cooperate with others. We also have to be operationally excellent, efficient and comply with regulations.
All business units have adopted the global data protection policy (GDPP) that qualifies as binding corporate rules. In each business unit and at bank level, a data protection executive is responsible for maintaining GDPP compliance and compliance with local privacy laws. Local data protection officers provide expertise and support. The GDPP is currently being revised to comply with the new EU General Data Protection Regulation 2016/679, which must be adhered to by May 2018.
The advanced analytics capabilities we are developing to better understand and service customers also play a key role in combatting criminal activity. Pattern recognition and advanced algorithms help to predict and detect, and thus prevent, fraudulent activity.
Compliance with applicable laws and regulations is resource-intensive and costly. Banks continue to be faced with new and increasingly onerous regulatory requirements, and we expect the scope and extent of regulations in the jurisdictions in which we operate to generally increase further. ING is concerned that the lack of coordination among policymakers and the lack of clarity on future regulatory requirements is making it increasingly difficult to actively support the economies where we operate.
The independent risk management departments, headed by the Chief Risk Officer (CRO), act as a second line of defence. Their role is to make sure risk is properly identified, measured, managed and reported. In order to achieve that, they set policies, implement and operate control frameworks, and have a deciding influence on risk acceptance. They also ensure compliance with internal and external requirements on an individual and consolidated basis. Further, they support the commercial departments and act where necessary to keep the risk profile within the defined risk appetite. The CRO sits on the Executive Board and the Management Board Banking, ensuring risk remains a continuing topic for the leadership team.
Taken together, we believe these three layers make for a strong risk and control environment.
Cybercrime is a continuous threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks increase on a global scale. Threats from Distributed Denial of Service (DDoS), targeted attacks (also called Advanced Persistent Threats) and Ransomware intensify worldwide. ING Bank builds on its cybercrime resilience, further enhancing the control environment to protect, detect and respond to e-banking fraud, DDoS and targeted attacks. Additional controls continue to be embedded in the organisation as part of the overall internal control framework and are continuously re-assessed against existing and new threats. During 2016 ING did not experience any cyber incident that can be classified as material. ING provides continuous reporting on cyber incidents to the ECB.
The graph above reflects portfolio figures per sector for ESR client assessment outcomes relating to Wholesale clients.
• Pillar 2 guidance (P2G), which is not directly binding, so a failure to meet P2G does not automatically trigger legal action. Nonetheless, the ECB expects banks to meet P2G and a breach of the P2G will lead to the ECB taking fine-tuned measures based on the individual situation of the bank.
Requirement and Guidance for ING Group in 2017 ING Group has been notified of the European Central Bank (ECB) decision on the 2016 Supervisory Review and Evaluation Process (SREP), which sets the capital requirements for 2017. The common equity Tier 1 requirement for ING Group was set at 9.0% in 2017. This requirement consists of a 4.5% Pillar 1 requirement, a 1.75% Pillar 2 requirement, a 1.25% Capital Conservation Buffer (CCB) and the 1.50% Systemic Risk Buffer (SRB) that has been set separately for Dutch systemic banks by the Dutch Central Bank (De Nederlandsche Bank). This excludes Pillar 2 guidance, which is not disclosed. ING Group’s fully-loaded common equity Tier 1 ratio of 14.2% at 31 December 2016 is well in excess of this requirement.
Capital distribution ING Group manages capital at Group as well as Bank level and allocates capital within its different entities to meet local capital requirements. ING’s subsidiaries are well capitalised. ING sets targets for individual businesses above the minimum local capital requirements and aims for an efficient distribution of capital. The capital provides room for loan growth and supports the acceleration of our Think Forward strategy to achieve continued commercial growth, an improved customer experience and quicker delivery of new products.
A strong capital base ING Bank continues to maintain a strong and high quality capital level, with a fully-loaded common equity Tier 1 ratio and a phased-in common equity Tier 1 ratio of 12.6%, thereby complying with CRR/CRD IV solvency requirements. A dividend from ING Bank to ING Group of EUR 1.3 billion was paid in November 2016. The fourth quarter 2016 profit of EUR 0.6 billion is not included in the regulatory capital per December 2016 as this was upstreamed as dividend to ING Group in February 2017
A. (Aris) Bogdaneris (53) Head of Challengers & Growth Markets and member of the Management Board Banking Aris Bogdaneris was appointed a member of the Management Board Banking as of 1 June 2015. He is also head of Challengers & Growth Markets, responsible for all markets where ING is active in both retail banking and wholesale banking outside the Benelux.
Number of shares in issue and shares outstanding in the market 1 in millions Year-end
Ordinary shares 3,878.5 3,870.2 Own ordinary shares held by ING Group and its subsidiaries 0.6 1.5 Ordinary shares outstanding in the market 3,877.9 3,868.7
Listings ING Group ordinary shares are listed on the stock exchanges of Amsterdam and Brussels, and American depositary receipts (ADRs) are listed on the New York Stock Exchange (NYSE). Options on ING Group ordinary shares and ADRs are traded on the Euronext Amsterdam Derivative Markets and the Chicago Board Options Exchange.
Sustainalytics 1 Score: 86 (out of 100) Position: 1 (out of 395 financial peers)
Score: 77 (out of 100) Position: 3 (out of 130 financial peers)
ING Groep N.V. A- Stable Baa1 Stable A+ Stable ING Bank N.V. A Stable A1 Stable A+ Stable – Short term A-1 P-1 F1
For a concise and accessible overview of ING’s 2016 results, see www.ing.com/2016ar.
Our approach to integrated reporting In our view a balanced integrated report contains information both on our economic performance and on the impact of our organisation on society and the environment. By disclosing and explaining our financial and non-financial results, strategy, governance, external developments and the risks and opportunities we face, we aim to enable our stakeholders to assess how we create value and how we earn our income. Our ambition is to further integrate financial and nonfinancial information and advance towards concise and connected reporting, focusing on material data points.
The boundaries of our economic, environmental and social impact differ. As a financial institution, we have a direct impact through our own operations and processes, but our impact in the value chain is more significant, through credit, loans and investments. In ING’s Sustainability Reporting Protocol, we describe the impact per material topic, by stakeholder group. Additionally, we report our impact on the society through our value creation model on pages 26 and 27.
The Corporate Governance section starting on page 77 is incorporated by reference in this Report of the Executive Board.
Feedback This integrated report aims to give all our stakeholders a balanced and complete overview of our activities and ability to create and sustain value. We welcome stakeholder reactions and views. Please send us your feedback via communication@ing.com.
Assurance We value the accuracy and reliability of all information and data in this report, both financial and non-financial. Therefore assurance for this integrated report, including the accompanying Non-financial Appendix, is provided by KPMG Accountants N.V. (KPMG).
Furthermore, KPMG audited ING Group’s internal control over financial reporting as of 31 December 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).
Description: The GRI Standards require to focus on (non-financial) material topics. Material topics are those topics that are sufficiently important to be reported as omission could substantially influence stakeholders’ decisions. ING Group updated the materiality assessment process in 2016 amongst others on the basis of a qualitative stakeholder sessions to define which Non-financial information has to be included. The materiality assessment is subject to significant management judgement and was therefore identified as a significant area for our review.
Information presents a balanced overall picture of ING Group’s non-financial performance.
Our response: We reviewed the reporting process and internal control framework, including the applicable definitions and criteria. We interviewed several staff members to understand the application of these definitions and criteria and we requested underlying evidence for some transactions classified as sustainable transitions financed. Finally, we reviewed whether the criteria, assumptions and limitations regarding the sustainable transitions financed are sufficiently explained in the Nonfinancial Information.
In a fast-changing world with many uncertainties, ING was able to achieve robust results in 2016. More customers joined us, customer satisfaction scores increased and lending – supporting economies of the countries where we are present – grew. This shows that we are successfully achieving our goal of a consistent customer focus and are serving the needs of all stakeholders.
Corporate governance review In 2015, ING conducted a review of its corporate governance, including the depositary receipt structure via the ING Trust Office. This structure was solely used to prevent a minority of shareholders from taking control of the decision-making process at the Annual General Meeting (AGM). As the attendance rate at ING’s AGM has been steadily increasing in recent years, the purpose of the depositary receipt structure has become less relevant. Therefore this review resulted in a proposal to amend ING’s articles of association, which was adopted at the 2016 AGM. As a result, holders of depositary receipts became shareholders of ING. I am pleased that this decision has been widely supported by investors, investors’ associations and proxy advisory bureaus. I want to thank the ING Trust Office for its work in the past and its co-operation in developing the proposal to abolish the depositary receipt structure.
Supervisory Board meetings The Supervisory Board met 12 times in 2016. On average, 98 percent of the Supervisory Board members were present at the meetings. This attendance rate illustrates that the members of the Supervisory Board are engaged with ING and are able to devote sufficient time and attention to ING’s affairs. The Executive Board and Management Board Banking were present during each Supervisory Board meeting. For part of the meetings only the chief executive officer was present; this was dependent on the nature of the topics addressed. Each Supervisory Board meeting was preceded by a session with only the Supervisory Board members present. The members of the Supervisory Board also interacted with senior management outside the regular Supervisory Board meetings for discussion and information sharing purposes. This includes speed-meet sessions which contribute to better mutual understanding and alignment on what matters most to ING and the Supervisory Board. The Supervisory Board finds it important to strike a balance between the interests of all the stakeholders and to maintain an open dialogue. ING seeks to take the interests of all stakeholders into account to ensure ING’s shareholders benefit, with the interest of the client remaining key.
Apart from closely monitoring the financial results in 2016, the Supervisory Board’s main focus points during 2016 were the acceleration of the bank’s Think Forward strategy, technological developments in banking and the growing impact of fintechs on the industry, capital requirements, the accounting for the NN anchor investments, completion of the divestment of NN Group, sustainability, the enhancement of ING’s internal controls and associated risk mitigation, and developments in the regulatory costs and external supervision landscape (including bank capitalisation). Also the results of the continuous dialogue between ING and the external supervisors were standard agenda items throughout the year.
Important topics on the agenda of the Supervisory Board in 2016 were the acceleration of the bank’s Think Forward strategy, capital requirements, the accounting for the NN anchor investments, completion of the divestment of NN Group, sustainability, the enhancement of ING’s internal controls and associated risk mitigation, and developments in the regulatory and external supervision landscape. The committees of the Supervisory Board discussed a range of subjects, the main ones being the interests of ING’s clients and other stakeholders, the quarterly results, corporate governance, risk management, human resources (including culture and behaviours throughout ING) and regulatory costs.
Financial and risk reporting The fourth quarter and annual financial results for 2015 and 2016 were discussed in February 2016 and in March 2017 respectively. This included the related press release and reports from the external auditor. The Executive’s Board assessment of the adequacy and effectiveness of the risk management and control systems was also discussed.
Specific attention was paid to a variety of other, related topics as well, such as the divestment of NN Group (including the accounting for the NN anchor investments), financial reporting standards (IFRS 9), the updated internal audit charter, netting of notional cash pools, deferred tax, the governance of ING’s booking centres around the world, the Dutch SME interest rate derivatives case, the financial control enhancement plan, the quarterly whistleblower report, CRR remuneration disclosures and sector-wide reviews on market conduct. User Access Management (UAM) was discussed as an important element of the control framework over financial reporting. These controls were discussed extensively, and as a result requirements increased and key control testing has been improved. In 2017 efforts will be continued to further enhance ING’s UAM.
In addition, the proposed 2016 targets for the Executive Board and the Management Board Banking members were approved.
Corporate Governance Committee meetings The Corporate Governance Committee met four times with no absentees.
Recent developments Corporate governance review 2015 As announced in the 2014 Annual Report, the Executive Board and Supervisory Board, assisted by its Corporate Governance Committee, have reviewed ING Group’s corporate governance, including the depositary receipts structure, in 2015. An external law firm and a proxy advisory firm have advised ING in this review. As part of this review ING has also reached out to investors, proxy advisors and other stakeholders to seek their views on key elements of the corporate governance. Also the board structure and the interaction between the Supervisory Board and the ING organisation were reviewed.
The purpose of this call option is to protect the independence, the continuity and the identity of ING Group against influences that are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). However, the ordinary shares are not used for protective purposes.
The currently applicable share issue authorisation enables the Executive Board to issue ordinary shares (including the granting of rights to subscribe for ordinary shares, such as warrants or in connection with convertible debt instruments) for a period of 18 months, ending on 25 October 2017: 1 up to 40% of the issued share capital, as a general rule with pre-emptive rights of existing shareholders; plus 2 up to 10% of the issued share capital, with or without pre-emptive rights of existing shareholders.
Shareholders who are not allowed to, do not elect to, or are unable to subscribe to a rights offering, are entitled to sell their rights in the market or receive any net financial benefit upon completion of a rump offering after the exercise period has ended.
Details of investors, if any, who have reported their interest in ING Group pursuant to the Dutch Financial Supervision Act (or the predecessor of this legislation), are shown on page 63.
Pursuant to Regulation (EU) no. 236/2012 of the European Parliament and the Council on short-selling and certain aspects of credit default swaps, any person who acquires or disposes of a net short position relating to the issued share capital of ING Group, whether by a transaction in shares or ADRs, or by a transaction creating or relating to any financial instrument where the effect or one of the effects of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a change in the price of such shares or ADRs, is required to notify, in accordance with the provisions of the above-mentioned regulation: a. The Dutch Authority for the Financial Markets if, as a result of such acquisition or disposal the person’s net short position reaches, exceeds or falls below 0.2% of the issued share capital of ING Group and each 0.1% above that.
Approximately 25 analysts actively cover and generally issue reports on ING Group. A list of these analysts can be found under “Analyst Coverage” in the Investor Relations section of ING Group’s website. During 2016, ING Group did not provide any form of compensation to parties that are directly or indirectly involved in the production or publication of analysts’ reports, with the exception of credit-rating agencies.
ING Group participated in 13 industry conferences during 2016. In total, there were approximately 700 meetings (including conference calls) with institutional investors and/or analysts during 2016. Conference presentations and face-to-face meetings with investors and/or analysts took place in 47 different cities across the globe.
As of the Annual General Meeting of 2017 Corporate Governance will only be a separate agenda item in case of material corporate governance changes.
As provided in the Dutch Civil Code, implementing the BRRD, ING Group’s Articles of Association permit to shorten this convocation period to 10 days if (i) ING Group meets the criteria for early intervention measures, (ii) resolution can be avoided by means of a capital increase and (iii) a general meeting would be required to enable ING Group to issue the required number of shares.
• The authorisation of a repurchase of outstanding shares and/or a cancellation of shares.
Reporting Resolutions adopted at a General Meeting are generally published on the website of ING Group (www.ing.com), within one week following the meeting. The draft minutes of the General Meeting are, in accordance with the Corporate Governance Code, made available to shareholders on the website of ING Group (www.ing. com) no later than three months after the meeting. Shareholders may react to the draft minutes in the following three months, after which the final minutes are adopted by the chairman of the meeting in question and by a shareholder appointed by that meeting. The final minutes are made available on the website of ING Group (www.ing.com). In a deviation from the provisions of the Corporate Governance Code, shareholders 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.
Executive Board Appointment, suspension and dismissal Members of the Executive Board are appointed, suspended and dismissed by the General Meeting. For the appointment of Executive Board members, the Supervisory Board may draw up a binding list, which may be rendered non-binding by the General Meeting.
According to the Banker’s Oath that is taken by the members of the Executive Board, they must carefully consider the interests of all stakeholders of ING. In that consideration they must put the customer’s interests at the centre of all their activities.
However, because of the fact that ING Group needs to balance several relevant selection criteria when composing its Executive Board, the composition of the Executive Board did not meet the abovementioned gender balance in 2016 (no women). In accordance with the diversity policy mentioned on page 45, ING Group will continue to strive for an adequate and balanced composition of its Executive 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 of large stock-listed companies and experience in the political and social environment.
Transactions involving actual or potential conflicts of interest In accordance with the Corporate Governance Code, transactions with members of the Executive Board in which there are significant conflicts of interest will be disclosed in the Annual Report. In deviation from the Corporate Governance Code this however does not apply if (i) such disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that the disclosure could damage the competitive position of ING Group.
Significant conflicting interests are considered to be absent and are not reported if a member of the Executive Board obtains financial products and services, other than loans, which are provided by ING Group subsidiaries in the ordinary course of their business on terms that apply to all employees. In connection with the aforementioned, the term loans does not include financial products in which the granting of credit is of a subordinated nature, e.g. credit cards and overdrafts in current account, because of a lack of materiality.
Other relevant ancillary positions: Member of the Management Board of the Nederlandse Vereniging van Banken (NVB), member of the Board of the Institute of International Finance, Inc. and member of the Supervisory Board of Foundation Royal Concertgebouw Orchestra Amsterdam.
A resolution of the General Meeting to render this list non-binding, or to suspend or dismiss Supervisory Board members without this being proposed by the Supervisory Board, requires an absolute majority of the votes cast. Additionally, this majority must represent more than half of the issued share capital. Also in connection herewith this, the Articles of Association now exclude the possibility available under Dutch corporate law to waive this requirement in a second General Meeting. Both additional elements, which deviate from what is recommended under the Corporate Governance Code, ensure that significant proposals of shareholders cannot be adopted in a General Meeting with a low attendance rate and can only be adopted with substantial support of ING Group’s shareholders.
Candidates for appointment to the Supervisory Board must comply with the suitability and reliability requirements as set out in the Dutch Financial Supervision Act and must continue to meet these while in function.
According to the Banker’s Oath that was taken by the members of the Supervisory Board, they must carefully consider the interests of all stakeholders of ING. In that consideration they must put the customer’s interests at the centre of all their activities. Certain resolutions of the Executive Board, specified in the Articles of Association, in the Executive Board Charter and in the Supervisory Board Charter, are subject to approval of the Supervisory Board.
ING Group has taken out liability insurance for the members of the Supervisory Board.
Ancillary positions/conflicting interests Members of the Supervisory Board may hold other positions, including directorships, either paid or unpaid. CRD IV restricts the total number of supervisory board positions or non-executive directorships with commercial organisations that may be held by a Supervisory Board member to four, or to two, if the Supervisory Board member also has an executive board position. The European Central Bank may, under special circumstances, permit a Supervisory Board member to fulfil an additional supervisory board position or non-executive directorship. Positions with, inter alia, subsidiaries or qualified holdings are not taken into account in the application of these restrictions. Such positions may not conflict with the interests of ING Group. It is the responsibility of the individual member of the Supervisory Board and the Corporate Governance Committee to ensure that the directorship duties are performed properly and are not affected by any other positions that the individual may hold outside ING Group.
For an overview of loans granted to members of the Supervisory Board, see page 105 of the “Remuneration report”.
Independence The members of the Supervisory Board are requested to assess annually whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board, with the
Committees of the Supervisory Board On 31 December 2016, the Supervisory Board had five committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee. An organisational chart of the five committees of the Supervisory Board can be found below.
Company secretary The Supervisory Board is assisted by the company secretary Cindy van Eldert-Klep.
Remuneration and share ownership Remuneration of the members of the Supervisory Board is determined by the General Meeting and is not dependent on the results of ING Group. Details of the remuneration are provided in the Remuneration report on page 97. Members of the Supervisory Board are permitted to hold shares in the share capital of ING Group for long-term investment purposes. Details are given on page 97. Transactions by members of the Supervisory Board in these shares are subject to the ING regulations regarding insiders.
Information on members of the Supervisory Board J. (Jeroen) Van der Veer (chairman) (Born 1947, Dutch nationality, male; appointed in 2009, term expires in 2017) Former Chief Executive Officer of Royal Dutch Shell plc.
H.J.M. (Hermann-Josef) Lamberti (Vice-Chairman) (Born 1956, German nationality, male; appointed in 2013, term expires in 2017) Former Chief Operating Officer of Deutsche Bank AG.
Other relevant ancillary position: Chairman of the Supervisory Board of Stichting Hoger Onderwijs Nederland.
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V. and Member of the Supervisory Board of SACYR S.A.
Relevant positions pursuant to CRD IV: Member of the Supervisory Board of ING Groep N.V./ING Bank N.V., Member of the Supervisory Board ING Direct (Australia), Member of the Supervisory Board Sydney Airport Corporation and Member of the Supervisory Board The Palladium Group.
The external auditor may be questioned at the Annual General Meeting in relation to its audit opinion on the financial statements. The external auditor will therefore attend and be entitled to address this meeting. The external auditor attended the meetings of the Audit Committee and Risk Committee and attended and addressed the 2016 Annual General Meeting, at which the external auditor was questioned on the audit opinion.
More information on ING’s policy on external auditor independence can be found at www.ing.com/16ar8.
Any reference to “shares” and “shareholders” in this Corporate Governance Chapter should also be read as a reference to “depositary receipt of shares” and “depositary receipt holders” that existed until 26 July 2016.
Trust Office followed such instructions for such number of ordinary shares equal to the number of depositary receipts for shares held by the relevant holder of depositary receipts.
• preparation of the meetings with the chairmen of the Executive Board and the Supervisory Board of ING Group on the basis of public information and press releases.
Votes cast During the AGM 2016, holders of around 57 percent of the outstanding depository receipts used their voting right, either by means of binding voting instructions to ING Trust Office (around 56 percent of the outstanding depository receipts), or by attending the meeting in person or represented by a third party (around 1 percent of the outstanding depository receipts). A more detailed overview of these voting results can be found on the website of ING Group (www.ing.com).
Meeting of holders of depositary receipts on 25 April 2016 The board convened a meeting of holders of depositary receipts, which was held on 25 April 2016, shortly after the AGM 2016. Holders of 0,1 percent of the total number of depositary receipts issued were present or were represented during this meeting.
As of the conversion of depositary receipts for shares into ordinary shares on the Conversion Date, the ING Trust Office no longer holds any shares in ING Group. As of this date, the depositary receipt holders of ING Group became shareholders of ING Group and the depositary receipt structure was abolished
The increase came about as follows: Add: conversion of shares into depositary receipts as of 1 January 2016 up to 25 July 2016: 7,792,484 Less: conversion of depositary receipts into shares as of 1 January 2016 up to 25 July 2016: 1,000
Composition and remuneration board The members of the board are appointed by the board itself for a maximum term of four years and may be reappointed twice. Holders of depositary receipts may make recommendations to the board on persons to be appointed as members of the board. In connection with this, the board informs them in a timely manner regarding the reason why, and according to which profile, a vacancy must be filled, and also in which manner a recommendation should take place.
The board re-appointed Harrie Noy for a second term as of 14 June 2016, ending on 13 June 2020. A profile and an overview of relevant positions held by the members of the board can be found on the website of ING Trust Office (www.ingtrustoffice.com). All members of the board stated that they meet the conditions regarding independence as referred to in the Articles of Association and in the Dutch Corporate Governance Code.
Harrie Noy and Jolanda Poots-Bijl stepped down on 31 December 2016. Herman Hazewinkel, chairman, Mick den Boogert, Paul Frentrop remain the members of the board in order to take care of a prudent winding down of ING Trust Office.
The annual remuneration for the chairman of the Board amounts EUR 25,000.00 and for the other members of the Board EUR 20,000.00 in 2016.
Stichting Continuïteit ING (“ING Continuity Foundation”), a foundation organised under the laws of the Netherlands, established in Amsterdam, was founded on 22 January 1991.
Report of the Executive Board on internal control over financial reporting The Executive Board is responsible for establishing and maintaining adequate internal control over financial reporting. ING’s internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that: • Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of ING; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorisations of our management and directors; and
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ING Groep N.V. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated March 13, 2017 expressed an unqualified opinion on those consolidated financial statements.
Performance is assessed against financial and nonfinancial indicators. The targets that are individually determined should represent a balanced range of measures that support long-term sustainable performance of the organisation and should take full consideration of areas such as: • Customer satisfaction, retention and growth • Corporate social responsibility and sustainability • Employee engagement, development and productivity • Market share, growth rates, financial return and value creation • Operational effectiveness and efficiency • Compliance with risk management policies and all other internal policies and external legislation
In line with the Capital Requirements Directive (CRD IV) and the Dutch Act on Remuneration Policies of Financial Undertakings (Wet beloningsbeleid financiële ondernemingen, or WBFO), any variable remuneration is based for at least 50% on non-financial performance and subject to maximum ratios of variable remuneration in relation to fixed remuneration for different categories of staff.
In the Annual General Meeting on 8 May 2017 the shareholders will be asked to issue a new mandate to subsidiaries of ING, to increase the maximum percentage of variable remuneration compared to fixed remuneration from 100% up to 200%. The mandate will be requested for a period of five performance years,
2016 Remuneration The total amount of variable remuneration awarded to all employees over 2016 was EUR 386 million, compared to total staff expenses of EUR 5,039 million. Variable remuneration includes both individual and collective variable remuneration, such as profit-sharing arrangements agreed with relevant trade unions.
In 2016, there were 17 employees, working in the Corporate Staff, Wholesale Banking and Retail Banking business lines, to whom total annual remuneration (fixed and variable remuneration including employer pension contributions) of EUR 1 million or more was awarded. The majority of these employees (excluding the Executive Board) work outside the Netherlands.
• On 12 May 2014 with respect to pensions. • On 11 May 2015 in order to lower the maximum variable remuneration in line with legal requirements and specify that variable remuneration be paid fully in shares.
In line with applicable regulations, a maximum of 40% of total variable remuneration is awarded “upfront” in the year following the performance year. The remaining part of the total variable remuneration (a minimum of 60%), is deferred. It is subject to a tiered vesting on the first, second and third anniversary of the grant date (onethird per annum).
It is the responsibility of ING’s Supervisory Board to take into account the interests of all stakeholders, as well as business continuity and sustainable growth, when determining the Executive Board’s remuneration.
• Increasing sustainable transitions financing, strengthening environmental and social risk management and increasing empowerment scores (i.e. number of people who feel empowered by ING)
Performance indicators 2016 Remuneration Executive Board The Executive Board remuneration for 2016 is in accordance with the Executive Board remuneration policy, with the exception of the alignment to the benchmark. The policy as approved by the AGM, specifies that total direct compensation should be slightly below the median of comparable positions in the Euro Stoxx 50 peer group. However, - as the tables show on page 103 - the actual total direct compensation for the Executive Board, particularly for the CEO, is significantly below the median.
2016 Executive Board base salary In 2016, the Supervisory Board slightly increased the total (at target) remuneration of all Executive Board members by 2% with effect from 1 January 2016. Please see the first table on page 102 for more information.
2016 Performance indicators Executive Board As indicated in the remuneration policy, the performance of the Executive Board is assessed based on financial and non-financial indicators. For 2016, performance indicators applied included the following: 2016 Executive Board performance evaluation On the next page, a table is included highlighting key achievements collectively accomplished by the Executive Board in 2016 in the areas of strategy implementation, capability development, innovation, sustainability and ING’s (financial) performance. The table includes both financial and non-financial achievements against the overall ambitions of ING and the specific performance indicators agreed with the Supervisory Board at the beginning of 2016.
• Accelerated the Think Forward strategy to further improve the customer experience, further grow the number of primary customers and lending and increase efficiency.
• Launched four major programmes to drive digital transformation (i.e. Orange Bridge, Model Bank, Welcome and WB TOM), while converging towards a global scalable banking platform.
• Increased number of new retail customers by 1.4 million to 35.8 million; number of primary relationships up by 0.7 million to 9.7 million.
Pension costs In 2015 and 2016, members of the Executive Board participated in the Collective Defined Contribution (CDC) pension plan as part of the Executive Board remuneration policy. In 2014 the Executive Board participated in the Dutch Defined Contribution Pension Plan.
The long-term incentive plan (LTIP) in place at ING until 2010 included employee stock options and performance shares. The ING employee stock options have a total term of 10 years and a vesting period of three years, after which they can be exercised during the remaining seven years.
Employee stock options The table below contains information on the outstanding employee stock options and the movements during the financial year of employee stock options held by the members of the Executive Board as of 31 December 2016, which were all awarded to these board members in roles within ING prior to their appointment to the Executive Board.
In this context, the Supervisory Board has decided to slightly increase the total (at target) remuneration of the CEO by 3% with effect from 1 January 2017. The remuneration of the other Executive Board members will remain the same.
The Supervisory Board will continue to monitor the development of international remuneration policies and the benchmarks and will continue to support the Executive Board remuneration policy of compensating slightly below the median of the Euro Stoxx 50 benchmark. As such, annual reviews will be held and trends monitored.
Remuneration Supervisory Board Supervisory Board remuneration policy On 25 April 2016, the AGM approved a new remuneration policy for the Supervisory Board. The policy aims to: • Move to a simpler and more transparent structure • Bring remuneration levels more in line with peers and with levels adequate to attract qualified (international)
Supervisory Board. 3 Mariana Gheorghe is a member of the Supervisory Board as of 11 May 2015. The remuneration figures for 2015 reflect a partial year as a member of the Supervisory Board.
Eric Boyer de la Giroday 226,864 92,984 319,848 69,542 389,390 23,181
Central works council Bank (COR) December 2016 L.G. (Bert) Woltheus, chairman J. (Yoap) Brugmann, deputy chairman F.E. (Ferry) van Wezel, secretary Yvonne Vork (Works council Support)
Notes to the Consolidated statement of cash flows 31 Net cash flow from investing activities 181 32 Cash and cash equivalents 182 Segment reporting 33 Segments 182 34 Information on geographical areas 190 Additional notes to the Consolidated annual accounts 35 Pension and other post-employment benefits 195 36 Taxation 199 37 Fair value of assets and liabilities 202 38 Derivatives and hedge accounting 218 39 Assets by contractual maturity 221 40 Liabilities by maturity 223 41 Assets not freely disposable 224 42 Transfer of financial assets 225 43 Offsetting financial assets and liabilities 225 44 Contingent liabilities and commitments 230 45 Legal proceedings 231 46 Consolidated companies and businesses acquired and divested 232 47 Principal subsidiaries 234 48 Structured entities 235 49 Related parties 237 50 The European Commission Restructuring Plan 241 51 Other events 243 52 Subsequent events 246 Risk management 247 Capital management 316
Other information Independent auditor’s report 333 Articles of Association – Appropriation of results 344
Total liabilities and equity 845,081 1,005,233 1,178,657 1 Loans and advances to customers and Customer deposits, as at 31 December 2015 and 2014, are adjusted as a result of a change in accounting policies.
References relate to the accompanying notes. These form an integral part of the Consolidated annual accounts. Reference is made to Note 1 ‘Accounting policies’ for information on Changes in presentation of the Consolidated annual accounts and related notes.
Net result (before non-controlling interests) 4,726 4,413 1,440 Net result attributable to Non-controlling interests 75 403 189
Net result attributable to Equityholders of the parent 4,651 4,010 1,251
− from discontinued operations 441 –456 –1,406 in EUR 2016 2015 2014 Earnings per ordinary share 29
Remeasurement of the net defined benefit asset/liability 35 –65 24 –289
Total amount recognised directly in other comprehensive income 996 996 126 1,122 Net result from continuing and discontinued operations 131 3,879 4,010 403 4,413
Changes in the composition of the group and other changes 235 –371 –136 –72 –208 1 Exchange rate differences and other include the transfer of Revaluation reserves to Other reserves due to the partial sale of NN Group in February 2015.
Repayment and premium on non-voting equity securities1 –750 –750 –1,500 –2,250
ING Group Annual Report 2016 118 in EUR million 2016 2015 2014 Cash flows from operating activities
– change in provisions for insurance and investment contracts –1,499 –3,527
– deposits from banks, not payable on demand –342 5,179 3,353
– other financial liabilities at fair value through profit or loss –432 –1,582 –1,018
Comparison of the Consolidated cash flow statements between 2016, 2015 and 2014 is impacted by NN Group. Included in the 2015 and 2014 cash flow statements respectively, are the NN Group cash flows for five months until deconsolidation at the end of May 2015 and NN Group cash flows for the year ended 31 December 2014, respectively.
Under the EU carve out, ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging). For further information, reference is made to Note 1 ‘Accounting policies’, f) Principles of valuation and determination of results and Note 38 ‘Derivatives and hedge accounting’.
1 Accounting policies a) Changes in accounting policies in 2016 ING Group has consistently applied its accounting policies to all periods presented in these Consolidated annual accounts. Other than the change in accounting policy related to ‘Offsetting of financial assets and liabilities’, as described below, there were no changes in accounting policies, effective from 1 January 2016, that materially impact ING Group.
Offsetting of financial assets and financial liabilities IAS 32 ‘Financial Instruments: Presentation’ prescribes that a financial asset and a financial liability shall be offset when there is a legally enforceable right to set off and in addition an ‘intention to settle on a net basis’ simultaneously (IAS 32.42). ING has both the legally enforceable right (by contract) to set off the amounts under notional cash pooling arrangement as well as the intention to settle on a net basis. IFRS is principle based and does not prescribe how the intention to settle on a net basis is evidenced.
In April 2016, an Agenda Rejection Notice (ARN) was published by the IFRS Interpretations Committee (IFRIC) on balance sheet offsetting of notional Cash Pooling products. The issue in the ARN relates to the question whether certain cash pooling arrangements would meet the requirements for offsetting under IAS 32. The IFRIC provided further clarification that the transfer of balances into a netting account should occur at the period end to demonstrate an intention to settle on a net basis.
As a result of the ARN, which is applicable from 6 April 2016, ING has changed its accounting policy and practice, and therefore as a result performs physical transfers of cash balances of certain clients subject to cash pooling arrangements into a single netting account on a period end basis to evidence the intention to settle net. This change in accounting policy is accounted for retrospectively. Comparative amounts are adjusted accordingly with further information as set out below.
Summary of impact of changes in accounting policies The change in the accounting policy, as described above, has no impact on the Consolidated statements of profit or loss (including earnings and diluted earnings per ordinary share), statements of comprehensive income, statements of cash flows and the statements of changes in equity.
The list of upcoming changes to IFRS, which are applicable for ING Group: • Amendments to IAS 12 ‘Income Taxes’: Recognition of Deferred Tax Assets for Unrealised losses; • Amendments to IAS 7 ‘Statement of Cash Flows: Disclosure Initiative’; and • Annual improvement cycle 2014 – 2016
IFRS 9 Program governance and status The structure of the IFRS 9 Program has been set-up based on the three pillars of the IFRS 9 standard: Classification and Measurement, Impairment, and Hedge Accounting. These central work streams consist of experts from Finance, Risk, Bank Treasury, Operations and the business. The IFRS 9 Technical Board consists of the heads of various Finance and Risk functions supporting the IFRS 9 Steering Committee by reviewing the interpretations of IFRS 9, the central guidance, and instructions as prepared by the central work streams. The IFRS 9 Steering Committee is the key decision making body and consists of senior managers from Group Finance, Finance Operations, Retail Banking, Credit & Trading Risk, Risk Operations, Bank Treasury, Balance Sheet Risk Management, and Wholesale Banking Lending Services. In addition, an international IFRS 9 network has been created within ING to connect all countries with the central team to ensure consistency in implementation. The Management Banking Board and the Audit Committee are periodically updated about IFRS 9 and will be actively involved in future decisions.
Classification and Measurement IFRS 9 is built on a single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Financial assets are therefore classified in their entirety rather than being subject to complex bifurcation requirements.
In 2016, the central team finalised a Business Model Blueprint based on the structure of the organisation and all the entities across the Group through discussions with various parties from the business, finance, and risk functions. The central team created and communicated the Business Model templates that were later tailored by local project teams to fit the local organisation as well as local business structure and product offering.
Impairment The expected credit loss (ECL) model more is more forward-looking, than the incurred loss model under IAS 39. The ECL estimates are required to be unbiased, probability-weighted, and should include supportable information about past events, current conditions, and forecasts of future economic conditions. The ECL should reflect multiple macroeconomic scenarios and include the time value of money. The ECL model applies to all on-balance financial assets accounted for at amortised cost and FVOCI such as loans and debt securities, as well as off-balance items such as certain loan commitments, financial guarantees, and undrawn revolving credit facilities.
ING Group established a framework for whether an asset has a significant increase in credit risk. Each asset will be assessed at the reporting date on the triggers for significant deterioration. ING Group intends to assess significant increase in credit risk using a delta in the lifetime default probability, forbearance status, watch list status, arrears and the more than 30 days past due backstop for stage 1 to stage 2 transfers. The stage allocation will be implemented in the central credit risk systems. In 2017 analyses on the movements between stages in both directions will be performed.
To measure ECL, ING Group applies a PD x EAD x LGD approach. For stage 1 assets a forward looking approach on a 12 month horizon will be applied. For stage 2 assets a lifetime view on the underlying parameters is taken. The Lifetime Expected Loss (LEL) is the discounted sum of the portions of lifetime losses related to default events within each time window of 12 months. For stage three the PD equals 100% and the LGD and EAD represent a lifetime view of the characteristics of facilities that are in default.
Impact Based on the IFRS 9 ECL model a more volatile impairment charge may be expected on the back of macroeconomic predictions. Financial assets with high risk and long maturity profiles are expected to be subject to the biggest impact. A 12-month ECL will be recognized for all financial assets that have not had a significant increase in credit risk. IFRS 9 requires to calculate lifetime ECL for those assets with a significant increase in credit risk since initial recognition but are not credit impaired at the reporting date (i.e. Stage 2). This category did not exist under IAS 39. These factors combined with off-balance sheet items also in scope of the ECL model could result in an increase in the total level of impairment allowances.
ING expects that any negative effect on equity may be partly offset by the release of expected loss elements currently included in the calculation of regulatory capital (i.e. the regulatory shortfall). As the impact cannot be quantified reliably as of 31 December 2016, ING intends to quantify the potential impact of IFRS 9 no later than in the Annual Report 2017.
IFRS 15 ‘Revenue from Contracts with Customers’ IFRS 15 ‘Revenue from Contracts with Customers’ is effective for annual periods beginning on or after 1 January 2018 and has been endorsed by the EU in September 2016. IFRS 15 introduces a five-step approach for recognising revenue as and when the agreed performance obligations are satisfied. Agreed performance obligations are individual promises made to the customer that delivers benefit from the customers perspective. Revenue should either be recognised at a point-in-time or over-time depending on the service being delivered to the customer. The standard may be applied retrospectively, although transitional relief is available. Fees related to the effective yield of the loan which is presented in Interest income and bank guarantee fees are not in the scope of IFRS 15. ING is currently assessing the revenue stream for commission income.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to various valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings), and customer behaviour are taken into account. ING maximises the use of market observable inputs and minimises the use of unobservable input in determining the fair value. It can be subjective dependent on the significance of the unobservable input to the overall valuation. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
The process of setting assumptions is subject to internal control procedures and approvals, and takes into account internal and external studies, industry statistics, environmental factors, and trends and regulatory requirements.
Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in euros, which is ING Group’s presentation currency.
Derecognition of financial liabilities Financial liabilities removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished and the consideration paid is recognised in profit or loss.
Classification of financial instruments Financial assets and liabilities at fair value through profit or loss Financial assets at fair value through profit or loss include equity securities, debt securities, derivatives, loans and receivables, and other, and comprise the following sub-categories: trading assets, non-trading derivatives, and financial assets designated at fair value through profit or loss by management. Financial liabilities at fair value through profit or loss comprise the following sub-categories: trading liabilities, non-trading derivatives, and other financial liabilities designated at fair value through profit or loss by management. Trading liabilities include equity securities, debt securities, funds on deposit, and derivatives.
A financial asset or financial liability is classified at fair value through profit or loss if acquired principally for the purpose of selling in the short term or if designated by management as such. Management will make this designation only if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis.
If the Group purchases its own debt, it is removed from the statement of financial position, and the difference between the carrying amount of the liability and the consideration paid is included in the statement of profit or loss.
The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge), hedges of highly probable future cash flows attributable to a recognised asset or liability or a forecast transaction (cash flow hedge), or hedges of a net investment in a foreign operation. Hedge accounting is used for derivatives designated in this way provided certain criteria are met.
Impairments on other debt instruments (Loans and held-to-maturity investments) are part of the loan loss provision as described above. Impairment of available for sale financial assets At each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the specific case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. Significant and prolonged are interpreted on a case-by-case basis for specific equity securities; generally 25% and six months are used as triggers. If any objective evidence exists for available-for-sale debt and equity investments, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in net result – is removed from equity and recognised in the statement of profit or loss. Impairment losses recognised on equity instruments can never be reversed. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the statement of profit or loss, the impairment loss is reversed through the statement of profit or loss.
Property and equipment Property in own use Land and buildings held for own use are stated at fair value at the balance sheet date. Increases in the carrying amount arising on revaluation of land and buildings held for own use are credited to the revaluation reserve in shareholders’ equity. Decreases in the carrying amount that offset previous increases of the same asset are charged against the revaluation reserve directly in equity; all other decreases are charged to the statement of profit or loss. Increases that reverse a revaluation decrease on the same asset previously recognised in net result are recognised in the statement of profit or loss. Depreciation is recognised based on the fair value and the estimated useful life (in general 20–50 years). Depreciation is calculated on a straight-line basis. On disposal, the related revaluation reserve is transferred to retained earnings.
ING Group as the lessee The leases entered into by ING Group are primarily operating leases. The total payments made under operating leases are recognised in the statement of profit or loss on a straight-line basis over the period of the lease.
Where a business combination is achieved in stages, ING Group’s previously held interests in the assets and liabilities of the acquired entity are remeasured to fair value at the acquisition date (i.e. the date ING Group obtains control) and the resulting gain or loss, if any, is recognised in the statement of profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to the statement of profit or loss, where such treatment would be appropriate if that interest were disposed of. Acquisition related costs are recognised in the statement of profit or loss as incurred and presented in the statement of profit or loss as Other operating expenses.
The initial accounting for the fair value of the net assets of the companies acquired during the year may be determined only provisionally as the determination of the fair value can be complex and the time between the acquisition and the preparation of the Annual Accounts can be limited. The initial accounting shall be completed within a year after acquisition. Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities, that are identified within one year after acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. On disposal of group companies, the difference between the sale proceeds and carrying value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the statement of profit or loss.
Property obtained from foreclosures Property obtained from foreclosures is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price, less applicable variable selling expenses. Property obtained from foreclosures is included in Other assets - Property development and obtained from foreclosures.
Property under development is stated at fair value (with changes in fair value recognised in the statement of profit or loss) if ING Group has the intention to recognise the property under development after completion as real estate investments.
Other liabilities Defined benefit plans The net defined benefit asset or liability recognised in the statement of financial position in respect of defined benefit pension plans is the fair value of the plan assets less the present value of the defined benefit obligation at the balance sheet date.
Expense recognition Expenses are recognised in the statement of profit or loss as incurred or when a decrease in future economic benefits related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably.
The difference between the net cash flow in accordance with the statement of cash flows and the change in Cash and cash equivalents in the statement of financial position is due to exchange rate differences and is accounted for separately as part of the reconciliation of the net cash flow and the change in Cash and cash equivalents in the statement of financial position .
Designated as at fair value through profit or loss 5,099 3,234
The notional value of the related credit derivatives is EUR 260 million (2015: EUR 215 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated, amounts to EUR –8 million (2015: EUR –9 million) and the change for the current year amounts to EUR 1 million (2015: nil).
In June 2016, the VISA transaction closed. As a result of this transaction, the Available-for-sale equity securities amounting to EUR 163 million, comprising ordinary shares held in VISA Europe Limited, were derecognised. As part of the upfront consideration, ING received EUR 30 million preferred shares convertible into VISA Inc. class A ordinary shares. These preferred shares are classified as Available-forsale equity securities. Reference is made to Note 51 ‘Other events’.
In the fourth quarter of 2016, the merger between Equens SE (Equens) and Worldline was completed. The legal entity Equens ceased to exist and was renamed equensWorldline SE. ING Group previously held 15.42% in Equens at EUR 34.7 million. As a result of the merger, ING Group now holds a shareholding of 5.9% in the combined company at EUR 64.9 million. Reference is made to Note 23 ‘Investment income’ for further information on the results from the merger included in the statement of profit or loss.
In October 2016 ING sold 2.5% of Kotak Mahindra Bank shares representing a carrying value of EUR 456 million.
Designated as at fair value through profit or loss 1,669 1,080
Financial assets at fair value through profit or loss 11,532 15,396
Corporate bonds 1,345 1,177 791 1,036 2,136 2,213 Financial institutions’ bonds 2,020 1,865 351 363 70 64 2,441 2,292
In 2016 ‘Changes in the composition of the group and other changes’ includes the modification of an Available-for-sale debt security into newly issued shares.
ING Group Annual Report 2016 145 6 Loans and advances to customers
Loans guaranteed by credit institutions1 201 4,795 944 191 1,145 4,986
2 In 2016, Loans and advances to customers by type as at 31 December 2015 are adjusted. Certain Corporate Loans have been reclassified to Loans secured by mortgages.
− more than 1 year but less than 5 years 6,282 6,004
The allowance for uncollectable finance lease receivables includes in the loan loss provisions an amount of EUR 282 million as at 31 December 2016 (2015: EUR 271 million).
Loans guaranteed by credit institutions 2 1 12 15 14 16
Corporate loans and Credit Facilities 1,738 1,903 1,617 1,438 3,355 3,341
Changes in the composition of the group and other changes 3 33
Changes in the composition of the group and other changes 18
Revaluations In 2016, revaluations as presented in the table above of EUR 38 million includes, EUR 54 million relating to TMB, EUR 17 million relating to Equens SE, and EUR –31 million is due to other revaluations.
• Impairments on investments in associates and joint ventures of nil.
In 2015, Disposals of EUR 125 million was mainly attributable to sale of Ivy Retail SRL and Ontwikkelingscombinatie Overhoeks C.V. as referred to above.
Exchange rate differences In 2016, Exchange rate differences includes EUR 20 million, of which 28 million relates to TMB and EUR –9 million relates to Appia Group (2015: EUR 11 million related to TMB).
Group of CGU’s 2016 2015 Retail Belgium Values in use 8.64% 0.45% 50 50
Retail Growth Markets1, 2 Fair value less cost of disposal 12.48% 3.19% 375 427
Wholesale Banking2 Values in use 8.80% 0.96% 129 159 1 As of 2016, the group of CGUs Retail Central Europe is renamed to Retail Growth and enhanced with Asian stakes to align with segment reporting. This change has no impact on goodwill allocated to this group of CGUs in 2016 and 2015. 2 Goodwill related to Growth Countries is allocated across two groups of CGUs EUR 375 million to Retail Growth and EUR 109 million to Wholesale Banking.
Goodwill impairment testing Impairment reviews with respect to goodwill are performed at least annually and more frequently if events indicate that impairments may have occurred. Goodwill is tested for impairment at the lowest level at which it is monitored for internal management purposes and is referred to as a Cash Generating Unit (CGU), or group of CGUs. Goodwill is tested for impairment by comparing the carrying value of the group of CGUs (that is, the group of cash generating units or CGUs) to the best estimate of the recoverable amount of that group of CGUs. In compliance with IAS 36 ‘Impairment of assets’, the carrying value is determined on a basis that is consistent with the way in which the recoverable amount of the CGU is determined. The actual IFRS capital is the basis for allocation of carrying value to CGUs, adjusted for Retail/Wholesale split using a solvency allocation key which is based on the CGUs share of risk-weighted assets.
The amount that ING Group is contractually required to pay at maturity to the holders of financial liabilities designated as at fair value through profit or loss is EUR 11,720 million (2015: EUR 12,220 million).
Included in Other provisions – Litigation in 2016 and 2015, is a provision related to floating interest rate derivatives that were sold in the Netherlands. Reference is made to Note 27 ‘Other operating expenses’ and Note 45 ‘Legal proceedings’.
Included in Other provisions – Litigation in 2016, is a provision related to medical insurance plan damages for retired employees of ING Belgium. Reference is made to Note 27 ‘Other operating expenses’ and Note 45 ‘Legal proceedings’.
Amounts to be settled Amounts to be settled increased compared to 31 December 2015 as a result of reclassification of Items to be settled in respect of securities transactions. The items to be settled in respect of securities transactions of EUR 3,571 million, at 31 December 2016 (31 December 2015: EUR 2,257 million), were previously reported under Customer deposits and Deposits from banks. On the basis of materiality, comparative amounts as at 31 December 2015, have not been adjusted. Furthermore, the remaining increase, as at 31 December 2016, is due to higher market activity compared to year end.
ING Group Annual Report 2016 158 17 Debt securities in issue Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit or loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: 2016 2015 Fixed rate debt securities
More than 2 years but less than 3 years 7,365 11,192
More than 1 year but less than 2 years 2,724 6,056
More than 2 years but less than 3 years 4,168 1,958
More than 3 years but less than 4 years 793 2,827
More than 4 years but less than 5 years 320 476
Subordinated loans issued by ING Groep N.V. have been issued to raise Tier 1 capital for ING Bank N.V. Under IFRS these bonds are classified as liabilities and for regulatory purposes, they are considered capital. Subordinated loans issued by ING Group companies comprise, for the most part, subordinated loans which are subordinated to all current and future liabilities of ING Bank N.V.
In April 2016, ING Bank N.V. issued EUR 1,000 million CRD IV-eligible Tier-2 instruments. The transaction had an issuer substitution option which gives ING the right to exchange these for subordinated Tier-2 notes issued by ING Groep N.V. ING has classified this instrument as a financial liability because of the contractual interest payments and fixed maturity date.
Other reserves - Revaluation reserve: Available-for-sale and other 3,830 3,896 6,838 - Revaluation reserve: Cash flow hedge 777 666 3,877 - Revaluation reserve: Property in own use 204 326 306 - Net defined benefit asset/liability remeasurement reserve –371 –306 –504 - Currency translation reserve –770 –538 –741 - Share of associates, joint ventures and other reserves 2,235 1,733 1,483 - Treasury shares –8 –18 –46
During the Annual General Meeting of Shareholders, held on 25 April 2016, it was decided to reduce the par value per ordinary share from EUR 0.24 (2015 and 2014) to EUR 0.01. As a result of this, EUR 891 million is attributed to the Share premium. For further information, reference is made to the section ‘Depository receipts for ordinary shares’, below.
Depositary receipts for ordinary shares In 2016, ING Group proposed to the Annual General Meeting of Shareholders to amend the Articles of Association, which included the abolishment of the depositary receipt structure via Stichting Aandelen (ING Trust Office).
Following the adoption of the amendments to the Articles of Association, by the Annual General Meeting on 25 April 2016, the depositary receipt structure was abolished on 26 July 2016. As a result of the amendments to the Articles of Association, a holder of a depositary receipt became entitled to ordinary shares in ING in exchange for depositary receipts previously held.
Changes in composition of the group and other changes 13 –497
In 2016, the available-for-sale revaluation reserve decreased by EUR 154 million related to the release of previously recognised revaluation reserves, included in the line Unrealised revaluations in 2015, on shares held in VISA Europe Limited. Reference is made to Note 5 ‘Investments’, Note 37 ‘Fair value of assets and liabilities’ and Note 51 ‘Other events.
Realised gains/losses transferred to the statement of profit or loss 481
In 2014, Realised gains/losses transferred to the statement of profit or loss related to the deconsolidation of Voya at the end of March 2014.
Changes in composition of the group and other changes 113 119 –83
Transfer to/from share of associates and joint ventures reserves –265 161
Changes in composition of the group and other changes –371 –3,754
In 2014, Impact of IPO NN Group related to the IPO of NN Group in July 2014.
Ordinary shares - Restrictions with respect to dividend and repayment of capital The following equity components cannot be freely distributed: Revaluation reserves (being Available for-sale and other, Cash flow hedge, and Property in own use), Currency translation reserve, Share of associates and joint ventures reserve, and the part of the Retained earnings that relate to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Legally distributable reserves, determined in accordance with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code, from ING Group’s subsidiaries, associates and joint ventures are as follows: 2016 ING Bank Other Total 2015 ING Bank Other Total
Non-distributable reserves 6,824 6,824 2014 ING Bank NN Group Other Total
Required minimum total regulatory capital* 29,243 * Requirement is based on Pillar I only.
Required minimum total regulatory capital* 27,501 4,683 * Requirement is based on Pillar I only.
In 2015, the increase in total average assets (excluding Assets held for sale), combined with a decline in the net interest margin lead to an increase of EUR 257 million in net interest income. The increase in total average assets (with the cash pool balances still calculated on a net basis) was partly attributable to an increase in customer lending.
Valuation results on assets and liabilities designated at fair value through profit or loss (excluding trading) –79 372 –583
The portion of trading gains and losses relating to trading securities still held as at 31 December 2016 amounts to EUR –232 million (2015: EUR 147 million; 2014: EUR –18 million).
Net trading income relates to trading assets and trading liabilities which include assets and liabilities that are classified under IFRS as Trading but are closely related to servicing the needs of the clients of ING. ING offers products that are traded on the financial markets to institutional clients, corporate clients, and governments. A significant part of the derivatives in the trading portfolio are related to servicing corporate clients in their risk management to hedge for example currency or interest rate exposures. In addition, ING provides its customers access to equity and debt markets for issuing their own equity or debt securities (securities underwriting). Although these are presented as Trading under IFRS, these are directly related to services to ING’s customers. Loans and receivables in the trading portfolio mainly relate to (reverse) repurchase agreements, which are comparable to collateralised borrowing (lending). These products are used by ING as part of its own regular treasury activities, but also relate to the role that ING plays as intermediary between different professional customers. Trading assets and liabilities held for ING’s own risk are very limited. From a risk perspective, the gross amount of trading assets must be considered together with the gross amount of trading liabilities, which are presented separately on the statement of financial position. However, IFRS does not allow netting of these positions in the statement of financial position. Reference is made to Note 4 ‘Financial assets at fair value through profit or loss’ and Note 14 ‘Financial liabilities at fair value through profit or loss’ for information on trading liabilities.
ING Group’s trading books are managed based on internal limits and comprise a mix of products with results which could be offset. The results are presented in various lines within the statement of profit or loss. Reference is made to Note 20 ‘Net interest income’.
In 2016, Derivatives trading results includes EUR 36 million CVA/DVA adjustments on trading derivatives, compared with EUR 98 million CVA/DVA adjustment in 2015 (2014: EUR –205 million).
In 2016, Valuation results on assets and liabilities designated at fair value through profit or loss (excluding trading) includes fair value adjustments on own issued notes amounting to EUR –70 million (2015: EUR 404 million; 2014: EUR –632 million), of which DVA adjustment on own issued notes in 2016 amounted to EUR –50 million (2015: EUR 163 million; 2014: EUR –98 million).
Income from and fair value gains/losses on investment properties 4 4 9
In 2016, Dividend income includes EUR 16 million received as a result of the merger between Equens SE and Worldline. Reference is made to Note 5 ‘Investments’.
In 2016, Realised gains/losses on disposal of equity securities includes mainly EUR 163 million comprising the gain on disposal of the shares held in VISA Europe Limited. For further information on the disposal of shares held in VISA Europe Limited, reference is made to Note 51 ‘Other events’.
In 2014, Result on disposal of group companies included EUR 202 million profit on the deconsolidation of ING Vysya. Reference is made to Note 7 ‘Investments in associates and joint ventures’, Note 33 ‘Segments’, Note 34 ‘Information on geographical areas’, Note 49 ‘Related parties’.
The decrease in the number of employees in 2016, compared to 2015, is mainly as a result of the deconsolidation of NN Group at the end of May 2015 and reorganisations.
Share-based compensation arrangements include EUR 69 million (2015: EUR 63 million; 2014: EUR 57 million) relating to equity-settled share-based payment arrangements and EUR 6 million (2015: EUR 13 million; 2014: EUR 3 million) relating to cash-settled share-based payment arrangements.
Remuneration of senior management, Executive Board and Supervisory Board Reference is made to Note 49 ‘Related parties’.
As per 31 December 2016, total options outstanding consists of 16,861,694 options (2015: 27,657,794; 2014: 41,685,852) relating to equity-settled share-based payment arrangements and 8,713,218 options (2015: 9,653,337; 2014: 10,873,755) relating to cashsettled 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. As of 2015, ING Group no longer has share awards containing a market based performance condition. Previously, 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.
As at 31 December 2016, total unrecognised compensation costs related to share awards amount to EUR 41 million (2015: EUR 45 million; 2014: EUR 36 million). These costs are expected to be recognised over a weighted average period of 1.4 years (2015: 1.4 years; 2014: 1.3 years).
Addition/(unused amounts reversed) of provision for reorganisations and relocations 1,189 165 469
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 310 million (2015: EUR 281 million; 2014: EUR 239 million) in which ING Group is the lessee. No individual operating lease has terms and conditions that significantly affect the amount, timing and certainty of the consolidated cash flows of the Group.
Software and other intangible assets 44 15 1 44 15 1
In 2016, impairment losses on software and other intangible assets mainly include software that was impaired to its Value In Use, related to the announcements on ING’s Investor Day on 3 October 2016.
For further information, reference is made to Note 51 ‘Other events’.
Net result from disposal of discontinued operations In 2016, ING Group sold its remaining shares in NN Group resulting in a net profit of EUR 448 million which is recognised in the statement of profit or loss in the line Net result from disposal of discontinued operations. Also included in this line, are deferred losses related to former insurance activities.
Proportional interest held and key information The proportional interest held and key information on NN Group, until deconsolidation at the end of May 2015, are included in the tables below.
ING Group Annual Report 2016 180 29 Earnings per ordinary share
Cash and cash equivalents classified as Assets held for sale 6,239
Included in Cash and cash equivalents, are minimum mandatory reserve deposits to be held with various central banks. Reference is made to Note 41 ‘Assets not freely disposable’ for restrictions on Cash and balances with central banks.
The geographical segments for the Banking results are presented on page 189.
Special items include items of income or expense that are significant and arise from events or transactions that are clearly distinct from the regular operating activities. Disclosures on comparative periods also reflect the impact of current period’s divestments. Legacy Insurance consists of the intercompany eliminations between ING Bank and NN Group until deconsolidation at the end of May 2015, the results from Insurance Other and the results from discontinued operations. Insurance Other reflects (former) insurance related activities that are not part of the discontinued operations.
Underlying result as presented below is a non-GAAP financial measure and is not a measure of financial performance under IFRS. Because underlying result is not determined in accordance with IFRS, underlying result as presented by ING may not be comparable to other similarly titled measures of performance of other companies. The underlying result of ING’s segments is reconciled to the Net result as reported in the IFRS Consolidated statement of profit or loss below. The information presented in this note is in line with the information presented to the Executive Board and Management Board of ING Bank N.V.
ING’s Investor Day on 3 October 2016. 3 Insurance Other comprises mainly the net result relating to warrants on the shares of Voya Financial and NN Group.
Net result IFRS attributable to equity holder of the parent 4,651 1 Net result, after tax and non-controlling interests.
Intercompany eliminations between ING Bank and NN Group –28 –1 –7 –20
Net result IFRS attributable to equity holder of the parent 4,010 1 Net result, after tax and non-controlling interests.
Net result IFRS attributable to equity holder of the parent 1,251 1 Net result, after tax and non-controlling interests.
Special items –58 –58 1 Amounts are adjusted for comparison purposes. Czech Republic, previously fully reported within Wholesale Banking is now segmented to both Retail and
Underlying result before taxation 938 951 771 698 1,978 –611 4,724 Taxation 243 256 230 140 469 –117 1,221
Special items –58 –58 1 Amounts are adjusted for comparison purposes. Czech Republic, previously fully reported within Wholesale Banking Rest of the World is now reported under Other
USA ING Financial Holdings Wholesale banking 519 732 42,571 377 110
ING Group provides other post-employment employee benefits to certain employees and former employees. These are primarily postemployment healthcare benefits and discounts on ING products provided to employees and former employees.
Changes in the fair value of plan assets for the period were as follows: Remeasurements: Return on plan assets excluding amounts included in interest income 467 333
Other The actual return on the plan assets amounts to EUR 554 million (2015: EUR 426 million).
Actuarial gains and losses arising from changes in demographic assumptions 17 59
Changes in the composition of the group and other changes 185
For 2017 the expected contributions to pension plans are EUR 71 million.
Statement of profit or loss – Pension and other staff-related benefit costs
Financial assets and liabilities at fair value through profit or loss 1,112 –373 739
Unused tax losses carried forward not recognised as a deferred tax asset 973 969
The following tax losses carried forward and tax credits will expire as follows as at 31 December: No deferred tax asset recognised Deferred tax asset recognised
More than 10 years but less than 20 years 18 34
The table above includes a breakdown of certain net deferred tax asset positions by jurisdiction for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current or the preceding year. In 2016, the aggregate amount for the most significant entities is EUR 113 million (2015: EUR 269 million).
Impact on deferred tax from change in tax rates –1 12 –2
The weighted average statutory tax rate in 2015 was lower compared to 2014. This was mainly caused by the increase in the result in 2015 in the Netherlands.
The effective tax rate in 2016 is almost equal to the weighted average statutory tax rate. This is mainly caused by the fact the nontaxable income and the recognition of tax benefits from previously unrecognised amounts are almost fully offset by non-deductible expenses, the write-off of deferred tax assets and the adjustments to prior periods.
– designated as at fair value through profit or loss 12,266 12,616 12,266 12,616 1 Loans and advances to customers and Customer deposits, as at 31 December 2015, are adjusted as a result of a changes in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies and Changes in presentation in 2016. 2 Other assets do not include, among others: net defined benefit asset. 3 Other liabilities do not include, among others: net defined benefit and related employee benefit liabilities, and other taxation and social security contributions.
For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to various valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings), and customer behaviour are taken into account. ING maximises the use of market observable inputs and minimises the use of unobservable input in determining the fair value. The fair value can be subjective dependent on the significance of the unobservable input to the overall valuation. All valuation techniques used are subject to internal review and approval. Most data used in these valuation techniques are validated on a daily basis.
The Global Price Testing Committee is responsible for the use of appropriate models and inputs related to fair valued positions. It oversees the quality and coherence of valuation methodologies and processes. Local Parameter Committees monitor the appropriateness of (quoted) pricing, any other relevant market info, as well as that of pricing models themselves related to the fair valued positions to which they are applied. LPC executes valuation methodology and processes at a local level. Global Price Testing Committee oversees market data sources and market data set up / points used for official valuation of positions for fair value. Trading Pricing Model Committee approve and review all pricing models and methodologies for the calculation of market parameters.
If quoted prices in an active market are not available, fair value is based on an analysis of available market inputs, which may include values obtained from one or more pricing services or by a valuation technique that discounts expected future cash flows using a market interest rate curves, referenced credit spreads, maturity of the investment, and estimated prepayment rates where applicable.
Level 2 – Valuation technique supported by observable inputs This category includes financial instruments whose fair value is based on market observables other than (unadjusted) quoted prices. The fair value for financial instruments in this category can be determined by reference to quoted prices for similar instruments in active markets, but for which the prices are modified based on other market observable external data or reference to quoted prices for identical or similar instruments in markets that are not active. These prices can be obtained from a third party pricing service. ING analyses how the prices are derived and determines whether the prices are liquid tradable prices or model based consensus prices taking various data as inputs.
Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Trading assets, Non-trading derivatives, Assets designated at fair value through profit or loss, and Level 3 Financial liabilities at fair value through profit or loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as Level 3 if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which to derive a price that an unrelated, informed buyer would purchase the asset or liability at.
Financial assets designated as at fair value through profit or loss 502 4,141 456 5,099
Financial liabilities designated as at fair value through profit or loss 1,348 10,795 123 12,266
Main changes in fair value hierarchy in 2016 In 2016, the decrease in Level 2 financial assets and liabilities is mainly due to decreased (reverse) repo balances.
Financial assets designated as at fair value through profit or loss 242 2,654 338 3,234
Financial liabilities designated as at fair value through profit or loss 1,578 10,840 198 12,616
Amounts recognised in the statement of profit or loss during the year 226 –34 76 200 468
Amounts recognised in the statement of profit or loss during the year 146 –163 –55 30 –42
Amounts recognised in the statement of profit or loss during the year (Level 3)
The remaining EUR 1.0 billion (31 December 2015: EUR 1.1 billion) of the fair value classified in Level 3 financial assets is established using valuation techniques that incorporates certain inputs that are unobservable. This relates mainly to assets that are classified as Available-for-sale investments, for which changes in fair value are recognised in shareholders’ equity and do not directly impact profit or loss.
ING Group Annual Report 2016 214 2015 Assets Liabilities Valuation techniques Significant unobservable inputs
– Other 1 Option pricing model Commodity volatility (%) 17% 82%
Interest rates Prepayment rate and reset spread are key inputs to mortgage linked prepayment swaps valuation. Prepayment rate is the estimated rate at which mortgage borrowers will repay their mortgages early, e.g. 5% per year. Reset spread is the future spread at which mortgages will re-price at interest rate reset dates.
Statement of profit or loss – Valuation results and net trading income
Loans and advances to banks 16,228 4,141 5,152 3,502 965 29,988
Loans and advances to customers2 219,782 14,457 37,665 153,002 275,901 700,807
Financial assets at fair value through profit or loss 447 550
The table does not include assets relating to securities lending as well as sale and repurchase transactions. Reference is made to Note 42 ‘Transfer of financial assets’.
Financial assets at fair value through profit or loss 1,428 4,106 8,965
Financial liabilities at fair value through profit or loss 1,443 4,635 4,280
Other items where offsetting is applied in the statement of financial position 6,326 –5,846 480 15 465
Loans and advances to banks Reverse repurchase, securities borrowing and similar agreements 151 151 151 154 –3 151 – 151 – Financial assets at fair value through profit or loss
Other items where offsetting is applied in the statement of financial position 3,576 –3,477 99 4 95
Repurchase, securities lending and similar agreements 53,508 –22,569 30,939 242 30,570 127
Other items where offsetting is applied in the statement of financial position 2,201 –2,174 27 25 2
Impact of enforceable master netting arrangements or similar arrangements2 Derivatives –13,231 7,457 5,774 1 Customer deposits, as at 31 December 2015, is adjusted as a result of a change in accounting policies. Reference is made to Note 1 ‘Accounting policies’ – Changes in accounting policies in 2016. 2 The line ‘Impact of enforceable master netting agreements or similar arrangements’ contains derivative positions under the same master netting arrangements being presented in different statement of financial position line items.
ING Group Annual Report 2016 230 44 Contingent liabilities and commitments In the normal course of business, ING Group is party to activities where risks are not reflected in whole or in part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Other contingent liabilities include acceptances of bills and are of a short-term nature. Other contingent liabilities also include contingent liabilities resulting from the operations of the Real Estate business including obligations under development and construction contracts. Furthermore other contingent liabilities include a contingent liability in connection with a possible Dutch tax obligation that relates to the deduction from Dutch taxable profit of losses incurred by ING Bank in the United Kingdom in previous years. The existence of this obligation will be confirmed only by the occurrence of future profits in the United Kingdom.
45 Legal proceedings ING Groep and its consolidated subsidiaries are involved in governmental, regulatory, arbitration and legal proceedings and investigations in the Netherlands and in a number of foreign jurisdictions, including the U.S., involving claims by and against them which arise in the course of their businesses, including in connection with their activities as lenders, broker-dealers, underwriters, issuers of securities and investors, and their position as employers and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened governmental, regulatory, arbitration and legal proceedings and investigations, ING is of the opinion that some of the proceedings and investigations set out below may have or have in the recent past had a significant effect on the financial position, profitability or reputation of ING and/or ING and its consolidated subsidiaries.
As requested by the AFM, ING has reviewed a significant part of the files of clients who bought interest rate derivatives. In December 2015, the AFM concluded that Dutch banks had to re-assess certain client files, potentially including derivative contracts that were terminated prior to April 2014 or other client files. As advised by the AFM, the Minister of Finance appointed a Committee of independent experts (the Committee) which has established a uniform recovery framework for Dutch SME clients with interest rate derivatives. ING has adopted this recovery framework and will reassess individual files against this framework. ING has taken an additional provision for the financial consequences of the recovery framework.
46 Consolidated companies and business acquired and divested Acquisitions There were no significant acquisitions in 2016, 2015 and 2014.
Voya In 2014, ING Group reduced its’ stake in Voya from 56.5% at 31 December 2013 to 18.9% at 31 December 2014 through a number of transactions during the year. Voya was deconsolidated at the end of March 2014 and was accounted for as an available-for-sale investment held for sale as at 31 December 2014. Reference is made to Note 51 ‘Other events’.
For each of the subsidiaries listed, the voting rights held equal the proportion of ownership interest and consolidation by ING is based on the majority of ownership.
In 2015, Assets to Associates included Subordinated loans receivable from NN Group N.V. and amounted to EUR 823 million.
In 2015, included in off-balance sheet commitments, is a EUR 63 million facility to NN Bank which allows NN Bank an unconditional right to draw down additional Tier 1 capital at prevailing market terms, until 31 December 2018.
Variable compensation 1 Included their compensation earned in the capacity as Board members. 2 Excluded members that are also members of the Executive Board of ING Groep N.V. 3 In 2015, one new member joined. 4 The collective fixed allowances consisted of two savings allowances applicable to employees in the Netherlands; an individual savings allowance of 3.5% and a collective savings allowance to compensate for loss of pension benefits with respect to salary in excess of EUR 100,000.
Management Board members of ING Bank N.V. 120,646 216,211 123,237 216,568
Remuneration of the Executive Board and Management Board Bank is recognised in the statement of profit or loss in Staff expenses as part of Total expenses. The total remuneration of the Executive Board and Management Board Bank as disclosed in the table above includes all variable remuneration related to the performance year 2016. Under IFRS, certain components of variable remuneration are not recognised in the statement of profit or loss directly, but are allocated over the vesting period of the award. The comparable amount recognised in Staff expenses in 2016 and included in Total expenses in 2016, relating to the fixed expenses of 2016 and the vesting of variable remuneration of earlier performance years, is EUR 16 million. Remuneration in respect of NN Group is reflected in Net result from discontinued operations and does not impact the Total expenses. Total compensation of the Supervisory and Management Boards of NN Group, for the period until deconsolidation at the end of May 2015, amounted to EUR 3.0 million. These amounts are included in the 2015 statement of profit or loss of ING Group in the line item Net result from discontinued operations.
Risk Management Programme (RMP) Agreement The RMP Agreement has been in operation since 2003. RMP means the self-insured risk management program of ING Group encompassing professional liability, fidelity/crime, and employment practices liability exposures. Local insurance policies have been issued by a third party insurer to the subsidiaries of ING Groep N.V., which provide coverage for professional liability, fidelity/crime, and employment practices liability risks. The third party insurer has transferred 100% of the RMP liabilities to the reinsurer NN Re (Netherlands) N.V. In 2011, the RMP was split into the RMP Insurance (including the former subsidiaries Voya Financial, Inc. and the LatAm subsidiaries) and the RMP Bank. As of the initial public offering of NN Group N.V. has been responsible for administering the RMP Insurance, excluding Voya Financial, Inc. and the LatAm subsidiaries, for NN Group N.V. pursuant to the Relationship Agreement. The exposures with respect to and arising from the RMP Insurance, excluding Voya and the LatAm Entities, have stayed within NN Re (Netherlands) N.V. and have not be transferred to or taken over by ING Groep N.V.. As ING Groep N.V. has exposure, arising under the Indemnity Agreement agreed upon with the third party insurer, to certain claims under the RMP relating to NN Group Entities, ING Groep N.V. and NN Group N.V. have agreed to enter into this RMP Indemnity Agreement in respect of those claims.
In July 2014, NN Group, ING’s former European/Japanese insurance and investment management business, was listed on the Euronext Amsterdam stock exchange. Through the listing, ING’s stake in NN Group was reduced to 68.1%. Through a series of follow-on transactions, ING reduced its shareholding to 25.8% by 30 June 2015. ING’s minority stake was deconsolidated in line with IFRS accounting rules. With the divestment of more than 50% of its stake in NN Group and its deconsolidation, ING achieved compliance with the EC divestment conditions before the committed deadline of year-end 2015. In addition, after the deconsolidation of NN Group, the restrictions on acquisitions and on price leadership from the original 2009 Restructuring Plan, and amended in a restructuring agreement with the EC in 2012, no longer applied.
State Aid ING’s total State aid was repaid in a number of tranches between 2009 and 2014.
Also, in 2009 ING issued Government Guaranteed Notes, which all have been redeemed in full and for which ING paid a total of EUR 0.4 billion in fees to the Dutch State.
Impact on profit (+) or 1 Initial public offering (IPO). 2 Further divestment of NN Group. 3 Capital injection into NN Group. 4 Deconsolidation of NN Group; remaining investment in NN Group accounted for as an Investment in associate held for sale. 5 Second tranche exchange of subordinated notes: Anchor investors. 6 NN Group share repurchase. 7 Further divestment of NN Group in September 2015. 8 Loss of significant influence over NN Group. 9 The dilution of ING Group’s ownership in NN Group, to 25.75% and 14.08% respectively, was as a result of shares issued by NN Group as part of its internal stock options and share plans. 10 Final tranche exchange of subordinated notes: Anchor investors. 11 Divestment of remaining shareholding in NN Group.
July 2014 – Initial public offering (IPO) On 2 July 2014, ING sold 77 million existing ordinary shares in the initial public offering of NN Group at EUR 20.00 per share. On 10 July 2014, the joint global coordinators, on behalf of the underwriters, exercised an over-allotment option to purchase 11.55 million of additional existing shares in NN Group at the same price. At the time of the IPO, a first tranche of EUR 450 million of the mandatorily exchangeable subordinated notes (the pre-IPO investments from the three Asian-based investment firms RRJ Capital, Temasek and SeaTown Holdings International) was exchanged into NN Group shares. The remaining two tranches (each for an aggregate amount of EUR 337.5 million) were mandatorily exchangeable into NN Group shares from 2015 onwards.
May 2015 – Capital injection into NN Group In May 2015, in order to fulfil its commitment to the European Commission (EC), ING Group made a capital injection into NN Group by subscribing for newly issued shares for an aggregate amount of EUR 57 million. The transaction increased the ownership of ING in NN Group from 54.58% to 54.77%. As part of this transaction, ING provided a EUR 63 million facility to NN Bank which allows NN Bank an unconditional right to draw down additional Tier 1 capital at prevailing market terms, until 31 December 2018. With this provision of capital, ING Group fulfilled its commitment to the EC pertaining to the capitalisation of NN Bank, per the EC decision of 16 November 2012. These transactions had no material impact on the capital position of ING Group and no impact on the capital position of ING Bank.
June 2015 - Second tranche exchange of subordinated notes: Anchor investors On 10 June 2015, ING announced the exchange of the second tranche of EUR 337.5 million mandatorily exchangeable subordinated notes into 13.6 million NN Group ordinary shares. The exchange price was set at a 3% discount to the NN Group closing price on 4 June 2015, resulting in an exchange price of EUR 24.78 per share. Accrued interest on these notes of approximately EUR 14.6 million were settled in an additional 0.6 million NN Group ordinary shares as per the terms of the investment. The transaction was settled on 15 June 2015 and resulted in a further decrease of the ownership of ING in NN Group from 42.43% to 38.23%. The transaction did not have a material impact on the statement of profit or loss of ING Group. Reference is made to Note 18 ‘Subordinated loans’.
January 2016 – Loss of significant influence over NN Group On 5 January 2016, ING sold a further 33 million ordinary shares of NN Group. As part of the transaction, NN Group repurchased 8 million ordinary shares. The gross proceeds to ING Group from the offering, including the repurchase by NN Group, amounted to EUR 1 billion. The transaction reduced the ownership of ING in NN Group from 25.75% (as at 31 December 2015) to 16.22%. As a result of the transaction, together with ING Group no longer having any nominees on NN Group’s Supervisory Board as of 14 December 2015, ING Group no longer had significant influence over NN Group and accounted for its remaining stake in NN Group as an available-forsale investment. The sale transaction, together with the revaluation of the remaining stake, resulted in a net profit of EUR 522 million and is recognised in the statement of profit or loss in the line Net result from disposal of discontinued operations.
The ING Group Chief Risk Officer (CRO) is also the CRO of ING Bank. Therefore, he is responsible for the day-to-day Risk Management of the Group and the Bank. The remaining risk functions and processes that are specific for the Group function have been delegated to ING Bank.
Purpose and business model The purpose of ING Bank’s risk management function is to support the ambition of ING Bank to be the primary bank for our customers, empowering the business through an integrated, state of the art, enterprise-wide risk management platform. The following principles support this purpose: • The risk management function is embedded in all levels of ING Bank’s organisation and is part of the daily business activities and strategic planning to have a sustainable competitive advantage; • Products and portfolios are structured, underwritten, priced, approved and managed properly and compliance with internal and external rules is monitored; • Delegated authorities are consistent with the overall Bank strategy and risk appetite; and • Transparent communication to internal and external stakeholders on risk management.
Risk governance Effective risk management requires a firm-wide risk governance. ING Bank’s risk and control structure is based on the ‘three lines of defence’ governance model, whereby each line has a specific role and defined responsibilities in such a way that the execution of tasks is separated from the control of the same tasks. At the same time, they have to work closely together to identify, assess and mitigate risks. This governance framework ensures that risk is managed in line with the risk appetite as approved by the Management Board Bank (MBB) and the Supervisory Board (SB), and is cascaded throughout ING Bank.
• The SB is responsible for supervising the policy of the MBB, the general course of affairs of ING Bank and its business (including its financial policies and corporate structure). For risk management purposes the SB is assisted by two sub-committees: • The Audit Committee, which assists the SB in monitoring the integrity of the financial statements of ING Bank, in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING's internal and external auditors; and
Executive level The ING Bank Finance and Risk Committee (BF&RC) is a platform for the CRO and the Chief Financial Officer (CFO), along with their respective direct reports, to coordinate issues that relate to both the finance and risk domains. On reporting level, BF&RC has the responsibility to coordinate finance and risk decisions that have an impact on internal and/or external reporting.
The key risk committees described below act within the overall risk policy and delegated authorities granted by the MBB: • Global Credit & Trading Policy Committee (GCTP), former Global Credit Committee Policy or GCC (P): Discusses and approves policies, methodologies and procedures related to credit, trading, country and reputation (ESR) risks within ING Bank. The GCTP meets on a monthly basis; • Global Credit Committee – Transaction Approval (GCC(TA)): Discusses and approves transactions which entail taking credit risk (including investment risk), country, legal and ESR risk. The GCC(TA) meets twice a week; • Asset and Liability Committee Bank (ALCO Bank): Discusses and approves on a monthly basis the overall risk profile of all ING Bank’s market risks that occur in its activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank; and
Risk management function Organisational structure Based on the three lines of defence, an independent risk management function has oversight in all levels of ING Bank’s organisation. The CRO, a MBB member, bears primary overall responsibility for the risk management function and reports directly to the Chief Executive Officer. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING Bank’s risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
Over the past years, banks have been faced with regulatory and public pressure with regard to their risk management policies, processes and systems. New requirements and regulations have been introduced and implemented. To be able to effectively address these internal and external (market and regulatory) developments and challenges, ING Bank started to redesign the set-up of its riskmanagement organisation in 2015. This in order to better support the Bank’s Think Forward strategy and enhance the interconnection of the business units risk oversight responsibilities on one hand, and the global risk functions on the other hand.
The organisation chart below illustrates the current reporting lines within ING Bank global risk organisation: As announced in October 2016, ING is accelerating its Think Forward strategy. Therefore, ING has introduced a number of initiatives to further improve the customer experience, further grow primary customers and lending, and increase efficiency. For Risk, it has initiated a Target Operating Model (TOM) programme to enable further convergence of our operations, which resulted in a new risk organisation to start on 1 March 2017.
Risk policies, procedures and standards ING Bank has a framework of risk management policies, procedures and minimum standards in place to create consistency throughout the organisation, and to define requirements that are binding to all business units. The governance framework of the local business units aligns with ING Bank’s 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 practices.
Commonly seen as norms and traditions of behaviour of individuals and of groups within an organisation, risk culture determines the way in which employees identify, understand, discuss, and act on the risks the organisation is confronted with and the risks it takes. This is a continuous long-term commitment and journey. In this respect, The Orange Code has been set as a declaration of who we are. It describes what we can expect from each other when we turn up to work each day. A set of standards that we collectively value, strive to live up to, and invite others to measure us by.
In the Netherlands, employees of all financial institutions – and that includes ING Bank – are required to take the Banker’s Oath. This legal requirement came into force on 1 April 2015 as part of the joint approach from all banks, known as ‘Future-oriented Banking'. With the introduction of a social regulation, the revision of the Dutch Banking Code and the implementation of a banker's oath (with the associated rules of conduct and disciplinary law), the banks want to show the society what they stand for and what they can be held accountable for, both as individual banks and the banking sector as a whole.
Lastly, ING Bank makes sure that the remuneration policy is properly aligned with its risk profile and the interests of all stakeholders. For more information on ING’s compensation and benefits policies and its relation to the risk taken, please refer to the “Capital Requirements Regulation (CRR) Remuneration disclosure” published on the corporate website ing.com. us/Annual-reporting-suite.htm
The solvency risk appetite is closely aligned with capital management activities and policies. ING has determined tolerances for its risk-weighted solvency position (CET1 ratio), for non-risk-weighted solvency (leverage ratio) and for a more economic value based solvency (economic capital utilisation expressed via the Overall Supervisory Review and Evaluation Process (SREP) Capital Requirement). These statements are complemented with a specific statement regarding profitability. The CET1 ratio and leverage solvency risk appetite statements as well as profitability statement are not only compared to the actual reported level, but also include the potential impact of a standardised and pre-determined 1-in-10-year stress event (i.e. at a 90% confidence level with a 1year horizon). Based on this mild stress scenario, the impact on ING Bank’s earnings, revaluation reserve and risk-weighted assets (RWA) is calculated (these are labelled earnings-at-risk, revaluation reserve-at-risk and RWA-at-risk). These stressed figures are used as input for a two-year simulation which depicts the developments of ING’s solvency level versus its risk appetite.
The concentration risk appetite set at consolidated level are directly translated into corresponding limits in the underlying risk appetite statements for profitability risk, credit risk, market risk and funding & liquidity risk.
ING measures and monitors its exposure to non-financial risk on an ongoing basis by assessing risks, analysing scenarios and mitigating actions as a result of audit and risk assessment findings. The aggregation of the assessed risk levels is expressed in an expected loss figure on non-financial risk, which is compared to the tolerance levels as captured in the NFR Risk Appetite Statements (RAS) based on a percentage of the operational income. The overall non-financial risk levels and tolerance breaches are periodically reported through the Non-Financial Risk Dashboard (NFRD). The NFRD consists of comprehensive and integrated NFR information on a quarterly basis. Changes in capital are monitored and reported in the NFRD as well. In case risk events cause ING to move towards or beyond the tolerance level, management is required to undertake action.
In particular to compliance risk: ING must meet its compliance obligations, seek to adhere to the spirit as well as to the letter of applicable laws and regulations, ING policies and minimum standards, the values and behaviours as defined in the Orange Code, and to act upon identified compliance breaches immediately and diligently.
Types of stress tests Within ING, different types of stress tests are performed. The most comprehensive type of stress tests are the firm-wide scenario analyses, which involve setting scenario assumptions for all the relevant macroeconomic and financial market variables in all countries relevant to ING. These assumptions usually follow a qualitative narrative that provides background to the scenario. In addition to firm-wide scenario analyses, ING executes scenario analyses for a specific country or portfolio. Furthermore, sensitivity analyses are performed, which focus on stressing one or more risk drivers; usually without an underlying scenario narrative. The 1-in10 -year stress scenario used in the risk appetite framework is an example of a sensitivity analysis. Finally, ING performs reverse stress tests, which aim to determine scenarios that could lead to a pre-defined severe adverse outcome.
Economic and Regulatory Capital Economic Capital (EC) and Regulatory Capital (RC) are the main sources of capital allocation within ING Bank. Both of these capital metrics are used to determine the amount of capital that a transaction or business unit requires to support the economic and regulatory-based risks it faces. The concept of EC differs from RC in the sense that RC is the mandatory amount of capital that is defined under Pillar I while EC is the best estimate of Pillar II capital that ING Bank uses internally to manage its own risk. EC is a nonaccounting measure that is inherently subject to dynamic changes and updated as a result of ING Bank’s portfolio mix and general market developments. ING Bank continuously recalibrates the underlying assumptions behind its economic capital model which may have an impact on the values of EC going forward.
Cybercrime Cybercrime is a continuous threat to companies in general and to financial institutions specifically. Both the frequency and the intensity of attacks increase on a global scale. Threats from Distributed Denial of Service (DDoS), targeted attacks (also called Advanced Persistent Threats) and Ransomware intensify worldwide. ING Bank builds on its cybercrime resilience, further enhancing the control environment to protect, detect and respond to e-banking fraud, DDoS and targeted attacks. Additional controls continue to be embedded in the organisation as part of the overall internal control framework and are continuously re-assessed against existing and new threats. During 2016 ING did not experience any cyber incident that can be classified as material. ING provides continuous reporting on cyber incidents to the ECB.
Credit risk Introduction Credit risk is the risk of loss from the default and/or credit rating deterioration of counterparties. Credit risks arise in ING Bank's lending, financial market and investment activities. The credit risk section provides information on how ING Bank manages, measures and monitors credit risk and gives an insight into the ING Bank portfolio from a credit risk perspective.
Governance Credit risk within ING Bank is part of the second line of defence (the front office being the first, internal audit the third) and is managed within the Credit & Trading Risk (C&TR) function. C&TR is responsible for reviewing and managing credit risk including environmental and social risk (ESR) for all types of counterparties. It consists of credit risk managers who are responsible for credit approvals and managing the specific credit risks in their portfolios and credit risk experts who provide support by means of credit risk systems, policies, models and reporting. To ensure the independence of the risk function, the C&TR general manager is functionally responsible for the global network of credit risk staff.
The credit risk role encompasses the following activities: • Measuring, monitoring and managing credit risks in the Bank’s portfolio; • Challenging and approving new and modified transactions and borrower reviews; • Managing the levels of provisioning and risk costs, and advising on impairments; and • Providing consistent credit risk policies, systems and tools to manage the credit lifecycle of all activities.
• Money market (MM) risk: arises when ING Bank places short-term deposits with a counterparty in order to manage excess liquidity. As such, money market deposits tend to be short-term in nature. In the event of a counterparty default, ING Bank may lose the deposit placed. Money market risk is measured as the accounting value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
Credit risk appetite statements Credit risk appetite is the maximum level of credit risk ING Bank is willing to accept for growth and value creation. This credit risk appetite is linked to the overall Bank-wide risk appetite framework. The credit risk appetite is expressed in quantitative and qualitative measures. Having a credit risk appetite achieves: • Clarity about the credit risks that ING Bank is prepared to assume, target setting and prudent risk management; • Consistent communication to different stakeholders; • Guidelines how to align reporting and monitoring tools with the organisational structure and strategy; and • Alignment of business strategies and key performance indicators of business units with ING Bank’s credit risk appetite by means of the MTP.
Credit risk appetite is present across different levels within ING Bank, at portfolio level as well as transaction level. The various credit risk appetite components at portfolio and transaction level together result in the credit risk appetite framework.
Country risk concentration Country risk is the risk that arises due to events in a specific country (or group of countries). Country risk is the risk of loss for ING Bank associated with lending, pre-settlement, money market and investment transactions as a result of country risk events. A country risk event can be described as economic, financial and political shocks and transfer or exchange restrictions, affecting all counterparties in a specific country. The occurrence of a country risk event may cause all counterparties in a country to be unable to ensure timely payments, despite their willingness to meet their contractual debt obligations. As such, country risk is an additional factor to be taken into account in the credit approval process of individual customers, as the country risk event probability may impact the default probability of individual counterparties.
Product approvals Across ING Bank a robust product approval and review process ensures effective management of risks associated with the introduction of new or modified products. It ensures that sound due diligence is performed by relevant stakeholders to ensure that all relevant risks (credit, operational, legal, etc.) are adequately mitigated in the Product Approval and Review Process (PARP).
Reference benchmarks A reference benchmark is the maximum appetite for credit risk per legal one obligor group. It is expressed as a (benchmark) exposure at the concentration risk level, which corresponds to a (maximum) internal capital consumption for credit risk. It is used as a reference amount in the credit approval process and can be waived on the basis of proper arguments.
Environmental and Social Risk Framework ING Bank makes a positive contribution to global economic growth and more sustainable development by promoting responsible lending and investment practices. The environmental and social risk (ESR) policy framework incorporates assessment tools that are used in ING’s mainstream processes and systems. It is therefore fully integrated into regular client and transaction reviews.
The ESR policy framework is reviewed every three years on the basis of significant changes identified in the sectors that are more vulnerable to environmental and social risks and impacts. In addition, environmental and social risks for all lending transactions are reviewed on a yearly basis following annual credit reviews. ESR transactions where funds will be used for asset based finance may require enhanced ESR due diligence e.g. application of the Equator Principles. Such enhanced ESR evaluation is also required for any high-risk transaction, such as those that impact indigenous people etc.
Credit risk capital and measurement Credit risk capital Regulatory capital is a law based prudent measure defined by regulators and serves as the minimum amount of common equity Tier1, additional Tier-1 and Tier-2 capital required to absorb unexpected losses. Regulatory capital is the minimum amount of capital (based on 99.90% confidence level) that ING Bank must hold from a regulatory perspective as a cushion to be able to survive large unexpected losses.
RWA comparison Comparison of RWA and risk weights across institutions is inherently challenging. Differences in RWA among banks have been classified by the Bank for International Settlements (BIS) in 3 categories: 1. Risk based drivers that stem from the differences in underlying risk at the exposure/portfolio level and in business models/
Risk based drivers ING Bank’s portfolio is dominated by secured lending especially in the areas of residential mortgages, leasing and commercial real estate. Secured lending tends to have a much lower LGD, given the collateral involved, which is a key driver of RWA calculation. Another important element of the ING business model is the focus on retail exposures collateralised by residential property. ING’s retail portfolio is mainly comprised of residential mortgages. The regulatory formula for this exposure class tends to result in lower RWA, all other factors being equal.
Regulatory environment ING Bank’s primary supervising entity is the ECB, who is supported by many host supervisors. The ECB supervises adherence to the regulatory rules: the regulatory framework defined in CRR/CRDIV, European Bank Authority (EBA) standards and ECB guidance. The ECB requires all ‘significant changes’ in internal models (PD, LGD and EAD) and policies to be reviewed and approved by the ECB.
Economic capital Economic capital reflects ING Bank’s own view on credit risk, which allows it to be used in decision making processes at transaction level, counterparty level and (sub) portfolio levels. Credit risk and transfer risk capital are calculated on all portfolios which contain credit or transfer risk, including investment portfolios. Economic capital is the minimum amount of capital required to cover unexpected losses within a 99.95% confidence level and a 12 months’ time horizon. It is used throughout ING Bank in the decision making process (mainly wholesale banking), in risk adjusted counterparty and portfolio profitability measurement tools (wholesale and retail banking), in investment and divestment decisions, in the country risk framework and in concentration risk management such as risk appetite statements (RAS), single name concentration and the systemic risk reports (sector concentration report).
Standardised approach The standardised approach applies a fixed risk weight to each asset as dictated by the CRR, and is based on the exposure class to which the exposure is assigned. As such, the Standardised Approach is the least sophisticated of the regulatory capital methodologies and is not as sensitive as the risk-based approach. Where external rating agency ratings are available, they may be used as a substitute to using the fixed risk weightings assigned by the Financial Supervisory Authorities. Because the underlying obligors are relatively small for exposures treated under SA, the underlying obligors tend not to have external ratings.
• Maturity (M): The fourth element is the time to the maturity of the underlying financial obligation. Regulatory requirements
• Exposure Class: The fifth element is the exposure class (a regulatory prescribed grouping of a common obligor type or product type) which is a driver for the correlation factor. To calculate risk-weighted assets the default correlation between a transaction and all other transactions in the portfolio is taken into account. The correlation factor determines which portion of the standalone risk of a transaction is retained when the transaction is included in the portfolio and the portfolio diversification benefits are taken into consideration.
Credit risk models Within ING Bank internal Basel compliant models are used to determine the PD, EAD and LGD for regulatory and economic capital. Bank wide, ING Bank has implemented over 80 models, including various sub models that may be applicable for a specific portfolio. There are two main 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 statistical models combined with knowledge and experience of experts from both risk management and front office staff and literature from rating agencies, supervisors and academics. These models are especially appropriate for ‘Low Default Portfolios’, where limited historical defaults exist.
Next to the model choice, the definition of default is an important starting point for model building. ING Bank uses a framework that integrates elements of the regulatory definition of ‘Default’ and the loan loss provisioning indicators under IAS 39. The rationale is that several indicators are very close to the indications of an obligor’s ‘unlikeliness to pay’ under European regulation (CRR/CRDIV) and similar regulations. Integration of both frameworks further enhances ING Bank’s compliance with the CRR/CRDIV ‘use test’. Key differences between the parameters used for loan loss provisioning and regulatory capital calculations are that regulatory capital parameters are typically through the cycle while loan loss parameters are more point in time. Additionally, the LGD for regulatory capital calculations is based on a down-turn LGD and a Loss Emergence Period is applied on the 1 year Default Probability to obtain Incurred losses.
Models used for exposure classes ING Bank has developed PD, EAD and LGD models for Wholesale Banking and Retail Banking portfolios. PD, EAD and LGD models are subject to CTRC (or in some delegated cases: MDC) approval and changes which significantly impact the results require approval from the regulator before implementation. By nature, the above described exposure classes have different, specific characteristics. To capture these specific characteristics and to have suitable valuations and analyses in place, credit risk department is continuously updating and developing models within each exposure class. In total, the credit risk department makes use of over 90 different internal models.
Changes in 2016 to credit risk models Model changes were in 2016 partly driven by regulatory guidance and thereby resulted in a EUR 13 billion increase of RWA. This increase resulted from several changes in different portfolios. An RWA add-on for the SME portfolios in the Netherlands and Belgium was implemented through LGD model updates which increased RWA by EUR 6.1 billion. Further, RWA add-ons were implemented on Belgian mortgages and Small Business Finance (SBF) portfolios through model updates, which increased RWA by EUR 1.9 billion. The RWA impact of all these add-ons were reported as an ONCOA item in 2015. For the Project Finance and ING Direct Spain mortgages LGD models risk-weight multipliers were added, increasing RWA by EUR 4.0 billion and EUR 0.7 billion, respectively. Next to these model updates, the model approach for the Dutch healthcare portfolio changed from AIRB to SA which increased RWA by EUR 1.0 billion.
A key component of the credit risk data is that this data is continuously used throughout all the stages of the credit risk management cycle. By using and re-using data, there is, a continuous incentive for all data providers and users to assure up to standard data quality with regards to data delivery and data usage.
• Data Quality Assurance: establishes data quality management with the primary focus how credit risk data quality is managed throughout the credit risk data lifecycle. It covers the data quality cycle, data quality criteria and relevant activities through the stages. The data quality cycle consists of four stages: define, implement, monitor and improve. During the data definitions step, data quality rules are determined. Having set the definitions, local data quality rules are implemented in the source systems, and both successively and simultaneously, data quality rules are implemented in the central credit risk system. The next stage consists of data validations, monitoring and control activities performed early in the data exchange and after data processing and calculations stage. The last stage is the continuous improvement of data quality which can be split into two categories: • One off issues and re-occurring issues that are identified, prioritised and subject to solution; • The periodical review of the data quality rules and improvements based on lessons learned from solving issues, audits and best practices. After the last stage, the data quality cycle resumes from the start, ultimately leading to up to standard credit risk data quality.
Exposure classes ING Bank portfolio per risk category, as % of total regulatory EAD
The total size of the residential mortgage portfolio grew which was mainly driven by Germany, Australia, Spain and Belgium, while the residential mortgage portfolio in the Netherlands decreased in size. The decrease was driven by the continued transfer of mortgages from WestlandUtrecht (WU) Bank to NN Bank, the run-off of the WU Bank mortgage book and mortgage prepayments.
Risk classes ING Bank portfolio per line of business, as % of total outstandings1,2
Decreased central bank deposits and the country rating downgrade of Finland to AA+ were the drivers behind the decreased proportion of AAA-rated assets in Wholesale Banking and increased investment concentration in rating class AA. Additional concentration in the Wholesale Banking AA rating class was driven by increased exposures in US government bonds and positive rating migration of one US financial institution which shifted derivatives exposure from rating class A. Next to this, the concentration in the A rating bucket decreased due to lower lending exposures to the Japanese Central Bank and negative rating migration of one German financial institution to bucket BBB, which mainly impacted Wholesale Banking and Corporate Line.
Risk industry concentration ING Bank uses a common industry classification methodology based on the NAICS system (North American Industry Classification System). This methodology has over 1,500 detailed industry descriptions, which are aggregated into 22 industry classes at the highest level. Certain countries require ING Bank to report locally based on other industry classification methodologies, which are generally derived from the NAICS classifications presented here. Residential mortgages are generally only extended to private individuals.
Risk classes ING Bank portfolio per credit risk type, as % of total outstandings1
Cover forms Assets The asset that has been pledged to ING Bank as collateral or security gives ING Bank the right to liquidate it in cases where the customer is unable to fulfil its financial obligation. As such, the proceeds can be applied towards full or partial compensation of the customer's outstanding exposure. An asset can be tangible (such as cash, securities, receivables, inventory, plant & machinery and mortgages on real estate properties) or intangible (such as patents, trademarks, contract rights and licenses).
Exposures are categorised into different Value to Loan (VTL) buckets that give insight in the level of collateralisation of ING Bank’s portfolio. VTL is calculated as the cover value divided by the outstandings at the balance sheet date. The cover values are indexed and exclude any cost of liquidation. Covers can either be valid for all limits, sub-limits or a particular outstanding of a borrower, the latter being the most common. For the purpose of aggregation, the coverage of all outstanding is capped at 100%. Over-collateralisation is ignored in this overview. Each limit is subsequently assigned to one of the six defined VTL buckets: no cover, >0% to 25%, >25% to 50%, >50% to 75%, >75% to <100%, and ≥ 100%. As the nature of the Pre-settlement portfolio determines that collateral is netted, these VTL buckets are not shown.
A significant, but decreasing part of ING Bank’s residential mortgage portfolio related to mortgage loans provided in the Netherlands (43.2% in 2016 versus 45.8% in 2015), followed by other main markets such as Germany (23.9%), and Belgium (11.8%). Given the size of the Dutch mortgage portfolio, the valuation methodology employed to determine the cover values for the Dutch residential mortgages is provided below.
Total Consumer Lending 304,448 486,156 3,494 391 25,846 34,839 5.6% 0.1% 0.1% 1.4% 12.7% 80.1% 1 Excluding intercompany positions.
House prices in the Netherlands continued to show an improvement in 2016. This helped to increase the total residential mortgages cover values whilst overall mortgage outstandings increased, mainly in Germany and Australia, where the coverage ratio is nearly 100%. As the Netherlands is the biggest market for mortgages for ING Bank, this also had a significant impact on the coverage quality of the portfolio. Mortgage portfolio in the Netherlands reduced in outstandings due to run-off and transfer of WestlandUtrecht Bank mortgages to NN Bank. NPLs have shown a big improvement, especially in the Netherlands.
Cover values including guarantees received - Consumer lending portfolio – 20151
Total Business Lending 295,987 119,583 16,736 81,729 90,158 130,344 36.8% 4.8% 4.7% 7.7% 10.3% 35.7% of which Total Nonperforming 9,841 5,171 287 2,993 3,521 4,180 24.2% 2.9% 8.1% 15.8% 16.2% 32.8% 1 Including loans to ING Group. 2 Excluding intercompany positions. 3 ‘Others’ comprises industries with outstandings below EUR 13 billion in 2015.
Cover values including guarantees received - Business lending portfolio – 20161,2
Cover values including guarantees received - Business lending portfolio – 20151,2
Similar to the retail lending portfolio, the risk profile of the business lending portfolio continued improving in 2016. Lower NPLs and increased levels of collateralisation contributed to this improvement. The cover values of Real Estate (traditionally a well collateralised sector) improved over 2016. New transactions were done on more conservative collateral terms and improved valuations in real estate markets further helped to boost the total coverage in Real Estate.
The increase in Belgium was mainly due to growth in the C&FI Lending. The decrease in the Netherlands was due to a large decline in central bank deposits. As these deposits are not collateralised this decline had no influence on the total cover amounts. The increase in the Rest of Europe was mainly observed in the United Kingdom, Luxembourg and Italy.
Investment and Money Market portfolio 2016 Cover type 2015 Cover type
A key characteristic of the investment and money market business is that typically little cover is given to support these exposures. 99.7% of Money Market and 99.0% of Investment exposure receives no covers. The guarantees listed under Rest of Europe comprised of cedulas and were booked in Spain. The decrease in the guarantees was related to the decreased outstandings in cedulas.
Cover values including guarantees received – Investment and Money Market portfolio1,2
• The outstandings column represents CEM exposure (MtM after netting and collateral) plus the Potential Future Exposure (PFE) at a 97.5% confidence level for derivatives and securities.
Belgium 5,463 3,368 2,871 2,455 5,343 3,875 3,360 2,507 Germany 5,300 2,757 1,842 3,479 7,216 3,783 2,486 5,038 Netherlands 9,146 5,859 3,741 4,848 10,256 5,842 4,385 5,138 Rest of Europe 124,173 31,656 26,648 25,481 118,920 34,762 28,212 27,504
During 2016 the pre-settlement portfolio decreased when expressed in outstandings. The MtM before and after netting and collateral increases were observed, especially in Rest of Europe due to increases from exposures to commercial banks and to central clearing houses. Rest of Europe forms majority of the pre-settlement portfolio which was mainly concentrated in UK and where the portfolio consisted of mostly derivatives.
The improvement in past due obligations was mainly seen in Retail Benelux, underlying a solid base for ING’s primary market. The improved economy and revival of the housing market in the Netherlands were the main drivers. At the same time, local risk management actions targeted at lowering arrears and enhancing the early warning methodology clearly helped to improve the overall portfolio quality.
ING uses three distinct statuses in categorizing the management of clients with (perceived) deteriorating credit risk profile, i.e. there is doubt as to the performance and the collectability of the client’s contractual obligations: • Watch List: Usually, a client is first classified as Watch List when there are concerns of any (potential or material) deterioration in the credit risk profile that might affect the ability of the client to adhere to its debt service obligations or to refinance its existing loans. The Watch List status requires more than usual attention, increased monitoring and quarterly reviews. Some clients with a Watch List status may develop into a Restructuring status or even a Recovery status.
• Restructuring: A client is classified as Restructuring when there are concerns about the client’s financial stability, credit worthiness and/or its ability to repay, but where the situation does not call for recalling or acceleration of facilities or liquidating the collateral. ING’s actions aim to maintain the going concern status of the client by: • Restoring the client’s financial stability; • Supporting the client’s turnaround; • Restoring the tension between debt and equity; and • Restructuring the debt to a sustainable situation.
• Recovery: A client is classified as Recovery when ING and/or the client concludes that the client’s financial situation cannot be restored and a decision is made to end the (credit) relationship or even to enter into bankruptcy. ING will prefer an amicable exit, but will enforce and liquidate collateral or claim on the guarantees if deemed necessary.
Additionally, ING uses three distinct reporting signs in identifying exposures for clients facing financial difficulties with the notion of: • Forbearance: For clients facing financial difficulties, ING might enter into a forbearance agreement with these clients in order to ease the contractual debt service obligation. All ING Business Units/Lines are required to review the clients with Early Warning Signals, Watch List, Restructuring and Recovery classification, to determine whether Forbearance is applicable. For further details on forbearance we refer to the Forbearance section.
• Individually Not Significant Financial Asset (INSFA) provisions: are made for non-performing loans (ratings 20-22), if the exposure to a borrower is below the threshold amount. A collective model based approach is taken to determine these provisions; and
At the end of 2016, ING Bank held specific (ISFA) and collective provisions (INSFA) of EUR 3,044 million and EUR 1,443 million, respectively (2015: EUR 3,331 million and EUR 1,686 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 821 million (2015: EUR 769 million) in provisions (IBNR) against the performing portfolio.
There was an improvement in the bank coverage ratio to 39.0% (2015: 38.5%) due to improved non-performing loan levels and a comparatively lesser decrease in stock provision level
Large parts of the Investment portfolio are not accounted for at amortised costs (loans & receivables or held-to-maturity) and therefore out of scope for LLP. Instead, these assets are evaluated for impairment. The ING Bank Impairment Meeting is a quarterly process that reviews all assets that are subject to an IFRS-EU impairment test.
Total 14,880 7,922 6,958 2.1% 10,637 4,122 6,516 1.5% 1 Undrawn commitments are excluded.
Wholesale Banking As per December 2016, Wholesale Banking forborne assets amounted to a total of EUR 7.8 billion, which represented 2.7% of the total Wholesale Banking portfolio.
Total 7,776 3,978 3,799 3,655 881 2,774 1 Undrawn commitments are excluded.
Wholesale Banking forborne assets were mainly concentrated in Natural Resources, Real Estate and Transportation & Logistics. Together they accounted for 70% (2015: 68%) of the total forborne assets and 67% (2015: 73%) of the total non-performing forborne assets.
Wholesale Banking forborne assets increased by EUR 4.1 billion compared to 2015. This was largely driven by the revision of the forbearance policy which resulted in increased forborne assets of EUR 3.1 billion, of which EUR 2.1 billion in the performing portfolio and EUR 1.0 billion in the non-performing portfolio. The main countries impacted were the Netherlands and the United States.
Retail Banking As per end of December, Retail Banking forborne assets amounted to a total of EUR 7.1 billion, which represented 1.7% of the total Retail Banking portfolio.