4. We regularly assess products, services and sales practices. Only through constant checks and balances can we ensure that we are giving customers what they want and need most.
ING Retail Banking Benelux is the leading bank in the Benelux.
ING Retail Banking International* is active in Australia, Austria, China, France, Germany, India, Italy, Poland, Romania, Spain, Thailand and Turkey.
Commercial Banking is restructuring its organisation to provide a more consistent customer experience across sales, servicing and back office support.
The folding of ING’s Commercial Banking activities in Germany into ING-DiBa in 2011 has given the Bank more scope to contribute to ING’s balance sheet optimisation programme. Synergies are achieved by Retail Banking providing funding at a competitive level, while Commercial Banking is generating an additional sources of high quality assets.
ING Romania introduced Fast Track Light Automation, a frequently used credit facility for new mid-corporate customers which processes transactions within 48 hours. ING Vysya Bank improved its infrastructure facilities and created a uniform “look and feel” fo its 527 branches.
ING was also recognised by Euromoney and Global Finance as “Best Bank in the Netherlands”. The Banker awarded ING Bank the “Bank of the Year in the Netherlands” accolade for the third year in a row, “Bank of the Year in Belgium“ and “Bank of the Year in Western Europe”. These awards are a true recognition of our commitment to support our clients during this challenging financial period.
Operations (“GSO”) hubs was completed in 2013. The GSOs will support multiple locations across Commercial Banking, delivering standardised, shared booking and processing in a high quality, cost-effective manner. This will result in greater agility, consistency of services for clients and management of risk. Overall, Commercial Banking aims to deliver superior client experience.
In summary, we are profitable, we are developing our already impressive capabilities in Europe and elsewhere and, most important of all, we are delivering what clients want.
SUPPORTING AND DEVELOPING EMPLOYEES For a customer-focused organisation such as NN Group, engaged employees are the key to success. This means attracting the right people, empowering them, giving them clear accountability and ensuring that they focus on continuous development and set ambitious but realistic goals.
Fees and premium-based revenues decreased slightly from EUR 514 million in 2012 to EUR 507 million in 2013, mainly due to lower unit-linked premiums in Belgium and Luxembourg.
The technical margin decreased to EUR 191 million in 2013 from EUR 210 million in 2012, mainly due to lower surrender results in Greece and lower morbidity margin in Romania and Greece. These declines were partly offset by a EUR 10 million reclassification of the Belgian crisis tax, booked in the technical margin in 2012, to DAC amortisation and trail commissions in 2013.
BUSINESS DEVELOPMENTS Japan Closed Block VA comprises NN Group’s closed-block single premium variable annuity (SPVA) individual life insurance portfolio in Japan. This portfolio consists of SPVA products with substantial minimum guarantee obligations sold predominantly from 2001 to 2009. In 2009 ING ceased the sale of these products and placed this portfolio in run-off. This portfolio has been classified as a closed-block and is managed as a separate segment.
This section, including the parts of this Annual Report incorporated by reference, together with the separate publication “ING’s implementation of the Dutch Corporate Governance Code” dated April 2010, on the website of ING Group (www.ing.com), also serves as the “corporate governance statement“ referred to in section 2a of the Decree with respect to the contents of the annual report (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag).(1)
significant conflicting interests will be disclosed in the Annual Report. In deviation from the Corporate Governance Code however, this does not apply if (i) such disclosure would be against the law; (ii) the confidential, share-price sensitive or competitionsensitive character of the transaction prevents such disclosure; and/ or (iii) the information is so competition-sensitive that disclosure could damage the competitive position of ING Group.
Ralph Hamers (1) Base salary 794 - - Variable remuneration in cash 0 0 - - - -
TOTAL DIRECT COMPENSATION Total direct compensation levels will be based on benchmark data in the international context in which ING operates. ING aims for compensation levels to be set at market median levels. Total compensation levels will be determined in line with the relevant market.
Independent auditor’s report 354 Proposed appropriation of result and subsequent events 355 7 Additional information
Consolidated statement of comprehensive income of ING Group for the years ended 31 December 93ING Group Annual Report 2013 1 W h o w e are 2 R
Taxation paid –1,656 –745 –1,353 Changes in: – amounts due from banks, not available on demand –9,400 5,272 7,188
Remeasurement of the net defined benefit asset/ liability 44 –3,221 –3,221 –3,221 Unrealised revaluations property in own use –22 –22 –22 Unrealised revaluations available-for-sale investments and other 6,932 6,932 9 6,941 Realised gains/losses transferred to the profit and loss account –840 –840 –840 Changes in cash flow hedge reserve 718 718 19 737 Transfer to insurance liabilities/DAC –2,181 –2,181 –2,181 Share of other comprehensive income of associates 29 29 29 Exchange rate differences and other –724 –724 54 –670 Total amount recognised directly in equity (other comprehensive income) 691 691 82 773
Shareholders’ equity (before change in accounting policy) 54,357 46,663 40,904 Change in Other assets - net defined benefit asset –3,032 758 –979 Change in Other liabilities - net defined benefit liability –484 –352 Change in Liabilities held for sale –7 Change in net defined benefit asset/liability before tax –3,523 406 –979
The identification of impairment and the determination of the recoverable amount are an inherently uncertain processes involving various assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and expected net selling prices.
The determination of the defined benefit obligation is based on internal and external actuarial models and calculations. The defined benefit obligation is calculated using the projected unit credit method. Inherent in these actuarial models are assumptions including discount rates (in particular based on market yields on high quality corporate bonds), rates of increase in future salary and benefit levels, mortality rates, trend rates in health care costs and consumer price index and are updated on a quarterly basis.
The results of the operations and the net assets of subsidiaries are included in the profit and loss account and the balance sheet from the date control is obtained until the date control is lost. On disposal, the difference between the sales proceeds, net of directly attributable transaction costs, and the net assets is included in net result.
Exchange rate differences on non-monetary items, measured at fair value through profit and loss, are reported as part of the fair value gain or loss. Non-monetary items are retranslated at the date fair value is determined. Exchange rate differences on non-monetary items measured at fair value through the revaluation reserve are included in the revaluation reserve in equity.
Gross carrying amount as at 31 December 41 1,977 1,137 1,966 2,079 2,144 265 493 3,522 6,580 Accumulated amortisation as at 31 December –21 –1,464 –1,421 –1,476 –192 –256 –1,634 –3,196 Accumulated impairments as at 31 December –662 –44 –35 –3 –48 –47 –745 Net carrying value as at 31 December 20 513 1,137 1,304 614 633 70 189 1,841 2,639
unearned revenues of EUR 867 million. The write-off is included in Amortisation and unlocking for the year 2013. Reference is made to Note 59 ‘Other events’.
12 ASSETS AND LIABILITIES HELD FOR SALE Assets and liabilities held for sale includes disposal groups whose carrying amount will be recovered principally through a sale transaction rather than through continuing operations. This relates to businesses for which a sale is agreed upon but for which the transaction has not yet closed or a sale is highly probable at the balance sheet date but for which no sale has yet been agreed.
As at 31 December 2012 Assets and liabilities held for sale related to ING’s Insurance and investment management businesses in Asia (‘Asia’) including ING Japan and ING Direct UK.
Dutch government guaranteed notes The following bonds are all issued under the Credit Guarantee Scheme of the State of the Netherlands. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme: • ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond in February 2009. The issue was priced at a fixed rate of 3.375%, 75 basis points over mid-swaps. After the repurchase in 2013 (see below) there is a remaining amount of approximately EUR 2.7 billion outstanding on these bonds; • ING Bank issued a 5 year USD 2.25 billion fixed rate government guaranteed senior unsecured bond in March 2009. The issue was priced at a fixed coupon of 3.90%, 145 basis points over USD mid-swaps. After the repurchase in 2013 (see below) there is a remaining amount of approximately USD 1.3 billion outstanding on these bonds; and
The second offer was for the USD-denominated notes with a principal amount of USD 2.25 billion (3.90% fixed rate notes due on 19 March 2014). The aggregate principal amount of the notes repurchased was approximately USD 990 million or 44%, leaving a remaining amount outstanding of approximately USD 1.26 billion. ING Bank paid a purchase price of USD 1,026.66 per USD 1,000 principal amount for the USD denominated notes. In 2013, a charge of EUR 11 million (EUR 8 million after tax) is recognised in Other income - Other on the USD-denominated notes. These transactions were settled on 3 July 2013.
18 INSURANCE AND INVESTMENT CONTRACTS, REINSURANCE CONTRACTS The provision for Insurance and investment contracts, net of reinsurance (i.e. the provision for ING Group’s own account) is presented gross in the balance sheet as ‘Insurance and investment contracts’. The related reinsurance is presented as ‘Reinsurance contracts’ under Assets in the balance sheet.
Effect of discounting –6 –13 –15 –24 –30 –32 –39 –54 –50 –34 –297
ING Hipotecaria –64 ING Direct USA 5 743 ING Direct Canada 1 1,124 ING Direct UK 10 –260 Clarion Real Estate Securities 182 ING REIM Asia and Europe 245 ING Car Lease 347 Clarion Partners 39 Other 30 –3 –12
Fee and commission expenses Banking operations Insurance operations Total 28 VALUATION RESULTS ON NON-TRADING DERIVATIVES Valuation results on non-trading derivatives includes the fair value movements on derivatives (used for both hedge accounting and economically hedging exposures) as well as the changes in the fair value of assets and liabilities included in hedging relationships as hedged items. In addition, Valuation results on non-trading derivatives includes the results on assets and liabilities designated as at fair value through profit and loss.
Expenditure from life underwriting Reinsurance and retrocession premiums 103 100 103
Share-based compensation arrangements includes EUR 61 million (2012: EUR 100 million; 2011: EUR 110 million) relating to equity-settled share-based payment arrangements and EUR 17 million (2012: EUR 22 million; 2011: EUR 24 million) relating to cash-settled share-based payment arrangements.
Reference is made to Note 36 ‘Discontinued operations’ for information on discontinued operations.
Annual contributions are paid to the funds at a rate necessary to adequately finance the accrued liabilities of the plans calculated in accordance with local legal requirements. Plans in all countries comply with applicable local regulations governing investments and funding levels.
The accumulated amount of remeasurements recognised directly in Other comprehensive income (equity) is EUR –5,113 million (EUR –3,802 million after tax) as at 31 December 2013 (2012: EUR –3,894 million, EUR –2,860 million after tax).
When the coverage ratio (assets divided by liabilities) of the plan is lower than 105% at year-end, ING is required to pay the plan an additional contribution in order to increase the coverage ratio to 106.7%. When the coverage ratio of the plan is lower than 110% but higher than 105% at year-end, ING is required to pay the plan an additional lump sum contribution in accordance with a pre-defined formula. When the coverage ratio is higher than 140%, ING receives a premium reduction in future periods.
In January 2014, ING reached an agreement with the various stakeholders to transfer all future funding and indexation obligations under ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement will make the Dutch ING Pension Fund financially independent. This agreement will result in the removal of the net pension asset related to the Dutch defined benefit pension fund from ING Group’s balance sheet. Reference is made to Note 60 ‘Subsequent events’ for information on this agreement.
Receivables –50 –9 –1 –14 –74 Loans and advances to customers 473 97 212 6 96 884 Unused tax losses carried forward –1,853 –1 306 20 231 –1,297 Other –46 –64 27 –165 –22 –270
To include credit risk in the fair valuation, ING applies both credit and debit valuation adjustments (CVA, DVA). Own issued debt and structured notes that are valued at fair value are adjusted for credit risk by means of a DVA. Additionally, derivatives valued at fair value are adjusted for credit risk by a CVA. The CVA is of a bilateral nature as both the credit risk on the counterparty as well as the credit risk on ING are included in the adjustment. All market data that is used in the determination of the CVA is based on market implied data. Additionally, wrong-way risk (when exposure to a counterparty is increasing and the credit quality of that counterparty decreases) and right way risk (when exposure to a counterparty is decreasing and the credit quality of that counterparty increases) are included in the adjustment. ING also applies CVA for pricing credit risk into new external trades with counterparties.
Main changes in fair value hierarchy in 2013 The decrease in Available-for-sale investments (level 2) reflects the presentation of ING U.S. as held for sale.
Financial assets Trading assets 158 –12 146 Investments for risk of policyholders 10 –1 9 Non-trading derivatives 383 26 409 Financial assets designated as at fair value through profit and loss –341 88 –253 Available-for-sale investments –130 27 –103
Insurance Of the total amount of financial assets classified as Level 3 as at 31 December 2013 of EUR 3.1 billion, an amount of EUR 2.4 billion is based on unadjusted quoted prices in inactive markets. This includes for example debt securities and shares in real estate investment funds and private equity investment funds for which the fair value is determined using quoted prices for the securities or quoted prices obtained from the asset managers of the funds. As ING does generally not adjust quoted prices using its own inputs, there is no significant sensitivity to ING’s own unobservable inputs.
Interest rates Prepayment rate and reset spread are key inputs to mortgage linked prepayments swaps valuation. Prepayment rate is the estimated rate at which mortgage borrowers will early pay off their mortgages, e.g. 5% per year. Reset spread is the future spread at which mortgages will re-price at interest rate reset dates. Inflation rate is a key input to inflation linked instruments. Inflation linked instruments protect against price inflation and are denominated and indexed to investment units. Interest payments would be based on the inflation index and nominal rate in order to receive/pay the real rate of return. A rise in nominal coupon payments is a result of an increase in inflation expectations, real rates, or both. As markets for these inflation linked derivatives are illiquid, the valuation parameters become unobservable.
Ireland Government bonds 59 59 Financial institutions 15 15 Portugal Government bonds 497 497
Classification of bonds in Levels 2 and 3 is mainly a result of low trading liquidity in the relevant markets.
The table does not include assets relating to securities lending as well as sale and repurchase transactions. Reference is made to Note 51 ‘Transfer of financial assets’.
Associated liabilities at carrying amount Amounts due to banks n.a n.a 3,186 Customer deposits and other funds on deposit n.a n.a 319 Financial liabilities at fair value through profit and loss n.a n.a 4,516 28,192
Impact of enforceable master netting arrangements or similar arrangements Derivatives –4,825 3,176 1,649
ING’s investment management business in Malaysia In December 2012, ING reached an agreement to sell its 70%-stake in ING Funds Berhad (IFB), ING’s investment management business in Malaysia, to Kenanga Investors Berhad (Kenanga Investors), a wholly owned subsidiary of K & N Kenanga Holdings Berhad (Kenanga). Tab Inter-Asia Services Sdn Berhad has also agreed to sell its 30% stake in IFB to Kenanga Investors. The transaction closed on 19 April 2013.
Since 2007, the most senior tranches of ING Group’s own securitisations have been called and are now retained by ING Group. ING Group hedged the first loss tranches in 2009. The mezzanine tranches are transferred to third parties.
Risk management benefits ING and its stakeholders directly by providing more efficient capitalisation and lower costs of risk and funding. The cost of capital and funding is reduced by working closely with rating agencies and regulators in satisfying their requirements in aligning capital and liquidity to risks. Risk Management helps business units with lower funding costs, the latest risk management tools and skills, and lower strategic risk, allowing them to focus on their core expertise with the goal of keeping ING’s businesses competitive in their markets.
Impact for ING Bank The typical interest rate position for ING Bank implies that the duration of the assets is somewhat higher than the duration of the liabilities. Given this mismatch, decreasing interest rates are initially favourable for ING Bank’s income: liabilities re-price quicker than assets, and therefore the average coupon of liabilities adapts quicker to lower interest rates. This should support ING Bank’s interest rate margin and subsequently our interest income.
Besides the regularly additional information that stems from the Basel II accords with detailed tables on ING Bank’s credit portfolio, the Pillar 3 will include additional disclosures on market, liquidity and funding risk from the EDTF recommendations as of 2013. An overview of all the EDTF recommendations and how they are followed-up can also be found in the introduction of this same Pillar 3 section. It is ING Bank’s ambition to incorporate most of the information into the risk management section such that all disclosed risk information is present in one section of the Annual Report. This contributes to the EDTF recommendations that strive towards transparent and comparative risk disclosures by global banks.
(including issuer investment risk). The GCC(TA) meets twice a week; • Asset and Liability Committee ING Bank (ALCO Bank): Discusses and approves on a monthly basis the overall risk profile of all ING
For allocation of EC to units and products, diversification factors are calculated for each risk type. These factors are applied consistently throughout ING Bank. The level of diversification benefit is dependent on both the inter-risk correlations as well as the relative size of the undiversified EC exposure for each risk type.
business lending benelux ING Bank’s Business Lending, defined as lending to corporates in the business line Retail Banking, is concentrated within the Benelux. The weak economic environment was reflected by increased risk costs and elevated percentage of non-performing loans. The Netherlands 259ING Group Annual Report 2013 1 W h o w e are 2 R
EC for SA portfolios is calculated by means of unexpected loss formula which is based on the corresponding PD, DLGD and EAD inputs. DLGD values used are obtained by applying a 125% downturn adjustment factor to economic LGD values.
Cover values including guarantees received - Consumer portfolio - 2013 (1,2)
Year-on-year variance analysis The Foreign Investments in US Dollar decreased due to a currency conversion of a branch from US dollar to Euro that was partly offset by realised profit and loss. The Pound Sterling Foreign Investment significantly increased and became positive due to a capital injection in a branch. The increase of the Foreign Investments and the Hedges in Australian Dollar is due to a transfer of a subsidiary. The Foreign Investments in Korean Won decreased due to the sale of the equity stake in Kookmin Bank. The increase of the Foreign Investments in Indian Rupee is due to the inclusion of the minority interest.
Liquidity buffers The liquidity buffer ING Bank holds can be seen as the short end of the counterbalancing capacity, i.e. the total of available sources and measures within ING to generate liquidity, and serves as a cushion for liquidity needs under normal and stressed conditions. The size and composition of the Liquidity buffer depends on ING Bank’s Risk Appetite (risk tolerance) and regulatory liquidity standards. In the buffer, only assets that are included that are ‘unencumbered’ and freely available for liquidity purposes.
The risk appetite (defined as the acceptable and authorised maximum level of risk) is set in each of the NFR risk areas and must be adhered to. Adherence to this risk appetite is monitored quarterly through the Non-Financial Risk Dashboard which reports the key non-financial risk exposures.
Main developments in 2013 ING Group Whistleblower Policy ING Group issued a revised ING Group Whistleblower Policy. The Policy covers reports of employees about actual or suspected irregularity of a general, operational or financial nature within ING. Employees are encouraged to report any of these behaviours through the specific Whistleblowing channels, including anonymously.
• Risk management policies, standards and processes. NN has a comprehensive set of risk management policies, standards and processes, which are updated regularly to align with market leading practices, applicable laws and regulations, and to changes in NN’s business and risk profile. These risk management policies, standards and processes apply throughout NN and are used by NN to establish, define, and evaluate NN’s risk tolerance levels and risk control processes and to ensure that the tolerance levels and policies are communicated throughout the organisational structure.
three lines of defence model The three lines of defence model, on which NN’s risk management structure and governance is based, defines three risk management levels, each with distinct roles, decision authorities, execution responsibilities, and oversight responsibilities. This framework ensures that risk is managed in line with the risk appetite as defined by the Management Board, ratified by the Supervisory Board, and cascaded throughout NN. • First line of defence: the CEOs of the business units of NN and the other management board members of the business units have primary accountability for the performance of the business, operations, compliance and effective control of risks affecting their businesses. They underwrite the insurance products that reflect local needs and thus know their customers and are well-positioned to act in both the customers’ and NN’s best interest.
The main contributors to policyholder behaviour risk in 2013 are the corporate owned life insurance business in Japan Life, Netherlands Life, the unit linked business in Europe, and the Japan Closed Block VA. Economic capital for policyholder behaviour risk decreased due to the increase of the discount curve in Netherlands Life and the weakening JPY.
Risk measurement The economic capital for credit spread risk reflects, with 99.5% level of confidence, the maximum amount of capital needed to absorb the impact of spreads widening. Credit spreads are stressed depending on the assets with regard to the credit rating, duration, and region, to determine the economic capital for spread risk. Furthermore, the illiquidity premium on the liabilities is stressed to dampen the impact of credit spread stresses.
Counterparty Default risk Counterparty default risk is the risk of loss of investments due to unexpected default, or deterioration in the credit standing, of the counterparties and debtors (including reinsurers) of NN Group. The economic capital for counterparty default risk is primarily based on the associated issuer’s probability of default (pD) and the estimated loss-given-default (LgD) on each individual asset combined with diversification across assets. Note that fixed income bonds are also subject to counterparty default risk, but this risk is included in credit spread risk.
(1) The Account value is the value of the underlying funds which belong to the policyholder. (2) The net amount at risk is the difference between the guaranteed minimum value and the account value, for those policies where the guaranteed value exceeds the account value. (3) The Additional IFRS reserve for the guarantees backing the GMDB block as of 1 January 2014 is EUR 219 million higher (total EUR 276 million)
Risk profile NN identifies two related liquidity risks: funding liquidity risks and market liquidity risks. Funding liquidity risk is risk that a company will have the funds to meet its financial obligations when due. This risk is in particular relevant for NN Bank. Market liquidity risk is the risk that an asset cannot be sold without significant losses. The connection between market and funding liquidity stems from the fact that when payments are due, and not enough cash is available, investment positions need to be converted into cash. When market liquidity is low, this would lead to a loss.
Risk measurement Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in the base case and under several stressed scenarios. The liquidity risk metrics indicate that liquidity resources would be sufficient to meet expected liquidity uses under the scenarios tested. NN does not hold a specific economic capital for liquidity risk in its insurance economic capital model as liquidity is sufficiently available in the insurance business units.
The table below provides the capital ratios for the larger Insurance subsidiaries according to local regulatory capital frameworks: Local Capital ratios for the larger insurance operations
– short-term a–2 p–2 F2 – long-term BBB+ stable Baa2 negative a– negative
Debenture loans 5,429 6,837 Amounts owed to group companies 824 2,250 Other amounts owed and accrued liabilities 335 1,001 Derivatives from group companies 291 122
Auditor’s responsibility Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing, and the standards of the Public Company Accounting Oversight Board (United States). This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free from material misstatement.
In 2011, ING reported to the Dutch authorities that ING has abstained from paying dividends on its shares for a period of two consecutive years (i.e., 2009 and 2010) as a result of which the EC opened an investigation into ING’s restructuring process. Following the approval of the Amended Restructuring Plan, the EC closed its formal investigations. Pursuant to the Amended Restructuring Plan, we had to repay the then outstanding amount of EUR 3 billion in four equal tranches. On 26 November 2012 and 6 November 2013, ING repaid the first two tranches of EUR 1,125 million each to the Dutch State. Each tranche consisted of EUR 750 million in repayment of Core Tier 1 Securities and EUR 375 million in premiums and interest. After the EUR 1,125 million payment made by ING on 6 November 2013, the remaining two tranches of approximately EUR 1,125 million each are expected to be paid in March 2014 and May 2015, respectively, translating into an overall internal rate of return of 12.5% p.a. Any repayment of the remaining Core Tier 1 Securities is conditional on approval from the DNB. Upon reaching the agreement on the Amended Restructuring Plan, ING indicated that it aims to repay the remaining Core Tier 1 Securities as soon as possible and accelerate repayments to the extent it is deemed prudent under prevailing financial circumstances. If the repayment of a tranche cannot be made in full or in part, ING will be required to make it up by a corresponding increase of the subsequent tranche to be repaid.
Australia showed an improvement of its LTV for the mortgage portfolio as a result of improved house prices. The improvement in India is a result of increase in Home equity which is a low LTV product and it has grown nearly 49% in 2013 and Home equity loans’ contribution in the residential mortgage portfolio has increased to 30.35% from 22%.
Includes both AIRB and SA portfolios; excludes securitisations, equities and ONCOA. Excludes revaluations made directly through the equity account.
LEVERAGE RATIO Simple measure for the solvency of banks, introduced under Basel III, defined as Total on balance sheet and off-balance sheet exposure / Tier 1 Capital.