› Developing networks: optimising coverage digitally/via branches; local presence and international network; developing relationships, sharing information internally and externally; reinforcing our social licence to operate.
Value creation with our stakeholders should be about supporting and stimulating economic, social and environmental progress, leading to a better quality of life for people in society. This is reflected in ING’s structure, strategy and in the values and behaviours we embrace.
Our strategy is tuned to ensure we focus our efforts on activities that benefit our customers and other stakeholders. It takes the current and estimated future impact of changes in the external environment into account. The context in which we operate is of course dynamic and evolves rapidly. Circumstances and stakeholders’ expectations change, requiring, in time, further refinement of definitions of value and progress, and ways of doing business that need to be slightly adapted or even changed radically.
Successful innovation depends on progress on multiple fronts. We need to ensure fluid transition from best practice sharing to common development. We need a constant stream of ideas and reliable mechanisms for choosing the best ones and executing them well.
Our enablers The following enablers help us to maintain key skills and organisational resources in support of our strategic priorities.
What matters most to our stakeholders chapter for more information about stakeholder dialogue.
In this chapter, we describe the issues that matter most to our various stakeholders and our business. These should therefore receive attention in this Annual Report and should be our highest priority in our daily business. We regularly evaluate the impact of our business on our stakeholders. We listen to and engage with them, and strive to respond to their views and concerns as much as possible. Their input helps us balance competing expectations, address issues in an informed way and, crucially, helps us to improve.
Innovation and information technology chapter for a list of actions taken in 2014.
2 Indirect economic impacts Granting loans and enabling financial empowerment are part of our key role in society.
11 Regaining trust We have learnt in recent years how important it is to retain the trust of our stakeholders. Trust has to be earned consistently and over time.
We have continued our efforts to retain and recruit qualified and expert leaders, senior staff and other highly qualified employees.
Our own capital and liquidity buffers have been bolstered to meet the stricter Basel III criteria. We broadly welcome the regulatory focus on improving banking resilience since 2008, but some of the new rules have had unintended consequences. They have sometimes limited banks’ capacity to lend to the real economy, particularly where the local regulators and the European economy are misaligned. For ING, local regulation limits the transferability of capital and liquidity between our entities in different European countries. This makes bank lending in liquidity-poor countries unnecessarily expensive and interest rates in liquidity-rich European countries unnecessarily low.
Effective underlying tax rate Banking 25.8% 24.9% 28.5% Risk-weighted assets ING Bank (EUR billion, year-end) 296 283 279 Underlying risk costs in bps of average RWA 55 83 74
Customers in Luxembourg can manage their money and finances better with the My Money financial blog, which offers tips and advice. In Belgium, both self-employed individuals and companies can now easily and securely sign and conclude their professional credits online. This service is available for several types of loans and financing. It saves the customer time and allows them to access credit at the most convenient time.
As we implement our strategy our customers should expect us to be making banking clear and easy, to be there for them anytime, anywhere, to empower them to make smart decisions and to keep getting better at what we do for them.
We continually engage with our customers through a range of online channels, such as Google Hangouts, on social media such as Twitter, Facebook and LinkedIn, and via ING’s own social media channels. We contact “fans” directly, review the ING Customer Board, conduct customer surveys, and coordinate roundtable sessions with SME and mid-corporate customers.
(2) There is an overlap between allocated assets in the sustainable ING funds and the managed sustainable portfolios in which some of these funds are part of the managed allocation; the total allocated amount has been adjusted. An estimate indicates that most of the adjustment relating to 2012 and 2013 is attributable to the NN funds.
Risk costs declined by 23.0 percent to EUR 1,094 million in 2014, with declines in all regions, including lower risk costs for Dutch mortgages.
Risk costs declined by 18.6 percent to EUR 714 million, both in residential mortgages and business lending, reflecting a gradual economic recovery in the Netherlands.
› Our business transformation programme aims to deliver harmonisation of our client services, standardised products and channels and to improve mobile and online capabilities, substantially enhancing the client experience.
Key risks and challenges In 2014, the environment in which we operated, was challenging. There were several headwinds which influenced our business. These included the fragile economic recovery and low demand for lending in Europe which impacted our general lending as described above. Also, concerns for the future of the eurozone intensified toward the end of the year as early elections were called in Greece. The ECB’s decisions to introduce negative deposit rates, renewed long-term refinance operations and, in early 2015, to embark on quantitative easing, highlight the difficulties faced by the eurozone economy. Other headwinds were the drop in oil prices and the downward pressure on the Russian economy and the declining rouble.
We have a huge amount of knowledge and expertise within our organisation, an asset well worth sharing. Todos para Uno (All for One) is an initiative promoted by the training area of ING Spain’s Human Resources Department. It aims to train the unemployed, by helping them refresh their knowledge and professional skills, so that they can look for a job with renewed confidence and enthusiasm.
The Power of IT strategy, launched in 2013, supports the bank’s Think Forward strategy. We help to create a differentiated customer experience by delivering systems and applications that are customer-centric, reliable and secure. Efficiency, agility and collaborative communities are the enablers, facilitating delivery. We made considerable progress in executing our strategy during 2014.
Business line managers have primary responsibility for day-to-day risk management 2nd line of defence Risk
Active risk management and balance sheet optimisation have enhanced ING’s resilience. The IPO of NN Group and further reductions in our shareholding in Voya Financial, Inc as well as SulAmérica have reduced our insurance industry exposure.
ING made its first repayment to the Dutch State in December 2009 and completed the final payment in November 2014. All payments were approved by De Nederlandsche Bank (DNB), the Dutch central bank. The total amount repaid to the Dutch State on the core Tier 1 securities was EUR 13.5 billion, including EUR 10 billion in principal and EUR 3.5 billion in interest and premiums, giving the State an annualised return of 12.7%. In 2014, ING made a payment of EUR 1.225 billion in March and a final EUR 1.025 billion payment on 7 November. Repayments were completed half a year ahead of the repayment schedule agreed with the European Commission in 2012.
Sustainalytics Score: 77 (out of 100) Position: 3 (out of 130 financial peers)
Composition of the Executive and the Management Boards At the Annual General Meeting of Shareholders in May, no changes to the Executive Board were proposed.
Dutch Insurers' Code The application of the Insurers’ Code principles is described in the publication “Application of the Insurers’ Code by ING Insurance Eurasia” available on the website of NN Group ( ).
› By number: insofar as a sufficient number of unissued ordinary shares is available in the authorised capital, ordinary shares may be issued up to a maximum of 10% of the issued share capital, or, in the event of a merger or takeover or to safeguard or conserve the capital position of ING Group, up to a maximum of 20% of the issued capital.
Pursuant to the 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, depositary receipts or American depositary receipts, 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, depositary receipts or American depositary receipts is required to notify, in accordance with the provisions of the above-mentioned Regulation: a. The Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) if, as a result of which acquisition or disposal his net short position reaches, exceeds or falls below 0.2% of the issued share capital of ING Group and each 0.1% above that.
Ancillary positions/conflicting interests Members of the Supervisory Board may hold various other directorships, paid positions and ancillary positions and are asked to provide details on these. 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.
ING regulations regarding insiders are available on the website of ING Group ( ).
The minutes of the aforementioned meeting are published on the website of ING Trust Office ( ).
According to the Executive Board remuneration policy, remuneration of Executive Board members consists of a combination of fixed compensation (base salary) and variable remuneration (together ‘total direct compensation’), pension arrangements and benefits as described below.
Members of the Executive Board working on a nonDutch contract will be offered pensions in line with home country practices.
(2) Wilfred Nagel was appointed to the Executive Board on 14 May 2012. The figures reflect the loans and advances received before his appointment to the Executive Board and repayment of EUR 250,000 in December 2014 in accordance with the terms of the mortgage.
› ING’s accounting policy for Property for own use is fair value, with changes in fair value reflected in the revaluation reserve in equity (‘Other comprehensive income’). A net negative revaluation on individual properties is reflected immediately in the profit and loss account.
Summary of impact of changes in accounting policies The above mentioned impact of changes in accounting policies that were implemented as of 1 January 2014 is summarised as follows: Changes in accounting policies in 2014: Impact on the balance sheet
Net result from continuing and discontinued operations (before change in accounting policy) 3,439 4,270
Application The classification and measurement and impairment requirements are applied retrospectively by adjusting the opening balance sheet at 1 January 2018, with no requirement to restate comparative periods. Hedge accounting is applied prospectively from that date.
Impairments of loans and advances to customers (loan loss provisions) ING Group assesses periodically and at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, but before the balance sheet date, (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The following circumstances, among others, are considered objective evidence that a financial asset or group of assets is impaired: › The borrower has sought or has been placed in bankruptcy or similar protection and this leads to the avoidance of or delays in repayment of the financial asset; › The borrower has failed in the repayment of principal, interest or fees and the payment failure has remained unsolved for a certain period; › The borrower has demonstrated significant financial difficulty, to the extent that it will have a negative impact on the expected future cash flows of the financial asset; › The credit obligation has been restructured for non-commercial reasons. ING Group has granted concessions, for economic or legal reasons relating to the borrower’s financial difficulty, the effect of which is a reduction in the expected future cash flows of the financial asset; and
Until 2009, before IFRS 3 ‘Business Combinations’ was revised, the accounting of previously held interests in the assets and liabilities of the acquired entity were not remeasured at the acquisition date and the acquisition-related costs were considered to be part of the total consideration.
As at 31 December 2014, Trading assets includes receivables of EUR 50,692 million (2013: EUR 48,690 million) with regard to reverse repurchase transactions.
Loans and advances to customers and Amounts due from banks include finance lease receivables and are detailed as follows: Finance lease receivables
The allowance for uncollectable finance lease receivables includes in the loan loss provisions an amount of EUR 269 million as at 31 December 2014 (2013: EUR 344 million).
If the outcome of this first step indicates that the difference between recoverable amount and carrying value may not be sufficient to support the amount of goodwill allocated to the reporting unit, an additional analysis is performed in order to determine a recoverable amount in a manner that better addresses the specific characteristics of the relevant reporting unit.
In 2014, NN Group is presented as Assets and liabilities held for sale and discontinued operations because it is assessed highly probable that ING will lose control within a year. Upon classification, the carrying amount of the disposal group was compared to NN Group’s fair value less cost to sell. The fair value less cost to sell was lower than the carrying value of the disposal group and as a result goodwill and certain other non-current non-financial assets of EUR 103 million and EUR 367 million respectively were written-off. Reference is made to Note 33 ‘Discontinued operations’, Note 57 ‘Other events’ and Note 58 ‘Subsequent events’.
Investment Management Taiwan In 2013, goodwill of EUR 42 million related to Investment Management Taiwan was written-off. The developments in the sales process of Investment Management Taiwan during 2013 (resulting in a sale in January 2014) indicated that the expected sales proceeds was no longer above the carrying value. The related charge was included in 2013 in the profit and loss account in Net result from discontinued operations.
Valuation methodology The fair value of private equity investments is generally based on a forward looking market approach. This approach uses a combination of company financials and quoted market multiples. In the absence of quoted prices in an active market, fair value is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects, price, earnings comparisons and by reference to market valuations for similar entities quoted in an active market. Valuations of private equity investments are mainly based on an ‘adjusted multiple of earnings‘ methodology on the following basis: › Earnings: Reported earnings adjusted for non-recurring items, such as restructuring expenses, for significant corporate actions and, in exceptional cases, for run-rate adjustments to arrive at maintainable earnings. The most common measure is earnings before interest, tax, depreciation and amortisation (‘EBITDA‘). Earnings used are usually management forecasts for the current year, unless data from management accounts for the 12 months preceding the reporting period or the latest audited annual accounts provide a more reliable estimate of maintainable earnings.
› Adjustments: A marketability or liquidity discount is applied based on factors such as alignment with management and other investors and NN Group’s investment rights in the deal structure.
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: Legally distributable reserves 2014 ING Bank NN Group Other Total
Cumulative preference shares – Restrictions with respect to dividend and repayment of capital ING Groep N.V. is subject to legal restrictions regarding the amount of dividends it can pay to the holders of its cumulative preference shares, when issued. Pursuant to the Dutch Civil Code, dividends can only be paid up to an amount equal to the excess of the company’s own funds over the sum of the paid-up capital, and reserves required by law.
In 2014, the change in Other liabilities includes EUR –3,950 million (EUR –5,387 million as per classification date) as a result of the classification of NN Group as held for sale and EUR –266 million related to the deconsolidation of Vysya. Reference is made to Note 12 ‘Assets and liabilities held for sale’ and Note 57 ‘Other events’.
Transfer to Other reserves (pension settlement) 3,434 5 Changes in the composition of the group and other changes 142 Closing balance –515 –3,802
Amounts due from banks The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics, similar to Loans and advances to customers described below.
Investment contracts For investment contracts for risk of the company the fair values have been estimated using a discounted cash flow approach based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. For investment contracts for risk of policyholders the fair value generally equals the fair value of the underlying assets.
Of the total amount of financial assets classified as Level 3 as at 31 December 2014 of EUR 1.8 billion, an amount of EUR 0.8 billion (50%) is based on unadjusted quoted prices in inactive markets. As ING does not generally adjust quoted prices using its own inputs, there is no significant sensitivity to ING’s own unobservable inputs.
Included at Group level are EUR 180 million (2013: EUR 116 million) Voya warrants which are classified as level 3 instruments. These warrants are valued using an option pricing model where equity volatility is a significant unobservable input. The lower and upper ranges of that unobservable input used are 19.22% and 26.78% (2013: 22.70% and 36.68%). Reference is made to Note 4 ‘Financial assets at fair value through profit and loss’.
Customer deposits and other funds on deposit 411,639 27,067 25,336 2,912 3,201 3,856 301 474,312 Financial liabilities at fair value through profit and loss
For details on transactions with regard to ING’s divestments in SulAmérica S.A., reference is made to Note 5 ‘Investments’ and Note 7 ‘Investments in associates and joint ventures’.
(2) Excluding members that were also members of the Executive Board of ING Groep N.V. (3) In 2013 the compensation of the Management Board NN Group reflects the extension of the Board by two members. (4) In 2013 the Named Executive Officers ING U.S. consisted of five persons (in 2012 three Executive Officers). (5) In 2011, the Named Executive Officers of ING U.S. were granted a one-time incentive award of EUR 8.4 million contingent upon successfully executing the IPO of
Indemnification and allocation agreement with NN Group N.V. ING Groep N.V. and NN Group N.V. have entered into an indemnification and allocation agreement, in which ING Group has agreed to indemnify NN Group N.V. for certain liabilities that relate to the business of or control over certain (former) U.S. and Latin American subsidiaries of the Company in the period until 30 September 2013 or, if the relevant subsidiary was divested by NN Group N.V. after 30 September 2013, such later date of divestment. These liabilities mainly include contingent liabilities that may arise as a result of the initial public offering of Voya Financial Inc. (such as prospectus liability) and the sales of the Latin American businesses (such as claims under warranties and other buyer protection clauses).
The 2012 amended Restructuring Plan was formally approved by the European Commission, by decision of 16 November 2012. As a result, the Commission closed its formal investigations as announced on 11 May 2012 and ING also withdrew its appeal at the General Court of the European Union, filed in July 2012. For principal legal reasons the EC continued with its appeal against the General Court ruling of March 2012. However, as part of the agreement of 19 November 2012, ING, the Dutch State and the EC agreed that the outcome of this appeal would not affect the EC approval of the 2012 amended Restructuring Plan. The EU Court of Justice rendered a final judgment on 3 April 2014 and dismissed the EC’s appeal against the General Court ruling of March 2012.
Governance 298 RWA comparison 403 Economic capital 298 Market risk in banking books 299 Market risk in trading books 305 Fair values of financial trading assets & liabilities 305 Capital at Risk 403
ti er b o ar d st ru ct u re 3rd line of defence2nd line of defence
Non-financial risk To ensure robust non-financial risk management, ING Bank monitors the implementation of ING Bank’s Risk Policies and Minimum Standards. Business units have to demonstrate that the appropriate steps have been taken to control their operational, compliance and legal risks. ING Bank applies Key Control testing scorecards to measure the quality of the internal controls within a business unit, which are based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
Step 3. Data processing & proposal mitigating actions When the scenario parameters have been finalised, the impact of the scenario on the solvency and liquidity position is determined. Based on the scenario values for the relevant macro-economic and market variables, the impact on amongst others P&L, revaluation reserves, RWA and liquidity buffers is calculated. These outcomes are subsequently used to calculate the evolution of relevant solvency and liquidity ratios, such as the CET1 ratio, the leverage ratio and the CRD IV liquidity buffer.
The Comprehensive Assessment, which included an asset quality review (AQR) and a stress test, commenced in November 2013 and concluded with the publication of results on 26th October 2014. ING Bank passed both the AQR and stress test reflecting ING’s strong capital position and resilient balance sheet. The methodology used by the ECB to determine the AQR impact was non-IFRS based and consisted of a combination of a credit file review, extrapolations thereof, review of emergence periods used in collective provisioning, and a review of fair values.
Regulatory EAD is employed for all exposures. Economic EAD is employed instead of regulatory EAD for all exposures except for FM products for which regulatory EAD is used (as well as downturn LGD).
In 2014 CVA Capital Charge is added to Regulatory Capital for credit risk.
Financial Statements data is automatically forwarded to Risk Rater, where it is incorporated into one of the various probabilities of default rating models. Risk Rater contains two kinds of rating models: › Automated, whereby the data for a large number of counterparties is automatically processed from the source systems on a periodic (usually monthly) basis to determine new risk ratings; › Manual ratings, which are calculated on an individual basis and where the user is required to also answer additional qualitative questions in order to create a rating.
Increase/(decrease) in loan loss provision 500 867 857 1060 237 362 1,594 2,289 Exchange or other movements –34 –12 76 –28 –1 –87 41 –127
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 held together with the IPC is a quarterly process that reviews all assets that are subject to an IFRS-EU impairment test.
While a cover can be an important mitigant of credit risk and an alternative source of repayment, generally it is ING Bank’s practice to lend on the basis of the customer’s creditability rather than exclusively relying on the value of the cover.
Total Lending, Investment and Money Market 677,065 558,673 20,673 84,726 88,552 144,282 32.2% 22.0% 45.7% Pre-settlement (3) 51,602
Overall, an improvement was seen in the Business Lending portfolio over the year 2014. This reflected not only the improving economy but also a more prudent approach from ING Bank.
(1) Including loans to ING Group and NN Group. (2) Excluding intercompany positions
Korean Won 0.01% 0.01% –15% –15% Indian Rupee 0.04% 0.02% –20% –20% Brazilian Real 0.02% 0.01% –25% –25% Russian Rouble 0.01% 0.01% –20% –20%
securities held in the available-for-sale (AFS) portfolio of EUR 2,718 million (2013: EUR 1,645 million). The value of equity securities held in the available-for-sale portfolio is directly linked to equity security prices with increases/decreases being recognised in the revaluation reserve, except in the case of impairment. Investments in associates and joint ventures are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
All valuation techniques used are subject to a model governance framework. Model governance refers to a set of policies and procedures that have to be strictly followed and that cover the complete lifecycle of a model, i.e. its development, validation, approval, implementation and maintenance. The pillars of model governance are independent validation and periodic review. Such a review aims to determine whether a model still is appropriate for its intended use. Where models are used for valuation, there can be uncertainty on the assumptions of the underlying models and/or parameters. In those cases where significant uncertainty on assumptions arises, a model risk valuation adjustment is applied.
Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Dec 14
› The liquidity buffer is composed of cash and core assets that are eligible for the Liquidity Coverage Ratio (LCR) and/or highly marketable, which are not pledged to payment systems or clearing houses. For longer term buffer purposes, a broader set of liquid assets might be appropriate, subject to the Bank’s or entity’s ability to generate liquidity from them under stress, within the specified period of time.
Contingency funding plan In the contingency funding plan, contingency liquidity risk is addressed which specifically relates to the organisation and planning of liquidity management in time of stress. Within ING Bank, for contingency purposes, a specific crisis team – consisting of key Board Members, representatives from staff departments (e.g. Finance, Risk and Capital Management) and Bank Treasury – is responsible for liquidity management in times of crisis. Throughout the organisation adequate and up-to-date contingency funding plans are in place to enable senior management to act effectively and efficiently in times of crisis. These contingency plans are tested on a regular basis, both centrally and at business unit level.
In June 2014, ING Group sold the last tranche of its stake in SulAmérica for total proceeds of EUR 180 million.
(2) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Bank or NN Group. Hybrid capital securities are perpetual fixed income securities with an embedded call and coupon deferral feature. All hybrids capital securities rank senior to core tier 1 securities and ordinary shares of ING Group and they are structurally subordinated to the senior debt instruments issued by ING Groep N.V. More details on terms and conditions can be found on www.ing.com.
Changes in balance sheet values due to changes in the Revaluation reserve of the associates and joint ventures are reflected in the Share of associates and joint ventures reserve, which forms part of Shareholders’ equity. Changes in balance sheet values due to the results of these associates and joint ventures, accounted for in accordance with ING Group accounting policies, are included in the profit and loss account. Other changes in the balance sheet value of these associates and joint ventures, other than those due to changes in share capital, are included in Share of associates and joint ventures reserve in Other reserves.
Following our assessment of the risk of material misstatement to ING Group’s annual accounts, we have selected 34 reporting units which represent the principal business units within ING Group’s reportable segments and account for approximately 94% of ING Group’s total assets and approximately 92% of ING Group’s profit before tax. 15 reporting units required an audit of the complete financial information, either due to their overall size or risk profile. Specific audit procedures on certain balances and transactions were performed for 19 reporting units. We have used the work of other EY auditors when auditing these reporting units in and outside the Netherlands.
Our responsibility for the audit of the annual accounts Our responsibility is to plan and perform the audit assignment to obtain sufficient and appropriate audit evidence for our opinion. Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all errors and fraud.
› Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of ING Group’s internal control.
Common Reporting Standard Similarly, the Organisation for Economic Cooperation and Development (‘OECD’) has developed a Common Reporting Standard (‘CRS’) and model competent authority agreement to enable the multilateral and automatic exchange of financial account information. The CRS will require financial institutions to identify and report the tax residency and account details of nonresident customers to the relevant authorities in jurisdictions adhering to the CRS. In October 2014, 51 jurisdictions, including the Netherlands, signed a multilateral competent authority agreement to automatically exchange information pursuant to the CRS. The first information exchange by the Netherlands (as for most of the signatories) is intended by September 2017.
The negative publicity associated with any sales practices, any compensation payable in respect of any such issues and regulatory changes resulting from such issues, has had and could have a material adverse effect on our business, reputation, revenues, results of operations, financial condition and prospects.
The READ increase is mainly the result of volume increases to Corporates and Sovereigns, FX movements and the CRR/CRD IV implementation. Not only READ, but also RWA was influenced by these changes. The RWA density showed a reduction mainly driven by the Masterscale implementation and the update of the Sovereign LGD model.
Exposures before and after risk mitigation for the SA portfolio The table below shows how credit risk mitigation (CRM) in the SA portfolio is distributed over the exposure classes. ING Bank’s exposure value is shown before and after credit risk mitigation. There are two principal methods for reducing or mitigating Credit Risk: i) by reduction of Credit Risk through the acceptance of pledged financial assets as collateral or ii) mitigation or shifting of credit risks to a lower risk weighting group by accepting guarantees from unrelated third parties. ING Bank uses both methods to take CRM effects into account. For financial collateral, ING Bank uses the Financial Collateral Comprehensive Method to allow for mitigation effects.
The Real Estate sector saw a big reduction in provisions due to improved risk profile over the year and sale of non-performing assets. This improvement was however dampened due to the increased flow to non-performing loans in the private individuals sector which was due to the enforcement of the new Forbearance regulations. An increase in provisions set aside for Structured Finance business in Ukraine and Russia has caused the rise seen in the Natural Resources sector.
Past due loans by geographic area The table below is based on the country of residence of the obligor and on credit risk outstandings. Credit Risk outstandings include amounts associated with both on- and off- balance sheet products, but exclude amounts related to unused limits.
Credit default swaps ING Bank participates in the credit risk derivative trading market, as a net purchaser of credit risk protection from other counterparties. ING Bank has purchased a small amount of credit risk protection for hedging purposes, usually in order to reduce concentration on certain ‘legal one obligor groups’ without having to reduce ING Bank’s relationship banking activities. ING Bank does not actively sell Credit Default Swaps (CDS) for hedging or investment purposes. Although CRR/CRD IV rules permit a reduction of credit risk capital under certain circumstances where ING Bank has purchased CDS protection, ING Bank does not currently make use of this provision in determining its CRR/CRD IV capital base.
The first transactions (Moon and Memphis 2003) were repaid in 2008 with no loss for the investors. The following transactions were also repaid, still with no loss for the investors: Mars 2004 in 2009, Memphis 2005 and Mars 2006 in 2012, Flipper in January 2013 and Memphis 2006 in April 2013 and BEL SME 2006 in March 2014 meaning that, as of 31 December 2014, there were no synthetic transactions left.
Key changes Over the year, the ING Bank Market Risk Weighted Assets (MRWA) increased by EUR 1.9 billion to EUR 10.7 billion. The key changes are the following: › MRWA increased by EUR 2.6 billion as a result of a combination of position changes and market movements. › The LGD parameter update for the Central and Local Government portfolios led to a decreased IRC in Q4 2014, which subsequently resulted in a EUR 1.3 billion decrease in MRWA.
Audit Committee The Audit Committee, consisting of members of the Supervisory Boards, assists the Supervisory Board in monitoring the integrity of the financial statements of ING Group N.V., NN Group N.V. and ING Bank N.V., in monitoring the compliance with legal and regulatory requirements, and in monitoring the independence and performance of ING’s internal and external auditors.
Central Clearing Parties or Central Counterparties (CCP) A legal entity that interposes itself between two trade counterparties in a bilateral transaction. The parties legally assign their trades to the CCP (usually through novation), and the CCP becomes the counterparty to each, assuming all rights and responsibilities. Thus, from the point of view of the original counterparties, the counterparty credit risk exposure is shifted from the other, original counterparty to the CCP.
Compliance risk Compliance risk is defined as the risk of impairment of ING Bank’s integrity as a result of failure or perceived failure to comply with relevant laws, regulations, ING Bank policies and standards and the ING Bank Business Principles (replaced by ING Bank Values as from 1 January 2015).
Credit risk exposure Total amount of committed facilities to a designated borrower or an obligor group or, if higher, their outstanding balances, together with the outstanding balances of any related uncommitted facilities.
FiCo ratio Financial Conglomerate ratio. The quotient of (a) the sum of the available capitals of the underlying entities, adjusted for double leverage and (b) the sum of the required capitals of the underlying entities.
Money market risk Money market 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 notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment
Obligor Corporate borrower, counterparty or individual to which ING has recourse for repayment of the obligation.
Premiums earned The portion of net premiums written in current and past periods, which applies to the expired portion of the policy period, calculated by subtracting movements in unearned premium reserves from net premiums.
Recognition The process of incorporating in the balance sheet, or profit and loss account, an item that meets the definition of an element and satisfies the following criteria for recognition: › It is probable that any future economic benefit associated with the item will flow to or from the enterprise.
Structured entity An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.