ING brought the total repaid above the EUR 10 billion of capital support provided by the Dutch State in October 2008. The total repaid so far of EUR 10.2 billion consists of a principal amount of EUR 7.8 billion and EUR 2.4 billion in premiums and interest. Second, ING and the Dutch State reached an agreement with the European Commission on amendments to the Restructuring Plan we had to submit to obtain approval for the state aid we received. The amended Restructuring Plan gives us more time and greater flexibility to shape our future.
Continuing challenges in the external environment had an impact on ING in 2012, the most prominent being the deepening of the eurozone sovereign debt crisis which created an extremely challenging financial market environment in the first half of 2012, until the European Central Bank (ECB) took action to relieve the immediate financial markets stress. The ECB’s efforts were probably the main reason for financial market stability from the third quarter onwards.
Strong capital generation resulted in ING strengthening its core Tier 1 ratio to 11.9% as at 31 December 2012 under Basel II. Under the more stringent Basel III capital requirements, the core Tier 1 ratio was 10.4% (on a pro forma basis).
SUStainaBiLity In line with our Business Principles, social, ethical and environmental criteria are embedded in our financing and investment policies and our business ambitions. ING believes that to be a successful company, the company’s business decisions must be in line with the expectations and interests of those to whom we owe our license to operate – our stakeholders.
The business will continue to build on the ‘direct if possible, advice when needed’ model, while working towards becoming a more complete bank in certain countries. All initiatives are aimed at meeting the Bank’s ambition of becoming the Preferred Bank for our customers.
RETAIL BANKING BUSINESS DEVELOPMENTS ING’s ambition is to be the Preferred Bank for its customers, driven by operational excellence, customer centricity, balance sheet optimisation, and also on being a top employer.
ING BE was labelled ‘Top Employer 2012’ by the CRF Institute, which identifies leaders in excellent human resources management.
In October 2012, ING established a Sustainable Lending Team within Commercial Banking. The team will encourage and initiate viable sustainable commercial opportunities for Commercial Banking by focusing on companies and transactions that contribute to positive change for society and the environment.
For the insurance and investment operations in the US, the priority was to prepare the organisation for a standalone future through an IPO. Employees were guided in this process through training on how they can contribute to further performance improvements. High-quality talent management programmes were set up and a cultural change programme was officially launched. The overall change programme is divided into three pillars: communicate a clear strategy and define clear roles; create a culture of high performance and create an environment for continuous improvement.
Sustainability Insurance CRE is very mindful of its responsibility to society everywhere it operates. Whether it is improving the customer experience through the NPS programme or introducing new products and services that have an extra customer-centric dimension (such as the ‘For You’ product in the Czech Republic), ING aims to be a responsible financial services provider and business partner. ING is also an active investor in the community throughout its CRE markets. Activities range from financial education to health and wellbeing initiatives (‘Chances for Life’, which provide first aid lessons in Romania and donations for child health care in Hungary). They involve raising funds through donations and through employees volunteering their time for special projects.
ING U.S.’s insurance business comprises two major product lines: Individual Life and Employee Benefits. Individual Life provides wealth protection and the opportunity to transfer assets upon death through universal, variable, and term products, distributed through independent channels. It caters to a broad range of customers from the middle-market to the affluent segment. The Individual Life distribution model is supported by independent life sales agents, strategic distribution and specialty markets.
TRANSACTIONS WITH THE DUTCH STATE On 12 November 2008, ING Group issued one billion core Tier 1 securities (‘Securities’) for a total consideration of EUR 10 billion to the Dutch State. Following the repurchase of 500 million Securities on 21 December 2009, the repurchase of 200 million Securities on 13 May 2011, and the repurchase and/or redemption of a total number of 75 million Securities on 26 November 2012, another 225 million of Securities representing EUR 2.25 billion remain outstanding. The Securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the General Meeting. The financial entitlements of the Securities are described in note 34 to the consolidated annual accounts.
Executive Board to allocate part of or all of the profits to the reserves – with approval of the Supervisory Board – and the declaration of other distributions, subject to a proposal by the Executive Board which was approved by the Supervisory Board; • the appointment of the external auditor; • an amendment of the Articles of Association, a legal merger or division of ING Group, and winding up ING Group, all subject to a proposal made by the Executive Board upon approval by the Supervisory Board; • the issuance of shares or rights to subscribe for shares, the restriction or exclusion of pre-emptive rights of shareholders, and delegation of these powers to the Executive Board, subject to a proposal by the Executive Board which was approved by the Supervisory Board; and
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2012, the consolidated profit and loss account, consolidated statement of comprehensive income, consolidated statement 79ING Group Annual Report 2012 1 W h o w e are 2 R
Discontinued operations 26 Net result from discontinued operations 548 684 414 Net result from classification as discontinued operations –394 Net result from disposal of discontinued operations 752 995 Total net result from discontinued operations 906 1,679 414
Reserves includes Revaluation reserve of EUR 10,476 million (2011: EUR 5,550 million; 2010: EUR 4,752 million), Currency translation reserve of EUR –841 million (2011: EUR 93 million; 2010: EUR 79 million) and Other reserves of EUR 27,769 million (2011: EUR 24,067 million; 2010: EUR 19,120 million). Changes in individual components are presented in Note 13 ‘Shareholders’ equity (parent) non–voting equity securities’.
IMPAIRMENT OF OTHER 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, (the combination of) 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 6 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 profit and loss account. 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 profit and loss account, the impairment loss is reversed through the profit and loss account.
Notes to the consolidated annual accounts of ING Group continued 121ING Group Annual Report 2012 1 W h o w e are 2 R
2011 – Greece, Italy, Ireland, Portugal, Spain and Cyprus At 31 December 2011, ING Group’s balance sheet value of ‘Government bonds’ and ‘Unsecured Financial institutions’ bonds to Greece, Italy, Ireland, Portugal, Spain and Cyprus and the related pre-tax revaluation reserve in equity was as follows: Greece, Italy, Ireland, Portugal, Spain and Cyprus – Government bonds and Unsecured Financial institutions’ bonds (1)
In 2011, Amortisation and unlocking includes EUR 488 million relating to the assumption review for the Insurance US Closed Block Variable Annuity (VA) business. Reference is made to Note 44 ‘Underwriting expenditure’.
Unrealised revaluations after taxation relates to changes in the value of hedging instruments that are designated as net investment hedges.
Trading liabilities 83,652 107,682 Non-trading derivatives 18,752 22,165 Designated as at fair value through profit and loss 13,399 13,021
In 2012, Changes in the composition of the group relates mainly to the classification of ING’s Insurance and investment management businesses in Asia as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies under the IFRS-EU hedge accounting rules. Derivatives that qualify for hedge accounting under IFRS-EU are classified and accounted for in accordance with the nature of the instrument hedged and the type of IFRS-EU hedge model that is applicable. The three models applicable under IFRS-EU are: fair value hedge accounting, cash flow hedge accounting and net investment hedge accounting. These are described under the relevant headings below. The company’s detailed accounting policies for these three hedge models are set out in the section ‘Principles of valuation and determination of results’.
Disposals announced in 2013 ING Vysya Life Insurance In January 2013, ING announced it has agreed to sell its full interest in ING Vysya Life Insurance Company Ltd. to its joint venture partner Exide Industries Ltd. ING’s exit from the Indian life insurance joint venture is part of the previously announced intended divestment of ING’s Insurance and investment management businesses in Asia. The transaction is expected to result in a loss and therefore, the related goodwill has been reduced by EUR 15 million in the fourth quarter of 2012. Subject to regulatory approvals, the transaction is expected to close in the first half of 2013.
Three members of the Executive Board of ING Groep N.V. are also members of the Management Boards of ING Bank N.V., ING Verzekeringen N.V., ING Insurance Eurasia N.V. and the Board of ING U.S., Inc. The Management Board members of ING Bank N.V., ING Verzekeringen N.V., ING Insurance Eurasia N.V. and the Board of ING U.S., Inc. are also considered to be key management of ING Group.
The calling or buy-back of Tier 2 capital and Tier 1 Hybrid Securities will continue to be proposed for authorisation to the European Commission on a case by case basis until ING has fully repaid the core Tier 1 securities to the Dutch State, but ultimately until 18 November 2014, whichever date comes first. Notwithstanding this restriction, ING was allowed to call the EUR 1.25 billion ING Verzekeringen N.V. Hybrid per 21 December 2012.
35 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Fair value hierarchy of certain ABS bonds 2011 Level 1 Level 2 Level 3 Total
Income from investments in debt securities 4,887 4,994 4,915 4,887 4,994 4,915 Income from loans
Addition/(releases) of provision for reorganisations and relocations 458 387 109 357 135 99 815 522 208 201ING Group Annual Report 2012 1 W h o w e are 2 R
Special items in 2011 includes costs for the Retail Netherlands change programme and strategic repositioning initiatives at Commercial Banking, additional costs for the combining of ING Bank and Postbank in the Netherlands, the transformation programme in Belgium, further restructuring at ING Real Estate following the sale of ING REIM, and costs related to the separation of Banking and Insurance, as well as an adjustment of the Illiquid Assets Back-up Facility based on higher prepayment behaviour in the underlying Alt-A securities and the result on the repurchase of subordinated loans executed in December 2011 as disclosed in Note 43 ‘Other income’ and Note 14 ‘Subordinated loans’.
Segments ING Group total 2010 Total Banking Total Insurance Eliminations Total
ING Bank applies forbearance activities to a limited extent in accordance with its Retail Loan Modification policy. Each ING Bank business unit that applies forbearance activities has established clear criteria to determine a client’s eligibility for a loan modification, procedures to verify a client’s representations and specific approval mandates. Such criteria, procedures and mandates are approved by local credit risk management. Credit risk management monitors the performance of clients with modified loans at least on a monthly basis.
Structural liquidity risk Structural liquidity risk is the risk that the structural, long-term balance sheet cannot be financed timely or at a reasonable cost.
The yearly objective setting process for both business management and NFR professionals aims to keep improving the management of NFR risk throughout ING Bank to ensure that ING stays in control of its current and future NFR risks.
The Management Board Insurance EurAsia (MBE) consists of 8 members, including the members of the ING Group Executive Board, and is responsible for managing risks associated with the insurance activities in Europe and Asia. The Board US Incorporated consists of 6 members, including the members of the ING Group Executive Board, and is responsible for managing risks associated with the insurance activities in the United States (ING Insurance US).
In 2011, ING has completed the divestment of its Latin American pensions, life insurance and investment management operations. This transaction was the first major step in the divestment of ING’s insurance and investment management activities. In 2012, ING Insurance and investment management activities in Asia and its reinsured Japan SPVA businesses in Corporate Reinsurance are classified as held for sale and as discontinued operations. In the remaining section of ING Insurance EurAsia, the risks of the discontinued operations in Asia have been removed from the figures in 2011 and 2012.
IFRS Earnings & EC: Storms and third party liabilities in Benelux 281ING Group Annual Report 2012 1 W h o w e are 2 R
AFR & IFRS earnings sensitivities: – Measured by the impact of a 25% upwards and downwards movement in equity prices.
Sensitivities of various guarantees (e.g. minimum interest rate guarantees, and guaranteed living benefits). CB-VA and GMIRs of insurance products.
In April 2012, in preparation of the planned insurance and investment management divestments, ING Group has completed three separate exchange offers and consent solicitations on a total of three series of senior securities of ING Verzekeringen N.V. with a total nominal value of EUR 2.6 billion. The objective of the transaction was to remove potential ambiguity that the planned divestments may create with regard to these ING Verzekeringen N.V. securities, predominantly with regard to the Change of Control clauses which may be triggered at the time of a substantial asset disposal. The difference between the book value of the currently outstanding securities and the fair value of the newly issued securities was recognised in the profit and loss account upon completion of the exchange.
Share capital 919 919 Share premium 16,034 16,034 Non-voting equity securities 2,250 3,000 Share of associates reserve 12,377 8,100 Currency translation reserve –963 –942 Other reserves 25,990 22,552
Positive components of the Share of associates reserve and Currency translation reserve cannot be freely distributed. The reserve for cash flow hedges is included in the Share of associates reserve on a net basis. Retained earnings can be freely distributed, except for an amount equal to the negative balance in each of the components of the Currency translation reserve and Share of associates reserve. Unrealised gains and losses on derivatives, other than those used in cash flow hedges, are presented in the profit and loss account and are therefore part of Retained earnings and are not included in Share of associates reserve.
The total amount of Equity in the parent company annual accounts equals Shareholders’ equity (parent) in the consolidated annual accounts. Certain components within equity are different, as a result of the following presentation differences between the parent company accounts and consolidated accounts: • Unrealised revaluations within consolidated group companies, presented in the Revaluation reserve in the consolidated accounts, are presented in the Share of associates reserve in the parent company accounts; • Foreign currency translation on consolidated group companies, presented in the Currency translation reserve in the consolidated accounts, is presented in the Share of associates reserve in the parent company accounts; • Revaluations on investment property and certain participations recognised in income and consequently presented in Retained earnings in the consolidated accounts, is presented in the Share of associates reserve in the parent company accounts.
• Under Title VII of the Dodd-Frank Act, the CFTC has promulgated requirements for recordkeeping and reporting of swap transactions to swap data repositories. The rules require swap counterparties and underlying reference entities to be identified by a legal entity identifier (‘LEI’). Recognizing that the rules will come into effect prior to the availability of global LEIs, the CFTC has mandated the use of interim entity identifiers called CFTC Interim Compliant Identifier (‘CICI’). In the event that we are unable to obtain a CICI and implement it into our system we may be limited in our ability to engage in hedging transactions.
Other factors that may impede our ability to implement the Restructuring Plan successfully include an inability of prospective purchasers to obtain funding due to the deterioration of the credit markets, insufficient access to equity capital markets, a general unwillingness of prospective purchasers to commit capital in the current market environment, antitrust concerns, any adverse changes in market interest rates or other borrowing costs and any declines in the value of the assets to be divested. Similarly, it may also be difficult to divest all or part of our insurance or investment management business through one or more initial public offerings. There can also be no assurance that we could obtain favorable pricing for a sale of all or part of our insurance or investment management business in the public markets or succeed in turning the relevant subsidiaries into viable stand-alone businesses. A divestment may also release less regulatory capital than we would otherwise expect.
Implemented in the Risk Management section: Risk Governance, Business Model and Risk Profile and the corresponding descriptions in the Credit Risk, Market Risk, Liquidity Risk and Non-Financial Risk sections 8 Describe the use of stress testing within the bank’s risk governance and capital frameworks
25 Provide a description of the primary risk management techniques employed by the bank to measure and assess the risk of loss beyond reported risk measures and parameters, such as VaR, earnings or economic value scenario results
The Dutch government adopted the Capital Requirements Directive (CRD), the European reflection of the Basel II capital accord in December 2006. CRD IV will be the reflection of the Basel III accord but is not yet in force. Preparations by ING Bank for the implementation of CRD IV are described in the Risk Management section.
ING Bank is in the process of updating its AMA Operational Risk model in conjunction with DNB. Until finalisation of this project which is expected in 2013, DNB has put a floor on the Operational Risk Capital of ING Bank. Since the internally calculated Operational Risk Capital of ING Bank is below the imposed floor, the Operational Risk Capital did not change over 2012.
in the money market and financial markets products. This was a conscious decision resulting from the reduction in short-term funding. Many of the de-risking exercises achieved their effect of reducing capital.
Additional Pillar 3 information continued 357ING Group Annual Report 2012 1 W h o w e are 2 R
The overall decrease in undrawn commitments comes mainly from the Retail Other and Residential Mortgages within the SA portfolios. For Retail Other, the limits were lowered while outstandings increased and for Residential Mortgages the rise in drawn limits caused outstandings to climb. These decreases were slightly offset by the increase in the AIRB portfolio which comes mainly from corporates where outstandings reduced much more than the limits.
CREDIT RISK MITIGATION For the determination of the Credit Risk applicable amount for Pre-Settlement deals, ING Bank first matches the trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING Bank reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING Bank under CSAs or other similar agreements.
For the other risk types and especially lending, covers are received which is intended to reduce the losses incurred subsequent to an event of default on an obligation a customer may have towards ING Bank. These are subdivided into four groups, called collateral values mortgages, cover values cash, cover value guarantees and other physical covers.
CREDIT INSTITUTIONS All institutions that are subject to banking supervision by public authorities, including mortgage banks, capital market institutions, multilateral development banks and the International Monetary Fund (IMF).