‘Taking charge of change’, the theme of this Annual Report, was the common thread across our operations: managing change to prepare for a new future as a fully independent bank and fully independent insurance businesses.
OUR PROFILE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services.
Price – year-end 7.06 5.56 7.28 Price/earnings ratio* 6.9 3.7 9.8 * Based on the share price at year-end and net profit per ordinary share for the financial year.
Dutch Parliamentary Committee on the Financial System The Dutch Parliamentary Committee on the Financial System (‘Commissie De Wit’) held a Parliamentary Inquiry from November 2011 to January 2012. Its mandate was to analyse the acute problems that developed in the Dutch financial system between September 2008 and January 2009, to assess the measures taken to deal with those problems, and to draw lessons for the future. Key people from the Dutch financial sector were interviewed and the Committee presented its report to the Dutch Parliament in April 2012.
The first sale among the Asian Insurance/IM units, announced in October 2012, was ING’s 33.3% stake in China Merchants Fund, an investment management joint venture, to the joint venture partners China Merchants Bank, and China Merchants Securities for EUR 98 million in cash and a net gain of EUR 64 million. The second sale announced in October 2012 and closed in December 2012, was that of the insurance businesses in Malaysia to AIA Group. ING received approximately EUR 1.3 billion in cash in this transaction, which delivered a net transaction gain at closing of EUR 745 million. The third sale was the sale of the life insurance, general insurance, pension and financial planning units in Hong Kong and Macau, and ING’s life insurance operation unit in Thailand, to the Pacific Century Group (PCG). The sale proceeds of EUR 1.64 billion in cash for this combined transaction, result in a net gain of approximately EUR 1 billion. The fourth sale, announced in November 2012, was ING’s investment management business in Thailand to UOB Asset Management for EUR 10 million in cash. The fifth sale, announced in December 2012, was ING’s IM business in Malaysia to Kenanga. All divestments mentioned are expected to close at the latest in the first half of 2013.
The commercial departments form the first line of defence. They originate loans, deposits, insurance and wealth management products and other products, they know our customers well and are best placed to act in both the customers’ and ING’s best interest. The second line of defence consists of the risk management organisation, headed by the chief risk officer (CRO), and the corporate legal function. The membership of the CRO on the Bank and Insurance boards ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation, which supports the commercial departments in their decision-making, but which also has sufficient countervailing power to prevent risk concentrations and other forms of excessive risks. The third line of defence is the corporate audit function, which independently oversees and assesses the functioning and effectiveness of the first two lines.
Non-financial risk issues increasingly demand our attention since they can seriously impact the functioning of our different businesses. These issues differ for each business activity and require tailored approaches to counter them. We have, for example, installed operational controls in the trading rooms of Financial Markets and anti-fraud programmes in our insurance and lending acceptance processes.
The integration of the commercial banking businesses and ING Direct continued in 2012 in Italy, Spain and France. It began in 2011 with the creation of One Bank in Germany. The One Bank concept optimises the banking businesses and customer service by making more efficient use of capital and liquidity.
In May 2012, as the new chair of the Equator Principles (EP) Association Steering Committee for 2012/13, ING led a review of a new version of the Principles, EP III.
RETAIL NETHERLANDS FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Netherlands dropped by 30.4% to EUR 878 million compared with EUR 1,261 million in 2011, mainly due to lower income and higher additions to the provision for loan losses.
ING in the Netherlands maintained a number two overall market position, serving 8.2 million retail and private banking customers and approximately 585,000 SME and mid-corporate customers. It has more than 400 agents, 275 branches and over 200 service points across the country.
The online start page for the ‘Make an Appointment’ application was renewed. This is an online tool to book appointments directly into the agenda of a branch employee. This application is now also available via our mobile channel, MyING.be.
Several countries have adopted local versions of Retail Banking’s social media strategy. ING Direct Spain is leading in social media and it is a user of different social media platforms. By the year-end, the number of Facebook fans had reached over 160,000.
ING will also do its utmost to support affected staff at WestlandUtrecht Bank who will be transferred to NationaleNederlanden Bank or who will be made redundant.
Despite the challenges, Commercial Banking kept to a steady course, maintaining leadership positions in its core markets and main product areas and supporting clients in closing many high profile transactions.
BUSINESS REVIEW: ADAPTING TO CHANGE 2012 was another challenging year for Europe and the global economy. The European sovereign debt crisis set the tone with uncertainty about the future of the single currency and fears of departures from the monetary union causing an adverse impact on economic and business sentiment. Markets recovered somewhat in the second half of the year, after central bankers took steps to further ease monetary policy.
Investments were also made in Working Capital Solutions (WCS) which has been identified as an important growth opportunity for Commercial Banking. WCS offers three product lines which enable ING clients to enhance working capital efficiency and unlock alternative liquidity sources without impacting their relationships with other participants in their supply chain. These product lines include Supply Chain Finance, Trade Receivables Purchasing Programmes and Corporate Factoring. WCS aims to become a recognised provider of receivables and payables solutions for corporate clients. It won several prestigious mandates in 2012, and in 2013 it will focus on further strengthening its market position and execution capabilities.
In the European loan markets, volumes decreased in 2012. Good quality names have ample access to the bond markets. For General Lending, the challenge is to maintain margins and volume within the current risk appetite while competition intensifies, in particular in markets where large domestic banks protect their core franchises. While margin pressures have increased, ING’s average margin remains above pre-crisis levels. General Lending has maintained its position as market leader in the Benelux and CEE as bookrunner, and continued to support corporate clients through its international network.
A key strategic portfolio initiative has been the run-off of Leasing in 11 European countries, including the UK. Leasing will continue only in those markets where it is an integrated part of ING’s full service offering. Given the nature of the leasing business, it was decided to transfer the remaining parts of Leasing out of TS into our General Lending division as from 1 January 2013.
CUSTOMER CENTRICITY Customer service remains at the heart of Commercial Banking and market leadership positions were maintained within the core franchise areas.
In 2012, ING became one of the founding signatories of the United Nations Principles for Sustainable Insurance (PSI). The PSI was launched during the UN Conference on Sustainable Development in Rio de Janeiro and is a framework for the global insurance industry to address environmental, social and governance risks and opportunities.
Products and Service Innovation ING introduced a number of new products and services in 2012 to make it easier for consumers to grow and protect their assets and wealth. Within the Netherlands, non-life products for the self-employed and small and medium-sized enterprises were standardised, making it simpler to understand. A simpler car insurance product was launched through the Nationale-Nederlanden website. In Belgium, ING overhauled a fire insurance product sold through ING Bank Belgium, making its terms and conditions more transparent.
The technical margin decreased by 45.5% compared with 2011. This decline was mainly attributable to lower results in Individual Life, partially offset by higher results in Employee Benefits and the closed block Group Reinsurance business.
The company’s strategy is centered on helping customers become emotionally and financially secure and ready for their retirement. ING U.S. believes that the rapid aging of the US population, the weakening of traditional social safety nets, the shifting of responsibility for retirement planning from institutions to individuals, and growth in total retirement account assets will drive significant future demand and therefore market opportunity for the business in the years ahead.
Information on members of the Supervisory Board is provided on pages 70-71.
CHANGES IN THE COMPOSITION OF THE SUPERVISORY BOARD Prior to the annual General Meeting 2012 Aman Mehta withdrew his nomination for reappointment as member of the Supervisory Board, after negative advice on this point from shareholder advisory groups over the number of board positions Aman Mehta held.
ING Trust Office has made it easier for votes to be cast this way by putting arrangements in place for proxy voting.
ROBERT W.P. REIBESTEIN (Born 1956, Dutch nationality, male; appointed in 2012, term expires in 2016) Former senior partner of McKinsey & Company. Other business activities: member of the Supervisory Board of IMC B.V. Chairman of the Board of Royal Concertgebouw Orchestra. Member of the Board of Overseers Columbia University Business School. Member of the Supervisory Board of World Wildlife Fund. Member of the European Council on Foreign Relations. Vice-chairman of the Supervisory Board of Leiden University. Vice-chairman of the Board of VVD (political party).
In 2010, ING evaluated the depositary-receipts structure, and concluded that it would be premature to change or abolish the depositary-receipts structure in 2010 and that it would be appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring and the completion of the divestments approved in the extraordinary General Meeting in 2009, the outcome of which was discussed in the annual General Meeting of 27 April 2010.
The decrease came about as follows: add: conversion of shares into depositary receipts 4,100 less: conversion of depositary receipts into shares 8,300
INg values and leadership ING leadership behaviours are also evaluated as part of each Executive Board member’s annual performance appraisal. The overall appraisal along with performance on predefined indicators is part of ING’s Remuneration Committee review in determining variable remuneration.
compensation and consider initiatives within the agreed Executive Board Remuneration Policy. When appropriate, the Supervisory Board, with the consent of the shareholders at the AGM, may deviate from the agreed Policy, to address this very significant gap taking into account regulatory requirements, rules and respective Corporate Governance codes.
fOCUs ON LONg-TERM VALUE CREATION, RIsK AND NON-fINANCIAL PERfORMANCE Variable remuneration is linked to long-term value creation and risk. It is determined/based on individual, business and company performance criteria. Performance measurement will increasingly account for estimated risks and costs of capital. There will be increased emphasis on long-term value creation by means of long-term incentives, deferral and claw back mechanisms.
IFRS 12 ‘Disclosure of Interests in Other Entities’ IFRS 12 ‘Disclosure of Interests in Other Entities’ introduces extended disclosure requirements for subsidiaries, associates, joint ventures and structured entities. The implementation of IFRS 12 will not have an impact on Shareholders’ equity, Net result and/or Other comprehensive income.
Accounting policies for the consolidated annual accounts of ING Group continued 102 ING Group Annual Report 2012
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs. Subsequently, they are carried at amortised cost using the effective interest method less any impairment losses. Loans and receivables include Cash and balances with central banks, Amounts due from banks, Loans and advances to customers and Other assets and are reflected in these balance sheet lines. Interest income from loans and receivables is recognised in Interest income and Investment income in the profit and loss account using the effective interest method.
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 profit and loss account. Increases that reverse a revaluation decrease on the same asset previously recognised in net result are recognised in the profit and loss account. 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.
Accounting policies for the consolidated annual accounts of ING Group continued 110 ING Group Annual Report 2012
Accumulated impairments of EUR 39 million (2011: EUR 38 million) have been recognised.
In general, the reporting dates of all significant associates are consistent with the reporting date of the Group. However, the reporting dates of certain associates can differ from the reporting date of the Group, but, no more than three months.
Other potential divestments In addition to the businesses presented as held for sale above, ING is considering potential divestments, including those that are listed under the European Commission Restructuring Plan in Note 34 ‘Related parties’. However, none of these businesses qualify as held for sale as at 31 December 2012 as the potential divestments are not yet available for immediate sale in their present condition and/or a sale is not yet highly probable to occur.
Notes to the consolidated annual accounts of ING Group continued 136 ING Group Annual Report 2012
Non-distributable reserves 2,172 5,792 7,964 2010 ING Bank ING Insurance Other Total
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 and loss is EUR 12,987 million (2011: EUR 13,726 million).
The provision for the estimated cost of the agreement with regard to unit-linked policies is included in ‘Insurance and investment contracts’ as disclosed in Note 17.
Notes to the consolidated annual accounts of ING Group continued 158 ING Group Annual Report 2012
22 ASSETS BY CONTRACTUAL MATURITY Amounts presented in these tables by contractual maturity are the amounts as presented in the balance sheet.
26 DISCONTINUED OPERATIONS General ING’s Insurance and investment management businesses in Asia and the reinsured Japan SPVA businesses in corporate reinsurance (‘Asia’) are classified as discontinued operations.
30 PRINCIPAL SUBSIDIARIES The principal subsidiaries of ING Groep N.V. and their statutory place of incorporation or primary place of business are as follows: Companies treated as part of the banking operations ING Bank N.V. The Netherlands Bank Mendes Gans N.V. The Netherlands ING Lease (Nederland) B.V. The Netherlands ING Corporate Investments B.V. The Netherlands ING Vastgoed Management Holding B.V. The Netherlands ING Commercial Finance B.V. The Netherlands WestlandUtrecht Bank N.V. The Netherlands ING België N.V. Belgium Record Bank N.V. Belgium ING Luxembourg S.A. Luxembourg ING Bank Slaski S.A. Poland ING Financial Holdings Corporation United States of America ING Vysya Bank Limited. India ING Direct N.V. Germany, Spain, Australia, France, Italy, United Kingdom ING Bank A.S. Turkey
Disposals effective in 2012 Insurance businesses in Malaysia In October 2012, ING announced that it has reached an agreement with AIA Group Ltd. on the sale of ING’s insurance operations in Malaysia, which include its life insurance business, its market-leading employee benefits business and its 60% stake in ING Public Takaful Ehsan Berhad. ING received a total cash consideration of EUR 1.3 billion. In December 2012, ING announced that it has completed the sale with a net transaction gain of EUR 745 million after tax.
ING Car Lease In September 2011 ING completed the sale of ING Car Lease to BMW Group fleet management division Alphabet for total proceeds of EUR 696 million and a net transaction result of EUR 347 million. ING Car Lease was previously partly included in both Commercial and Retail Banking.
KB Life Insurance Company Ltd (1) 49 1,524 1,390 449 434 ING-BOB Life Insurance Company Ltd 50 433 379 97 101 ING Vysya Life Insurance Company Ltd (1) 26 430 411 117 121
34 RELATED PARTIES In the normal course of business, ING Group enters into various transactions with related parties. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions between related parties have taken place on an arm’s length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral.
Observable inputs reflect market data obtained from independent sources. Unobservable inputs are inputs which are based on the Group’s own assumptions about the factors that market participants would use in pricing an asset or liability, developed based on the best information available in the circumstances. Unobservable inputs may include volatility, correlation, spreads to discount rates, default rates and recovery rates, prepayment rates and certain credit spreads.
ING Direct USA 743 ING Direct Canada 1,124 ING Direct UK –260 Other –3
Investment result for risk of policyholders –11,246 186 –10,120 Reinsurance recoveries –1,833 –1,760 –1,620
Continuing operations - average number of employees at full time equivalent basis (1) 24,940 26,332 27,750 61,520 65,658 65,242 86,460 91,990 92,992 Discontinued operations - average number of employees at full time equivalent basis 6,112 12,429 13,148 6,112 12,429 13,148 Total average number of employees at full time equivalent basis 24,940 26,332 27,750 67,632 78,087 78,390 92,572 104,419 106,140
Expected return on assets –870 –877 –886 1 –870 –877 –885 Amortisation of unrecognised past service cost 1 –1 –5 –5 Amortisation of unrecognised actuarial (gains)/losses 116 22 62 –1 –4 –9 4 1 1 119 19 54 Effect of curtailment or settlement –424 –110 –7 –1 –425 –110 –7 Other –10 –9 –15 –40 –16 –18 –50 –25 –33
Interest result banking operations 36 11,883 13,449 13,323 Investment income – insurance operations 38 6,255 6,107 5,752 Other interest expenses –326 –149 –183 48 OTHER OPERATING EXPENSES
Treasury bills and other eligible bills included in trading assets 79 1,471 1,697 Treasury bills and other eligible bills included in available-for-sale investments 439 1,140 2,744
Process The ING Bank risk appetite framework consists of specific risk appetite statements which are approved in the MBB on an annual basis or more frequently if this is felt necessary, and reviewed quarterly in the MBB and the Supervisory Board (SB). The bank risk appetite process is focused on setting the appetite at the consolidated Bank level and across the different risk categories. It is therefore essentially a top down process, which bases itself on the ambition of the Bank in terms of its risk profile and a function of the actual risk profile, the regulatory environment and the economic context. The process is set up according to the following steps: Step 4. Monitoring and management of underlying dedicated risk limits
• Expert models are based on the 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; thereby reducing the reliability of a statistical model.
Credit Risk Portfolio ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities and Asset Backed Securities are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other assets) held by the security‘s issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
Large parts of the Investment portfolio and real estate development exposures are not part of the loan book and thus evaluated for impairment instead of provision. The Global Impairment Meeting is a quarterly process that reviews all assets that qualify against the IFRS impairment test.
Problem Assets – Cover values including guarantees received** - AIRB Portfolio based
In general, positions are valued taking the bid price for a long position and the offer price for a short position. In cases where positions are marked at mid-market prices, a fair value adjustment is calculated.
An important element of the management of market risks in the banking books is the process of risk transfer. In this process the interest rate, FX and liquidity risks are transferred through matched funding to Bank Treasury, where it is centrally managed. The scheme below presents the transfer and management process of market risks in the banking books: Interest Rate Risk in Banking Book Interest rate risk in the banking books is defined as the exposure of a bank’s financial condition to adverse movements in interest rates originated from positions in the banking books.
(1) Please note that 2011 figures are restated for ING Direct Canada, ING Direct USA, and banking books that were included in trading risk section in 2011.
In anticipation of the intended divestment of the insurance activities, to a large extent risk management has been delegated to ING Insurance EurAsia and ING Insurance US with an oversight role at Group level.
Discontinued operations In 2012, ING Insurance and investment management activities in Asia Pacific and its reinsured Japan SPVA businesses in Corporate Reinsurance are classified as held for sale and as discontinued operations. Risks in the discontinued operations have and will be actively managed according to ING best practices. The main risk in Asia Pacific remains interest rate risk. This is mainly present in South Korea and management continues to take actions to reduce this risk.
Risk profile The following table presents the reconciliation from the EC 2011 for ING Insurance EurAsia as reported in the Annual Report 2011, to the comparable basis for ING Insurance EurAsia 2012. This reflects changes in scope, models and methodology. All risk figures disclosed in the remaining part of ING Insurance EurAsia will be on comparable basis to 2012.
Expense The risk that actual expenses in the future exceed the expected expenses. EC: Expense overruns in the Benelux. Premium re-rating The risk that actual premium rate adjustments in the future are less than the expected premium adjustment. EC: Related to renewable health riders in Greece.
MARKET RISK ING Insurance EurAsia is exposed to market risk to the extent the market value of surpluses can be adversely impacted due to movements in financial markets. Changes in financial market prices impact the market value of ING Insurance EurAsia’s asset portfolio and hedging derivatives directly have an impact on the calculated market value of the insurance liabilities.
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Risk Concentration: ING Insurance EurAsia portfolio excluding discontinued operations , by economic sector (1)
OPERATIONAL RISK Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the risk of reputational loss, as well as legal risk whereas strategic risks are not included. Operational risk also includes IT risk.
Sensitivities Mortality and morbidity sensitivities are calculated on a diversified basis assuming a normal distribution and a specified mortality/morbidity scenario for calibration. The largest contribution to the mortality sensitivity comes from the Individual Life business while the morbidity sensitivity comes from the Employee Benefit business.
The Compliance function In ING US, the Compliance function is an independent control and risk management department. The ING US Chief Compliance & Ethics Officer reports directly to the ING US Chief Legal Officer, who is a member of the Board of ING U.S., Inc. The ING US Chief Compliance & Ethics Officer also has a functional reporting line to the ING Group Chief Compliance Officer.
ING applies the following main capital definitions: • Adjusted Equity (ING Group) – This rating agency concept is defined as shareholders’ equity plus core Tier 1 securities, hybrid capital and prudential filters. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing available capital to core debt for ING Group; • Core Tier 1 capital, Tier 1 capital and total BIS capital (ING Bank) – Tier 1 capital is defined as shareholders’ equity including core Tier 1 securities plus hybrid capital less certain prudential filters and deductible items. Core Tier 1, Tier 1 and BIS capital divided by riskweighted assets equal the Core Tier 1, Tier 1 and BIS ratio respectively. Core Tier 1 capital is equal to Tier 1 capital excluding hybrid capital; • Insurance Group Directive capital (ING Insurance) – This regulatory concept is defined as shareholders’ equity plus hybrid capital, prudential filters and certain adjustments. IGD capital is calculated in accordance with method 3 ‘method based on accounting consolidation’ of the Dutch Act on Financial Supervision. In this method the solvency margin is calculated on the basis of the consolidated accounts and is the difference of (i) the assets eligible for the inclusion in the calculation of the solvency margin based on the consolidated data; and (ii) the minimum amount of the solvency margin calculated on the basis of the consolidated data. In applying this method a solvency deficit of an insurance subsidiary, if any, is taken into account, as well as regulatory adjustments of the Dutch insurance subsidiaries based on the Dutch Act on Financial Supervision. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing IGD capital to EU required capital base. In 2012 the IGD ratio was positively impacted by the adoption of the Ultimate Forward Rate Curve for the valuation of insurance liabilities in the Netherlands.
• EC, or Economic Capital (ING Insurance EurAsia excluding discontinued operations), is the pre-tax required capital for the insurance operations of ING Insurance EurAsia, based on a 99.5% confidence interval on a one-year horizon. This interval is aligned with the Solvency II capital requirement. The EC for third party pension funds is based on sectoral rules.
(7) An adjustment for the Dutch Financial supervision act. A ‘test-of-adequacy’ has to be included in the available capital measurement. The revaluation reserve debt securities and revaluation reserve crediting to life policyholders are not reversed out of the IGD capital definition.
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Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2012 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases governments nationalised companies or parts thereof. The measures adopted in the Netherlands include both liquidity provision and capital reinforcement, and a Dutch Credit Guarantee Scheme. The liquidity and capital reinforcement measures expired on 10 October 2009, and the Credit Guarantee Scheme of the Netherlands expired on 31 December 2010. Our participation in these measures has resulted in certain material restrictions on us, including those required by the European Commission (‘EC’) as part of our Restructuring Plan. See ‘Risks Related to the Restructuring Plan — Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’, ‘Risks Related to the Restructuring Plan — The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’. The Restructuring Plan, as well as any potential future transactions with the Dutch State or any other government, if any, or actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
We expect the scope and extent of regulation in the jurisdictions in which we conduct our business, as well as regulatory oversight and supervision, to generally continue to increase. Despite our efforts to maintain effective compliance procedures and to comply with applicable laws and regulations, there are a number of risks in areas where applicable regulations may be unclear, either because they are subject to multiple interpretations or under development, or where they may conflict with one another, or where regulators revise their previous guidance or courts overturn previous rulings, resulting in our failure to meet applicable standards. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result, among other things, in the suspension or revocation of our licenses, cease and desist orders, fines, civil penalties, criminal penalties or other disciplinary action which could materially harm our results of operations and financial condition.
• decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds.
Implemented in the Risk Management sections: Business Model and Risk Profile, Economic Capital, and the risk terminology and risk measures described in the Credit Risk, Market Risk, Liquidity Risk and Non-Financial Risk sections 3 Describe and discuss top and emerging risks for the bank Implemented in the Risk Management section: Risk developments in 2012 4 Once the applicable rules are finalised, outline plans to meet each new key regulatory ratio
The divestments of ING Direct US and ING Direct Canada had a material reduction on the ING Bank portfolio especially in the mortgage category. These two divestments also had a large impact on the investment portfolio. Although not closed yet, the UK sale has also already led to significant reduction in the investment portfolio of which mainly securitisations. In addition to absolute levels, these divestments also reduced the risk profile leading to large reductions in RWA as explained in the RWA migration analysis section. Especially the sale of the relatively high risk weight US portfolio led to almost EUR 30 billion reduction in RWA.
Many central governments exposure receives a zero risk weight due to the financing in local currency and the high quality rating (permanent partial use of the SA rules). Mortgages generally benefit from large levels of (over)collateralisation.
The back-test shows a conservative pattern; the predicted PD exceeds the observed default rate. For the exposure class Retail Other high defaults rates are observed in the small business portfolios due to challenging economic circumstances in Italy, Belgium and the Netherlands. The majority of the defaults in the exposure class Corporate originates from the pressured Real Estate segment and the SME portfolios in Belgium and the Netherlands. The higher observed default rate compared to the average PD for Sovereigns is due to the default of the Government of Greece.
ING’s exposure to securitisations has declined compared to last year, targeted efforts to reduce securitisation exposures have been executed and will continue so in 2013 in order to decrease impairment risk, credit migration and concentration risk on ING’s non-trading books. The main decreases arise from the sale of ING Direct US, ING Direct Canada and although not closed yet, the UK sale has also already led to a significant reduction in the securitisations portfolio. More details can be found in the following specific securitisation sections.
COMBINED RATIO The sum of the claims ratio and the cost ratio for a non-life insurance company or a reinsurance company. A combined ratio of more than 100% does not necessarily mean that there is a loss on non-life insurance policies, because the result also includes the allocated investment income.
Financial glossary continued 371ING Group Annual Report 2012 1 W h o w e are 2 R
Financial glossary continued 373ING Group Annual Report 2012 1 W h o w e are 2 R
WEIGHTED AVERAGE COST OF CAPITAL (WACC) The weighted average cost of capital is used as the discount rate for calculating the present value of future cash flows.