ING Groep N.V. (NYSE:ING) Q3 2020 Results Conference Call November 5, 2020 3:00 AM ET

Company Participants

Steven van Rijswijk – CEO

Tanate Phutrakul – CFO and interim CRO

Conference Call Participants

Benoit Petrarque – Kepler Cheuvreux

Stefan Nedialkov – Citi

Omar Fall – Barclays

Benjamin Goy – Deutsche Bank

Kiri Vijayarajah – HSBC

Giulia Miotto – Morgan Stanley

Thomas Dewasmes – Goldman Sachs

Guillaume Tiberghien – Exane BNP Paribas

Raul Sinha – JP Morgan

Tarik El Mejjad – Bank of America

Robin van den Broek – Mediobanca

Farquhar Murray – Autonomous

Jason Kalamboussis – KBC Securities

Anke Reingen – RBC

Daphne Tsang – Redburn Europe Limited


Good morning. This is Patricia Klosov welcoming you to ING’s Third Quarter 2020 Conference Call.

Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today’s comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statements.

A discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today.

Furthermore, nothing in today’s comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you.

Steven van Rijswijk

Thank you, Patricia, and good morning, everyone, and welcome to our third quarter 2020 results call. I hope you’re all in good health, and I’m happy to take you through today’s presentation. I’m joined by our CFO and interim CRO, Tanate Phutrakul; as well as Karst Jan Wolters, currently responsible for the day-to-day risk activities. At the end of the presentation, we will, as always, have time to take your questions.

The third quarter of 2020 was another quarter marked by the COVID-19 pandemic, and we continue to support our customers, employees and society during this time. We also continued our efforts to increase the effectiveness of our KYC activities and are pleased that these efforts were recognized in Italy, and we can again welcome new customers.

There are a couple of key points I want to make today. Our digital model continues to be a clear strength as we added another 213,000 primary customers, and the number of mobile interactions continued to grow. These also supported us to deliver a strong performance this quarter with pricing discipline, solid fees and cost control, resulting in a resilient pre-provision profits, excluding volatile items. Risk costs were markedly lower than last quarter despite taking a €552 million management overlay to reflect remaining uncertainty and delay in potential credit losses.

As the external environment remains challenging, we keep our focus on managing the company through these times and are taking steps to maintain our strong performance. Our margin discipline and risk appetite remain unchanged while we take steps to focus our activities.

At this point, we’re announcing adjustments in 2 areas: in Wholesale Banking with a focus on our core clients and where we need to be to service them; and secondly, in the Challengers & Growth Markets, we focus on how to best fulfill our ambition of scalability and being end-to-end digital with more certainty of execution.

The CET1 ratio improved from 15% flat to 15.3%. This excludes the €1.8 billion dividend reserve for 2019 and also excludes this quarter’s net profit. This quarter’s profit has been fully reserved for future distribution, reflecting our new distribution policy. With this policy, we are moving to a payout ratio of 50% of resilient net profit.

We have adjusted our long-term CET1 ambition from around 13.5% to around 12.5%, reflecting lower capital requirements and more visibility or regulatory RWA impact. This implies a management buffer of around 200 basis points. As long as high uncertainty due to COVID-19 pandemic remains, we will manage CET1 above the 12.5%, and gradually, we’ll move it to the 12.5%. I’ll come back to our capital ambition and our adjusted distribution policy later in this presentation.

Slide 3 shows that also in the current environment, we keep growing our primary customer base, benefiting from the digital experience we offer to our customers. On an annualized basis, the number of mobile interactions is further increasing to an 87% in total interactions. And this underscores my belief that our digital mobile first strategy is the right strategy, and our ambition to keep transforming into a data-driven digital bank remains firm. Having said that, with the current external environment, we do feel the need to refocus some of our activities.

In Wholesale Banking, we increased the focus on core clients and simplify our network by closing the offices in South America and some offices in Asia. Core clients will continue to be served from regional hubs in New York, Singapore and Hong Kong.

In our Challengers & Growth Markets, the focus has resulted in a decision to significantly reduce the scope of our Maggie program, a program that was launched to provide a standardized customer experience and integrate the product offering in 4 of our challenger countries.

Effectively, the reduced scope means we stopped the complex and costly cross-border integration of systems and products, and these actions will have an impact on our employees with a reduction of around 1,000 employees by year-end 2021 for which a redundancy provision will be taken in the next quarter. Going forward, we will continue to take a critical look at our activities and our cost base while we keep the focus on our strategic priorities. As you can clearly see, we do this by size because I want to have execution certainty.

Now on to the next slide. Data-driven digital leadership to offer our customers a differentiating experience remains a strategic priority. It is about scalability on the one hand and end-to-end digitalization on the other. And we do this by a number of points: the first point, rolling out a first — by rolling out a first-class customer engagement layer using and combining mobile ad components. This results in a continued expansion of the customer base with access to our improved digital channels. And all of our retail customers in the Netherlands and Germany are using the OneApp, OneWeb channels; and in Belgium, almost all our private customers have been onboarded. When this is completed, we will have achieved almost all milestones and 80% of the cost savings of our Unite program.

Two, when you look at the middle layer of the slide, that’s the purple layer, we will roll out global products and services in insurance, in investment products and in consumer lending. And on the right slide of that middle layer, you see the local products and services, which we will continue to build in a modular way, and that’s also end-to-end digitalization locally. The complex and costly cross-border integration of local systems and products under the Maggie program will, therefore, be discontinued.

And the third point is that our digitalization journey is enabled by the foundation that we’ve built over the years, and you see that at the bottom part. And this foundation allows us to use and reuse building blocks throughout ING worldwide and can be applied in the development of local products and services as well as to the rollout of cross-border platform initiatives such as the collaboration and cooperation with AXA on insurance products. As a digital leader, we continue to move towards an efficient, easy customer platform that caters for our own and third-party products and services.

On Slide 5, you can see that over the years, we have been able to grow our NII in a low-rate environment. Please note, 2020 is annualized and is not guidance. As you know, we have 5 levers we apply to support and grow NII: one, loan growth; two, margin discipline; three, charging on accounts to counter negative rate environment; four, our diversification in non-Eurozone countries; and five, changing of the asset mix.

On loan growth, I want to say that we are not willing to compromise our lending standards and our margins. However, we benefit from our geographical diversification, and we see loan demand already improving in the U.S. and in Asia. In Europe, demands remain subdued. However, we continue to be committed to support our customers and the wider community.

On deposits, we are increasing the charging of negative rates in the Eurozone, and in non-Eurozone countries, we have lowered deposit rates to counter the effect of significant local central bank rate reductions. We aim to change the lending mix to areas with higher margins also within risk appetite.

As you can see, we are successful at growing our fee base by increasing daily banking fees and introducing behavioral fees. As you will see later in this presentation, we have managed to keep the pressure on NII limited, while we have not yet included the conditional benefit for TLTRO III and have absorbed significant negative FX impacts in the third quarter of 2020. Please note, we remain confident that we will meet the TLTRO threshold.

In light of the current environment, wherein rates have gone more negative and we see low demand for corporate lending, we expect continued pressure on NII in the coming quarters. And this means that we will need to build on our good momentum on fees and apply strong focus and discipline on costs, which I have said already in the previous quarter.

Turning to Slide 6. As mentioned, we retain the same risk appetite and focus on a high-quality loan book, proven also by our strong track record with lower risk costs through the cycle compared to our Eurozone peers. Looking at the numbers for this quarter, these came in well below the second quarter despite taking a €552 million management overlay. This overlay reflects increasing uncertainty with the second wave of COVID-19 coming in and a delay in potential credit losses as support from governments and payment holidays phases out.

This overlay consists of 2 parts. The first part of the overlay offsets the effect of a €380 million release that would come by reflecting the updated macroeconomic indicators in our models, like I said last quarter, that would mean that a bad quarter will roll off and a good quarter will come on, but we’ve offset that impact.

The second part of the overlay was furthermore applied to increase provisions for loans that are still subject to a payment holiday. The total amount of loans on which payment holidays were granted remained limited to almost €20 billion or around 2.6% of our loan book. With almost €6 billion already expired, we have around €14 billion remaining, of which the large majority will expire either by the end of this year or in the first quarter of next year.

And while we don’t see a significant deterioration of the risk for loans with expired payment holidays, we have conservatively taking — taken additional provisions, also reflecting business customers and sectors, which we consider higher risk under COVID-19 and the uncertainty the second wave and structural lockdown measures may bring.

Slide 7 provides an overview of what we’ve done to strengthen our management of compliance risks, which continues to be a top priority. We have taken steps to implement one global approach to how we manage our know-your-customer activities. And this list is obviously not complete but shows some major areas where we have taken steps.

And I would like to highlight the rollout of some global tools for adverse media screening and pre-transaction screening; several digital solutions that we’ve developed to improve the effectiveness and efficiency of our KYC activities such as machine learning to detect when transactions are being broken up in small parts in an attempt to avoid raising alerts, so we call that smurfing; and last but not least, and I’m actually proud of that, we also were the first in the sector to put a team in place with people with a psychology degree that are purely focusing on ensuring the most effective behavior and getting groups to work well together with learnings from these assessments, the behavioral risk assessments, then to be applied across the entire organization, because in the end, it’s not only about governance and processes but also about behavior. That will make us much more effective.

As we’ve said before, as a bank, we have a responsibility to manage our compliance risks. At the same time, in order to maximize our effectiveness as a gatekeeper, close collaboration with other banks’ supervisors and also law enforcement agencies is key. We need to be able to share transactional data to receive more feedback on suspicious alert reports and to have a common approach across countries on KYC-related regulation and supervision to become more effective as a society.

We are pleased to see an increasing awareness on this topic with action plans presented by the Dutch government and by the European Commission. We are part of initiatives to collaborate with other banks on transaction monitoring in the Netherlands and Belgium. And although these are complex matters which will take time to realize, things are moving in the right direction.

Now let me take you to the second quarter — to the third quarter results, starting on Slide 9. In the third quarter of this year, income was lower both year-on-year and quarter-on-quarter, largely due to an impairment on our equity stake in TMB, mainly reflecting the deteriorated macro environment in Thailand. Excluding these impairments, lower income compared to the previous year was mainly driven by pressure on liability margins and lower results on foreign currency ratio hedging, reflecting lower interest rate differentials as local central bank rates in non-Eurozone countries were significantly reduced. And actually, that is the largest part of the decrease comes from these foreign currency ratio hedging differentials.

Sequentially, excluding the impairment in TMB, income was €155 million lower. And this reflects the lower client activity in financial markets compared to the previous quarter and lower income in the corporate line, again, including the lower results on foreign ratio — foreign exchange ratio hedging, partially compensated by the annual dividend received from Bank of Beijing. Pre-provision results, excluding both volatile items and regulatory costs, was resilient.

Next to the revenue differences I just talked about, the change compared to the third quarter of last year came from a VAT refund we received in that quarter as well as CLA increases that came in, in this quarter in loan costs. Compared to the previous quarter, the result next to the revenues was also impacted by slightly higher costs, driven by redundancy and legal provisions. If you would take those legal provisions and redundancy costs out, the operational costs this quarter were lower than last quarter.

On to NII on Slide 10. As mentioned earlier in the presentation, we have seen some pressure on NII from the current market conditions, which affected the levers we generally use to counter the impact from the low-rate environment. NII, excluding financial markets, was lower year-on-year, reflecting the continued pressure on liability margins, while deposit inflows this year were substantial. We kept lending margins stable. However, lending volumes declined, reflecting the currently lower demand, especially in Wholesale Banking.

The impact from FX was significant this quarter. Interest results on foreign currency ratio hedging was significantly lower, driven by local central bank rate reductions in non-Eurozone countries, while also the devaluation of some foreign currencies had a substantial negative impact. Compared to the previous quarter, NII, excluding financial markets, was 2.9% lower. Overall, lending margins improved. However, pressure came in from the aforementioned reasons.

To emphasize, we continue to focus on pricing discipline, which will benefit us in the future, and we may increase the benefit from negative rates charged on deposits. In addition, we did not book the conditional benefits from TLTRO III yet. However, we remain confident we will meet the threshold.

Our net interest margin decreased by 6 basis points this quarter to 138 basis points. This was mainly driven by a higher average balance sheet reflecting our TLTRO III participation and that was partly offset by lower average customer lending. The overlending margin improved. However, pressure on liability margins continued, and NII in the corporate line was lower. As stated previously, while NIM is an important metric for the market, we note that NIM can be impacted by volatile items as we’ve seen this quarter, so we believe it is better to look at overall NII development and guidance.

Turning to net core lending. As mentioned, loan demand dropped this quarter, especially in the corporate segment. In the current environment, we’re observing that companies delay investments and need less working capital, while, also, demand has been met through direct governmental support schemes.

We do see some divergence in circumstances between Northern and Southern Europe. In Northern Europe, governments have provided more direct support through tax deferrals and wage support, also reflected in generally low additional uptake of government-guaranteed bank loans. Meanwhile, in Southern Europe, bank lending is the main support channel for companies. Specifically, for the Netherlands, our largest market, companies were able to adjust our cost base by reducing the number of temporary workers, especially in sectors such as hospitality and tourism. In this context, overall, for the third quarter, net core lending was down by €6.9 billion.

In retail, net core lending grew by €1.1 billion, driven by mortgages, with growth mainly visible in Germany. In Wholesale Banking, low demand was visible with €8 billion reduction in net core lending, and that was mainly driven by further repayments of the COVID-related increased utilization of revolving credit facilities and lending, i.e., the emergency lending that people took as well as some repayments on term loans. In Daily Banking & Trade, the decline mainly reflects the impact of lower oil prices in trading commodity finance and FX.

Net customer deposits increased by €3.4 billion. This level is comparable to previous years. However, in the third quarter, this was composed of higher savings in Retail, reflecting continued uncertainty. In Wholesale Banking, we saw a net outflow, also reflecting repayments of protective drawings in the first quarter, which had been placed as deposits.

As mentioned, the negative net loan growth is a shift in demand which we don’t consider structural, and we expect loan growth to return when uncertainty subsides. And with our geographical diversification, we will be able to benefit as demand picks up with the first positive signs visible in Asia and the U.S.

Now on to fees. Year-on-year income — fee income was higher when adjusted for the reclassification of financial markets last year with impact from COVID-19 visible in how different product categories developed. If you look at Retail Banking, fees were 5.5% higher, again, driven by investment product fees with a continued higher number of trades to benefit from market volatility. In Daily Banking, fees were lower year-on-year, although payment transactions increased following the relaxation of lockdown measures, but these have not yet returned to normal levels yet.

The increase of Daily Banking packages in the first quarter of this year has a little part of this impact, and the full benefit of the action that we took should become visible when transaction levels return to normal. Lower fees in Wholesale Banking remain driven by lower demand, lower TCF volumes or Trade & Commodity Finance volumes, and less activity in financial markets. Sequentially, fees were 1.5% higher. Retail grew by 4.1% as some recovery in a number of domestic payment transaction was visible in Daily Banking. Fees on investment products were at a slightly lower but still high level.

In Wholesale Banking, lending fees were higher due to the closing of several syndicated deals for the quarter. Overall, fees in Wholesale Banking were down, reflecting less activity in financial markets. Year-to-date, fees grew by 5%, so this meets our ambition level, and under the current external circumstances, I find this a great achievement as it shows how well we adapted and have been able to diversify our income streams.

Moving to the next slide. Expenses this quarter include a €140 million impairment on capitalized software, driven by the changed scope of our Maggie program. Excluding KYC and regulatory costs as well as this impairment, expenses were up by €25 million year-on-year or 1.1%, this quarter includes CLA increases, while the third quarter last year included a significant VAT refund.

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Quarter-on-quarter, most segments reported lower operating expenses. Overall expenses, excluding KYC, regulatory costs and impairments, were €20 million higher, but this includes €37 million in provisions. KYC-related costs were comparable to the previous quarter as we work to become more effective and make progress on our final enhancement. These costs are expected to plateau in 2020, we said it before, but now somewhat below the initially expected run rate of €600 million for the year.

Regulatory costs were slightly up year-on-year and lower sequentially, which included a catch-up on contributions to the Single Resolution Fund. As stated earlier in the presentation, with a challenging external environment, we’ve taken steps to refocus our activities with adjustments in Wholesale Banking and to the Maggie program, reflecting a reduction of around 1,000 FTEs by the end of 2021.

Going forward, we will continue to monitor developments, and I will continue to critically review our activity and expenses and — where needed while making sure that we’re able to execute.

Slide 16 shows the risk cost split per business line, which, in the third quarter, came in at €469 million or 30 basis points on average customer lending and is well below the elevated level of the previous quarter. As explained on Slide 6, this includes a €552 million management overlay, primarily in Stage 1 and 2, consisting of 2 parts. And this was applied to compensate for a €300 million — €380 million release, driven by updated macroeconomic indicators; and the second part, an increase in provisioning for payment holidays. The resulting €172 million impact on risk costs, i.e., minus €380 million plus €552 million, was allocated to the segments with €105 million in Retail Benelux, €53 million in Retail C&G and €14 million in Wholesale Banking.

Aside from the allocation of the management overlay in Retail Benelux, risk costs mainly reflected some additions to individual files in mid-corporates. In Retail Challengers & Growth Markets, risk costs predominantly reflected higher collective Stage 3 provisioning, mainly visible in Australia, Romania, Germany and Poland.

In Wholesale Banking, Stage 3 risk costs were significantly lower than the previous quarter with some additions to existing Stage 3 files with — while new inflow of new clients was limited. The Stage 2 ratio was slightly higher at 7.6% as we conservatively moved more exposure to watch list. To reiterate, Stage 2 is not a waiting room for default. It implies that credit risk on individual exposure is monitored more closely, not that this exposure is expected to default. When credit risk is no longer being decreased, the exposure moves back to Stage 1. The Stage 3 ratio for the group was slightly higher at 1.7%. That’s still low, I would argue. And when excluding TLTRO III from credit outstandings, the Stage 3 ratio was stable at 1.8%.

The next slide shows our CET1 ratio development, which was up by 0.3%, reaching a very healthy 15.3%. CET1 capital was €0.4 billion lower, mainly driven by negative FX impact from the devaluation of the U.S. dollar and the Turkish lira, while net profit for the quarter was not added to capital as it was fully reserved for future distribution. The CET1 ratio was further supported by €9.9 billion lower RWAs, mainly driven by €10.5 billion of lower credit RWA, primarily due to FX impact and lower volumes.

We also saw some impact from positive risk migration, which might feel counterintuitive in these times, and it was primarily driven by a reduction of outstandings with a lower coverage ratio, resulting in a lower level of required RWA. Market RWA was down, mainly due to lower exposures as markets normalized, while operational RWA increased due to technical updates to the AMA model.

Turning to our capital update on Slide 16. During 2020, we have seen several developments which have contributed to the decision to lower our long-term CET1 ratio ambition from currently around 13.5% to around 12.5% going forward. This adjustment is mainly driven by a reduction of capital requirements in the course of 2020. This was partly driven by the COVID-19 pandemic. And here, we can expect buffers to come back, but part is also structural such as under Article 104A under CRD V, which was pulled forward. For the CRD V lovers amongst you, Article 104A.

Also, during 2020, we’ve taken the RWA impact of the definition of default as well as the majority of the TRIM exercises, so now we have a better visibility on our remaining expected regulatory RWA inflation. Our long-term around 12.5% ambition implies a management buffer of approximately 200 basis points on our current SREP requirements, higher than our previous management buffer of 170 basis points, reflecting uncertainty on that part of the capital buffers that may come back. Given the current uncertainty caused by COVID-19, we’ll manage the short-term CET1 ratio above 12.5% until there’s more clarity, and then we will move to the 12.5%.

On to Slide 17, which shows our distribution policy. As we’ve always said, we aim to offer our shareholders a sustainable and attractive return. And in March of this year, we suspended our dividend policy following ECB recommendation and did not accrue for dividend in the first half of 2020, while we kept a €1.8 billion dividend reserve for 2019. Our previous progressive dividend policy did not fit with a procyclical impact of IFRS 9 and the related volatility.

We now announce our new distribution policy, which consists of a payout ratio of 50% of resilient net profit to be paid out in cash or a combination of cash and share repurchases with the majority in cash. We have reserved this quarter’s full net profit for dividends, while the €1.8 billion dividend reserve over 2019 remains reserved for distribution to shareholders, when and how to be determined. We will also periodically look at returning structural excess capital. To be clear, any dividends or capital distribution is subject to prevailing ECB recommendation.

As you can see on Slide 18, both the CET1 ratio and leverage ratio remained ahead of our ambitions. Regarding ROE, in the current environment, it is below our ambition, and we very much intend to continue to provide an attractive total return, and we look in that to add businesses through the cycle. We believe our businesses should aim to cover at least our cost of capital. As mentioned in the previous quarters, our cost-to-income ratio was impacted by factors such as the negative rate environment and regulatory costs.

This quarter, also, impairments affected this metric in both income and costs but corrected the 3Q ‘20 cost-to-income ratio of 57.7% on a 4-quarter rolling basis, and for the quarter, it was 54.8%. To reiterate, cost to income is not how we run our business, but it remains an important input for our ROE, and we have an ambition to reach 50% to 52% as we further digitalize. We have taken steps to refocus our activities, and also, going forward, we will critically review expenses and with execution certainty. As for dividends, we have just provided you with an updated distribution plan.

To summarize, as I wrap-up, we continue efforts to help our customers, employee and society to deal with the effects of COVID-19. At the same time, countering financial and economic crime remains a priority. The current environment reinforces our belief that we are on the right strategic path with our digital model enabling us to continue to grow primary customers and mobile interactions. Loan demand was affected by COVID-19, but still strong in mortgages. However, we saw reduced demand, mainly from our business customers compared to when the lending went up at the end of the first quarter with the emergency drawings.

Pre-provision results proved resilience, supported by focus on pricing discipline and cost control. Risk costs sharply decreased, especially in Stage 3, while we further increased collective provisioning in Stage 1 and 2 to reflect the remaining uncertainty and the delay in potential credit losses.

With increasing uncertainty, we keep focus on margins and asset quality, and we also take a critical look at our activities, leading to some adjustments in the organization. The CET1 ratio was strong at 15.3%. We announced our capital update with a reduced CET1 ratio ambition of 12.5%. And given the current uncertainty, we will manage our CET1 ratio currently above, but after the uncertainty subsides, around that 12.5%. And finally, we have adjusted our dividend policy to a 50% payout ratio of resilient net profit.

Thank you, and I will now open the floor for questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from Mr. Benoit Petrarque, Kepler Cheuvreux.

Benoit Petrarque

Yes. It’s Benoit Petrarque from Kepler Cheuvreux. The first question is on capital. Thanks for all the details you’ve provided today. You are mentioning a periodic review of excess capital. I was wondering whether that will be once a year or do you plan to execute this periodic review. And also, on capital, you want to maintain a buffer during the pandemic, also reflecting uncertainties. What is this buffer right now? Could you be — help us to quantify how much you need, as we speak, looking around, looking at this, well, second lockdown, second wave? So could you help us to quantify that?

I want to understand if — assuming ECB will give a go-ahead on capital distribution in December, whether you are able to pay shareholders next — early next year? A bit of the excess capital sitting in the company or that would be a bit of a late decision? So that’s the first question. The second question is on costs. Also, in combination with the, let’s say, the NII outlook, it’s quite tough outlook, obviously. But how do you see costs moving? I get to a [indiscernible] cost at minus 1% in Q3 year-on-year. So that’s good. But what trend do you see for 2021 on costs? Could you help us to — well, to model the cost line going forward in this challenging top line environment?

Steven van Rijswijk

Yes. Thank you very much, Benoit. I will take the question on costs and then Tanate will take the question on capital. So on costs, we’ve taken clear actions in Wholesale Banking and with Maggie. The provisions in that regard will be taken in the fourth quarter. That’s just how we need to do it from an accounting point of view. But like I said, the previous quarter, the nose on the cost level need to come down. So costs need to move down from here.

Benoit Petrarque

On Maggie, how much cost-cutting will that bring, roughly? Could you quantify that?

Steven van Rijswijk

We will only take a provision in the fourth quarter. Currently, we’re looking at 1,000 FTE. That’s both internal and external FTE. But we need to go through our provision committees to finalize that, so that will come in the fourth quarter. And yes, you have mentioned that, indeed, is a tough environment on NII. And of course, that is the case. But at the same point in time, we see growth picking up in the U.S. and Asia. So yes, it’s a temporarily tough environment, but that’s where our diversification in the countries will help because that — because in some regions, growth is already picking up and that should benefit us as well. But coming back to costs, the nose of the cost will have to come down and it will come down. On capital, I will give the floor to Tanate.

Tanate Phutrakul

I think on capital, as we guided, we are looking to, over time, get to that 12.5% or around 12.5% target. And we do review our capital structures almost every quarter, of course, looking at the prospects for the future and where we stand. But I guess the question is how fast and at what pace you need to get to that 12.5%. We just need to make sure that as we glide to that 12.5% target, we must have a sustainable structural reduction in the capital needs of the company. So that’s what we will do over time.

Benoit Petrarque

Like this additional buffer you’re planning to keep for the time being, how much is that roughly? I mean you are mentioning, like, 200 bps above the MDA. But I’m not sure that is your current buffer.

Tanate Phutrakul

Our current buffer is almost 500 basis points, as you can see. And that — we think that over the cycle, we can comfortably accommodate a 200 basis points buffer.


Next question is from Mr. Stefan Nedialkov, Citi.

Stefan Nedialkov

So I have one bigger question on NII, which I’ll break down into, hopefully, quite short ones. The FX drag, can we assume that’s kind of a one-off item? I mean, obviously, one-off depending on how the FX trajectory develops from here. But more of a one-off than a recurring. Secondly, the TLTRO accrual decision, is that something that your auditors need to approve potentially in 4Q or the beginning of next year? Or is it much more of a management decision?

Thirdly, on the pricing of your lending products. Are you already incorporating a full Basel IV impact on capital when you price for your products? And how do you see the competition approaching Basel IV, especially now during COVID? Basically trying to see if there is any upside to NII over time now that you’ve taken your Basel IV impact.

And lastly, on negative rates. You mentioned that in Belgium, you will start charging negative rates. But I thought that there is, on the Retail side, 11 basis points of statutory minimum. So are you talking about more on the SME and large corporate side of things, plus Germany, the [indiscernible] of 50 bps above 100? So some color around the scope of the negative rates in countries outside of the Netherlands would be very helpful. Apologies for the 4 sort of shorter questions.

Steven van Rijswijk

Thank you. I will take the questions on negative rates and pricing. And for FX and TLTRO, we’ll give the floor to Tanate. If you look at the negative rates, there, we started to charge negative rates in Belgium to corporates and SMEs. And the 11 basis points goes for our current accounts for retail customers. So like we have already been doing in other markets for corporates and for SMEs, we will also now start to charge negative rates above certain amounts for these corporates. We apply also schemes in Germany, for example, whereby if people open a savings account only, then we charge negative rates to also nudge customers to either do more business or to do business with ING. But if they only apply for savings accounts and that you can call, in that sense, behavioral fee, we charge negative rates. So we do that in different ways and shapes to protect our P&L and to nudge clients in the right direction, not to unnecessarily stall deposits at our bank. And that’s what we will continue to monitor.

With regard to pricing, I mean, basically, with the TRIM missions that we have had already, including the TRIM mission on the large corporates, for which we have taken a further impact this quarter, so the full corporate large TRIM effect is now in. We still have only 2 TRIM missions to go on Trade & Commodity Finance and OMFI. The impact of that will be limited. So hence, by and large, the input of TRIM has come in for us. And hence, the capital uncertainty for us has been lower.

As I told you, the biggest impact of all the regulatory capital changes is not so much Basel IV per se but also the change in the models that we had to make a definition of default and other TRIM missions. And hence, we have been able to actually lower our capital requirement level to 12.5% as an ambition. And that means that we can become more competitive as we can price off a lower Common Equity Tier 1 level as compared to previously where we would price to our clients based on a Common Equity Tier 1 level of 13.5%. So in that sense, we are improving our competitive level.

Tanate Phutrakul

And Stefan, to answer your 2 other questions. On FX, I wouldn’t characterize it as one-off, but the impact on the differential interest rates between dollars or Turkish lira against the euro has already happened significantly in Q3. So we don’t expect that drag to be very significant going forward in the coming quarters. So that’s answering your first question. And in terms of TLTRO III and when we would book the potential gains, that’s really a management judgment when we are virtually certain that, that income will come. So it’s our decision. But of course, we do that in consultation with our auditors. And we will take that decision when we have reasonable confidence.


Our next question is from Mr. Omar Fall of Barclays.

Omar Fall

Just firstly, how much of the decline in the core lending was related to the protective drawings being repaid? And are you saying now we are at the trough of volume growth in Wholesale because, in some ways, it feels like this business is shrinking forever, particularly with this restructuring you’ve announced today? And then on that same note, in Wholesale, why didn’t you take this opportunity to deal with financial markets? The business has made an ROE for

— it goes through its cost of the capital in basically almost a decade. So wouldn’t it be an obvious candidate for restructuring? And then — so I think I misheard that the changes to the Maggie program are completely unrelated to the Unite program, right? So could you update us on that one and potential cost savings there?

Steven van Rijswijk

Thank you, Omar. If you look at the decline in core lending, that was — that came from the emergency drawings that was around €5 billion. So the largest share of the decline came from lower corporate demands as companies repaid their emergency drawings. And we have been seeing lower economic activity, and it also means lower investments. At the same point in time, we see that also in our payment business, activity has gradually been moving up again. We see increased demand coming from Asia and the U.S. So at some point in time, when companies will start to invest again, that also will then have an important effect on loan demand as well.

Why not have an opportunity to deal with FM? We look at our return on equity on an integral basis. And hence, we do not compartmentalize different elements because you shrink the glory. We need to make sure we are a client-driven and customer-focused bank and means that in that integral part, we want to make a 10% return on our CET1 ratio, and that’s how we see the business. Nevertheless, we will continue to look at businesses or business lines or countries that perform sub-hurdle. And if that is sustainably also through the cycle, then we will need to take action, like we have taken action right now.

With regards to Maggie, yes, that is unrelated to Unite. At the same point in time, a complexity that we saw in Unite, we’ve also seen in Maggie by the integration of local engagement layers and product elements is proving to be difficult. But we have been learning, and we’ve always talked about getting to — from an intermediate state to an end state, if you will. And now we are in a lucky circumstance that we have built a number of our modular blocks.

We’ve built our software blocks in terms of TPA. We’ve built our cloud. We’ve built our Data Lakes. We’ve built our global product propositions, including the insurance proposition that we have with AXA. We have already built an app environment in the Benelux and in Germany that is the same. And hence, we can use all those building blocks also in the countries in C&G, and that’s how we redirect both the scalability and end-to-end digitalization of the project. So that is — they’re separate.

On Maggie, we took a provision for capitalized software of €140 million this quarter. In the next quarter, the provisions will be taken for cost savings. If you look at the 1,000 FTE, approximately 600 relate to Wholesale Banking and approximately 400 relate to Maggie.

Omar Fall

Got it. And sorry, as just a cheeky follow-up on the TLTRO. How is the balances spread or the allocation across the divisions just so we can get a sense of, for our modeling, the impact on NII and NIM?

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Steven van Rijswijk

Cheeky questions, I always pass on to Tanate.

Tanate Phutrakul

So I think, Omar, the TLTRO is related to lending within the Eurozone. So if you want to see how we are doing, it’s really trying to look on a geographical basis for loan growth within the Eurozone. That would be the case for you to follow up in subsequent quarters.


Next question is from Mr. Benjamin Goy of Deutsche Bank.

Benjamin Goy

I hear your comments on the regulatory inflation, and you talked a lot already. So just wondering on the Basel IV ratio where you’re currently standing? Also, I guess, Dutch mortgages at some point could come in. So how this compares to the 12.5%? And then secondly, on your fee income, I guess this will gain importance going forward. The €200 million of fees from investment products this quarter, very nice growth rate. Just wondering how much is driven out of Benelux and Germany probably next. But any other countries where there’s already a significant contribution? Any color would be appreciated.

Steven van Rijswijk

Thank you, Benjamin. On RWA inflation, like we said previously, all these regulatory elements, DoD, TRIM, changing models, Basel IV have, for us, been largely taken into account, except for the final Basel IV output factor. Other than that, the impact for us is, from now on, almost benign. Hence, we have been able to take the CET1 level down to 12.5%. Assuming that Basel IV would be fully implemented in 2023 and then leading gradually up to 2027, that total impact will be around 50 to 60 basis points over the years. And hence, for us, it is a very — it is a readily minor part of all the impacts. And hence, with TRIM and DoD, we’ve basically had it, if you will. So that’s good.

On the fees, yes, typically, we come from an environment as a digital bank with our direct banks in different countries, whereby we had a very, very low fee share and investment products, in that sense, were actually not very well developed. And hence, we are now starting to do that. And you see now the first growth of that in Germany. We’re also rolling out investment proposition in other countries. So you should be able to see that space grow. But if you see that compared to the number of clients that we have compared to our peers, we’re still at a very low level. So in that sense, there is lots of upside potential in that investment product fee business.


Next question is from Mr. Kiri Vijayarajah of HSBC.

Kiri Vijayarajah

Just a couple of questions. Firstly, coming back to the pullback in the Wholesale Banking from Asia, LatAm, can you just give us a feel for what kind of sort of volume RWAs or revenue impact we should be thinking about? And timing-wise, when does this shrinkage get underway? And is it also fair to assume a lot of it’s going to overlap with your oil and gas commodity and shipping book? And then the second question is on capital, more just — really just a technical point because I think at the first half stage, you were letting your profits flow into CET1 capital. But then I see at the third quarter stage, you’re not letting the profits flow into CET1 capital. So sorry if I missed it, but what’s the thinking there? What’s the — have the regulators said something there? So just some color on that sort of moving parts on your CET1 capital, please.

Steven van Rijswijk

Yes. Thank you, Kiri. On Wholesale Banking, it’s not so much a matter of shrinking of volume in RWA because we will continue to service a number of those clients from regional hubs in New York and Singapore and Hong Kong. It’s basically an efficiency measure, if you will, to service those clients from hubs rather than from all kinds of different offices. And hence, we will close down 3 offices in South America and 4 smaller offices in Asia, but these are small offices. So we have Mongolia and we have Thailand, and we have Kazakhstan and we have Malaysia. And in Latin America, it’s Brazil, Argentina and Colombia.

But if you look at the total in Wholesale Banking, the number of people involved is still relatively small. We are actually able, across the Wholesale Bank, to actually service our clients with less people. So this also does not have an impact on the oil and gas book or shipping, if you will. We already said that we have put part of those books in rundown, but this measure has not an effect on that.

If you look at the background on why we did not add net profit of the previous quarters to CET1 is basically because at that point in time, we did not have a dividend policy because we aborted or delayed our dividend policy as of the first quarter. And since we now resumed in the third quarter, we added the entire profit of the third quarter in it as sort of a catch-up.


Next question is from Ms. Giulia Miotto of Morgan Stanley.

Giulia Miotto

A couple of questions from me. So first, from a strategic point of view, you made some clear announcement on capital and some announcement on costs. But I was wondering, should we expect an Investor Day with, for example, more clarity on cost direction or revenue initiatives? Or really, you have taken a look and this is — these are the only initiatives that you plan to announce over the next 12 months? So this will be my first question.

Then the second question, just going back to the 50 to 60 basis points that you mentioned for Basel IV, and — how are you thinking about the mortgage overlay from the DNB? I know that this has been postponed, but in theory, it’s still in the cards at some point. So is that included in this 50, 60 bps or would that be on top?

And then if I can just ask a follow-up on the IT, Slide #4. The product platforms, so insurance, investment, consumer lending, does this mean that now, finally, whenever you launch a product, that will be launched across the board to all your markets so we should be — we should see a faster ramp-up in fees?

Steven van Rijswijk

Thank you very much, Giulia. Starting top to bottom with your questions. Like I said, I want to — and like I said also previous quarter, I’m reviewing all business lines and all business that we have in ING. And if there are measures to be taken, I will — we will take them, and we will — and I mentioned in my presentation execution certainty because I want to avoid announcing big megalomaniac plans for long term that are not executionable. So when we see things happening, we take action, and we make sure we get to execution of what is coming.

So if there are new things to be done, then I will announce them at that point in time. So — and we will take it from there. So in that sense, there is not a current plan for an Investor Day with additional direction. But I’m sure that the IR team will discuss this further with you. They’re already looking very happy.

So with regards to the Basel IV impact and the mortgage overlay of DNB, the DNB overlay did not come because the further growth in mortgages did not come and there was also not a big increase in lending elsewhere. So it was a protective measure that the DNB would put in place. But in the current circumstances, it was not deemed necessary anymore. If it would still come, it would be a front-running of Basel IV. And hence, it is included in that 50 to 60 basis points.

In Retail, yes, we have — of course, in the past, we have developed products locally, and there are still local products. Some products are local in — for example, in Italy, such as loans related to people working in certain companies that do not exist elsewhere and there are also products that can be applied more globally. So we will — next to the local products that we have, we will also start to roll out these global products so we can easily make them scalable across more markets, which is, from both a revenue and cost point of view, more effective and efficient.


Next question is from Mr. Thomas Dewasmes from Goldman Sachs.

Thomas Dewasmes

I had 2 questions, please. One on capital targets. Am I correct in understanding that your current 12.5% target and 200 bps MDA buffer already includes the planned increase in countercyclical buffer down the line? And the second question is on fee income, please. Mr. [indiscernible] said recently that banks would consider growing those lines, possibly incorporate asset managers in their whole business plan. You often talked about AXA and your initiatives there. Could you talk a little bit about what you’re doing in the Netherlands in asset management and insurance to improve that line, please?

Steven van Rijswijk

Thank you, Thomas. On the first question, the answer is yes. So the 12.5% already includes potential increase in countercyclical buffers at some point in time. And so that’s why I said some parts of the decrease will be structural, some parts will be temporarily. But in our buffer, we have taken into account that the countercyclical buffers may come back. With regard to the article of Mr. [indiscernible], I will answer it in 2 ways because the article that he wrote was mentioned in a different way, and that was meant that he stated in the article that Europe would benefit from the setup of an asset management company for loans that were not performing to then deal with those loans and, i.e., function, if you will, a sort of a bad bank. And that was something to further support the European economy but also the banking industry.

Now if I speak about ING, we have a very healthy capital level, a very good risk management and low NPL level. So I don’t think that is needed for ING, but I think that was the reason why he wrote that article. That was the context in which he wrote it. If I answer you, and that’s the second part, and more directly, if you look at our insurance businesses or the sale of insurance and the fee that we make on that, again, since we came from an environment with our direct banks, which actually had no fees whatsoever, in the past, these banks were saving banks. And gradually, they moved into mortgages, and gradually, they’re now moving into fees. We’re actually punching well below our weight in developing our fee business, also in insurance and also in brokerage. And hence, you now see, since we are stepping up to the plate, for example, in Germany, that has given us a big boost. And this is exactly the area that we need to increase in as we came from these small amounts in the past.


Next question is from Mr. Guillaume Tiberghien of Exane BNP Paribas.

Guillaume Tiberghien

My first question relates to the net interest income. If I look at consensus for next year, the consensus is around €3.47 billion per quarter. You’re running at €3.3 billion. So I wanted — obviously, there’s €140 million mix — sorry, [indiscernible]. And a big chunk of that is due to the FX ratio hedging. But I wanted to know whether we simply need to take the current run rate and back the FX ratio hedging and then slip from that given the pressure on deposit margin, or can we stay stable from that level? The second question relates to the wholesale division. And you explained that given the lower equity Tier 1 target, you can price, I guess, at a lower price given that you’ve got less of a capital requirement. But don’t you think that prior to the reduction in the equity Tier 1 target, you actually had to increase your price in order to meet satisfactory return on the previous target? So I’m a bit confused whether you intend to price at lower rates or still improve the discipline in Wholesale.

Steven van Rijswijk

Yes. That’s a good question. Let me say upfront, we price to — first of all, we’re part of the market. And we — therefore, we are not setting the price of the market, but we price what is the market price. If we could direct the price of every market, then I’m sure that we would be talking to some regulatory authorities. But it’s just a market price that we take or not take, and in that, we will see whether it makes our return. Clearly, if it doesn’t make a return, we will need to price up. And hence, it may also mean that if we price up and others don’t, that we actually may not get the deal or the transaction. Now — so the fact that we go to a lower capital targets gives us more room to still win the transaction and still make adequate return. But first and foremost, we price at markets. And we want to make a sustainable return through the cycle with our clients. So in bad times, sometimes you see the returns becoming a bit lower. But through the cycle, you have seen that we have made an adequate return. So that’s how we deal with that. On NII, I give the floor to Tanate.

Tanate Phutrakul

Yes. Just to explain a little bit about our view on NII. Clearly, there are 3 components to why the NII is compressing that you see in Q3. Part of it is to do with the FX impact that we discussed on the corporate line, and that — we don’t see that going forward as being a bigger challenge given the fact that the rates are normalizing in our books already. So that’s one. The second, I think, in the Wholesale Bank, as you mentioned, that it really depends on the prospects for loan growth in the future. But we also see that we are not seeing further decline, for example, in the Trade & Commodity Finance activity. That is plateauing. So again, depending on the future, we don’t see too much further compression because of that and potentially growth as economies return to more normal levels. And then the last piece is really the negative rate compression that you see, particularly in the retail bank. And as Steven mentioned, we have already taken actions with respect to negative rate charging in the Netherlands, in Belgium. And yesterday, you see the announcement of charging for negative rates in Germany that has been executed as well.


Next question is from Mr. Raul Sinha, JP Morgan.

Raul Sinha

Can I have 2, please, as well? The first one is just on dividends. If the ECB were to allow dividend payments next year, are you intending to pay the 2019 reserve dividend to the €1.8 billion roughly as well as 50% for 2020? Otherwise, I’m struggling to understand why you’re accruing the €788 million that you have taken in the third quarter. So that clearly implies you intend to pay into 2019 as well as 50% payout for 2020. If you confirm that, that would be helpful. And then the second one is a broader question on the return on tangible equity target that you’re reiterating the ambition of 10% to 12%. I’m really struggling with that, I have to say. I mean you’re at 5.1% this quarter. The cost of risk is not that far away from a through-cycle normalized level. And in terms of your sort of cost messaging put against the NII pressures, it doesn’t look to me like that it’s going to be a very significant step-down in the cost-to-income ratio. So even if I sort of rightsize your capital base, which I suspect will take you many, many years to do, what am I missing that would double your returns from the current capital?

Steven van Rijswijk

If you — thank you. So if you look at the ROE ambition, if you look at the past 5 years, we have largely met that ambition. And only this year, we are significantly below the ambition. And we continue to look at costs and diversifying our business into fee business to get back to that 10% level and that we’re helped by a lower return hurdle of 12.5% compared to 13.5%. Please note that also, if you look at this year, it’s being modeled by many provisions that are currently being taken. But also — and I know that the risk costs that we had in this quarter were around €470 million. But if you look at the previous years, the risk costs were a lot lower still at between €600 million and €1 billion. So those are different elements.

You clearly see that in that sense also, IFRS pulls forward risk costs. So if there’s no changes in macroeconomic circumstances, you would see those risk costs from IFRS coming down. And hence, we’re still focused on that ROE ambition of 10% to 12%. With regards to the dividends, yes, so we have reserved €1.8 billion. We have reserved the amount in 2020. And if we would be allowed to pay it, we will pay it out.

Raul Sinha

That’s really helpful. If I can just follow up on the ROTE point. I suspect the cost-to-income ratio is obviously going to be a key driver of the improvement going forward. And I think you referred to how low rates have impacted, structurally, your cost-to-income ratio. Should we think about the ROTE ambition as something which also considers a normalized rate environment?

Steven van Rijswijk

Yes. Well, of course, I mean a normalized rate environment will help, but that’s not what we’re currently in. So we are currently dealing with what is the current rate environment, and we will — in this environment, we currently take steps to get to the right level of return. And as we said before, if we cannot price to the right return, we will not grow our business and give capital back to shareholders. But we’re very much focused on, again, making that return. It needs to bring us back in a normalized risk environment, I would say. But other than that, we take the current forecasts as they are in our medium-term plans.


Next question is from Mr. Tarik El Mejjad of Bank of America.

Tarik El Mejjad

Just a quick question on costs, please. Just Raul said, I mean to bridge the gap with your 10% to 12%, clearly, cost is a key component. And I guess CET1 ratio and capital as well is another one as the denominator will come down. So on the capital first, I mean I understand you want to take your time and have visibility on how the pandemic could evolve. But I guess you’re taking that action through your provisioning Stage 1 and 2, so on. So why this extra level of cautiousness there, which basically will delay as well, I guess, the profitability recovery? And then on costs, I mean it would be really helpful to give us a sense of how much savings you could generate from the projects you’ve announced today, or should we have to wait for Q4 to get these savings numbers?

Steven van Rijswijk

Yes. On capital, the reason why we have done this is that we are in a second wave of uncertainty with, yes, the name says it, the second wave of COVID-19. And if we would not have taken a management overlay, that would have — excluding the Stage 3 provisions, we would have had a release of €380 million risk costs, so negative €300 million risk costs. And why is that? Because IFRS, in our Stage 2, looks 3 years ahead. And every quarter, that means that the last quarter of economic development falls off and then the new quarter in 2022 comes on. And it gradually means that in your models, you get a positive, and the negative ones fall off. And that’s what we see because we had a very negative quarter in the second quarter, that is then taken out, and then you then add a quarter in 2022.

Now we’ve not done that as we are in a second stage or lockdown stage. And therefore, we say, well, we do not see in our models what we normally would see. If GDP would come down, then you would see defaults, but we don’t see that many defaults. And in a normal crisis, you would see those, but we don’t see them yet, and that may have to do with the measures that are being taken left, right and center by governments and the ECB and the Fed and what have you.

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Secondly, we have a number of clients in payment holidays. Also, there, we don’t see that much. As I said, of the €20 billion, €6 billion, it has already resumed a normal payment schedule. But there is no increase in terms of payment default compared to what we normally see. Now there is €14 billion remaining, but in that €14 billion, there are still a number of SME and mid-corporate companies. Those companies are typically the hardest hit in this crisis with a number of higher risk sectors. And for those, we’ve taken additional provisions. So yes, it is cautious, but I think that is prudent in these days. And as soon as we have the visibility, then these costs will be released.

Sorry, you had a — then on second question, I will go to Tanate.

Tanate Phutrakul

So I think the steps that we make is we make this announcement today about the reduction of the 1,000 FTEs. The next step for us is to be in consultation with our various different workers, councils and unions to basically inform the affected employees. And in Q4, based on the mix between internal and external staff, then we would likely announce some kind of a redundancy provision at that point in time. To address your question about how much the cost reduction would be, I think you can assume a certain FTE costs and then make your calculations from that. But this roll-off will happen starting probably the beginning of next year. So we’ll give more clarity in Q4, but I think you can do your own internal calculation based on this information.

Tarik El Mejjad

And to follow up on costs. I mean to Steven’s comment that you will do — announce measures as you see them materializing and as you identify them instead of having like a get-together strategy there, are you working now on another project than Maggie or scaling back? Or can you — are you envisaging to work on something else?

Tanate Phutrakul

I think as Steven mentioned, we will announce things when we believe to be appropriate and with a very high degree of execution certainty. So that’s a rhythm that we like to be in.


Next question is from Mr. Robin van den Broek, Mediobanca.

Robin van den Broek

My first one is around NII. I’m a little bit confused still on TLTRO because I think you indicated you’re confident of getting the benchmark. And yes, it’s a management decision, and you haven’t put it in NII for Q3. So I was just wondering how to think about this. You also said the growth in U.S. and Asia is picking up, not so much in Europe. So if you would close your books today on the benchmark, are you there already? Or do you still need some growth in Europe? And I would just want to make the remark that I think French and Italian peers, most of them are booking this up to full 100 basis points. And I think in the Q2 conference call, you were mentioning that there would be, I don’t know, a coordinated effort that these TLTRO bookings would be similar across Europe, but apparently that’s clearly not the case. Secondly, I wonder if you could quantify the impact for NII from the rate-mitigation actions you’ve announced today. And lastly, a quick one. Are you going to also put the Q4 profit fully in your shareholder distribution bucket? Or should we expect some of that to go to the ratio?

Steven van Rijswijk

Sorry, Robin, can you repeat the last question? So the second was rate — impact rate mitigation action, and the last one is?

Robin van den Broek

It’s basically your — whether you’re going to accrue the Q4 profits in your capital ratio, yes or no, or that you’re going to add it to the dividend reservation.

Steven van Rijswijk

Okay. These are all good questions. There are all questions for Tanate.

Tanate Phutrakul

I think different banks take different treatment with respect to the threshold that you need to meet with respect to accruing the impact of the TLTRO III. Our internal view is that the date for the measurement is a one-off measurement in the end of March 2021. And we want to be virtually certain of hitting it before we book that particular income. So I don’t want to comment on how other banks do it, but that’s one. And the second one, I think, is on your question on negative interest rate. And with that in mind, the impact of the announced plans, whether in the Netherlands, Belgium or Germany, we expect to have an annualized impact of approximately €140 million on an annualized basis. So that will come through. And then the last question is whether we would accrue the net profit of Q4 into dividend. Yes, indeed, we are planning to do that. The percentage cost, we will try to land on what ultimately gets us to the 50% over resilient profit. That’s what we’ll do in Q4.


Following question is from Mr. Farquhar Murray, Autonomous.

Farquhar Murray

Just 2 questions from me. The first is just on the deposits, which is actually a bit of a follow-up to Robin’s question there on the mitigations. But can you give us the numbers around how much deposits fall into negative rates in the fourth quarter and the first quarter, which I presume is behind the €140 million you just gave? And then secondly, just on capital management. Can you give us a little bit of an outline of how you’re going to think about the split potentially between cash dividend and share buybacks when you reach those decisions? Is it going to be — and when you talk about predominantly, what’s the maximum amount of share buyback you’d expect to do within the total capital return in a given year?

Steven van Rijswijk

I will give to — on both of these, I will give the floor to Tanate.

Tanate Phutrakul

So in terms of deposits, Farquhar, we don’t disclose that information, but you can see that over the course of the last 12 to 18 months, the level of threshold is declining deeply, right? We started with the Netherlands at €1 million, then €500,000 and now €250,000. In Belgium, from not charging at all, now we go to €1 million threshold. And we started introducing it in Germany for accounts opened with us, about €100,000. So you can imagine that the threshold gets lower and lower over time. Then on the stock buyback, to you, Steven?

Steven van Rijswijk

Yes. So what you can expect, Farquhar, is that we will pay out a majority in cash. We do not comment at this point in time how much we would think about doing in terms of buybacks or — stock distribution or buybacks. I mean that depends on the price at the prevailing time to the intrinsic value, and that’s how we look at it. But as soon as we start to make the distributions, we will announce it as well.

Farquhar Murray

Okay. But it’s very clear that price clearly will matter. And presumably, do you think your stock is cheap currently?

Steven van Rijswijk

We have no comment on our own share price. But I can only say we’re trading below book.


Next question is from Mr. Jason Kalamboussis, KBC Securities.

Jason Kalamboussis

A couple of things. The first one is on AXA. It’s often mentioned, but the contribution to results is still insignificant. When do you expect this to start being more significant? And do you expect to have more such deals now that you showed how you are structuring, if you want, the products? The second question is on costs. With this change in the model bank, basically, what we are missing is that before we would have had a number of IT systems being decommissioned. That was a bit of a long-term plan, but it’s still something that we — is not going to take place. Are there, therefore, other structural areas where you can see potential for cost efficiencies?

And finally, just to — again, on costs. You are reducing now by 1,000 FTEs, but your FTEs basically are standing at around 56,500. In 2019, they were 54,500. So it looks like you have — over the last 3 years, you have had a significant increase between 2% and 4% of your FTEs. So could you give us a bit of your thoughts on this and how you position this reduction of 1,000 versus the larger increases we have seen over the last 3 years?

Steven van Rijswijk

Yes. Thanks, Jason. Indeed, we have a partnership with AXA. We have been rolling out a number of products in 5 countries. We keep rolling them out as we speak also in more countries. So that contribution will grow over time. We also have a collaboration with Amazon, for example, in Germany, where we are on their SME seller platform so that we can sell loans to SMEs. And we will continue to develop these partnerships either with others or do them ourselves, but actually provide then a differentiating experience, i.e., insurance or travel insurance only when you need it that you can gain through your app rather than having an annual insurance that you pay for each and every month.

With regards to the cost and the structure area for cost efficiency, all the elements that I mentioned, so both the foundational building blocks, including our modular software, which we call TPA, including the use of our clouds and including the use of our Data Lakes, are meant to be consumed by each and every entity as to avoid that we need to develop things 2, 3 or, if you look at all the retail activities, 13x. And hence — and the same goes for all the app components, and the same goes for — also goes for the global product solutions that we roll out in different countries. That is meant to actually avoid double cost, and we should see the benefit of that coming in.

With regards to the FTEs that you see, it’s a good point. Those are actually the internal FTEs that we have. But next to that, we also work with work packages and external FTEs. And what you have seen over the past year or so is actually a shift from more expensive external FTE to less expensive internal FTE. And hence, that figure does not give you the complete picture as you need to look at it from an overall point of view.

Jason Kalamboussis

If I may just follow up on the last question. Is there a lot more to be done on that front?

Steven van Rijswijk

Yes. I realize that some of you are asking the same question in a different way. And as I’ve said before, I will be focused on costs. And the nose of the plane with the cost needs to come down. It has been going up for the past 5 or 6 years or so, and the nose of the cost will come down. And that’s what I work on. And as soon as I have something to announce with projects with execution certainty, I will announce it.


Next question is from Ms. Anke Reingen from RBC.

Anke Reingen

Yes. Actually, I wanted to ask the same question on — in a different way. But like on the cost — is flat cost, is that realistic? Or does nose down even mean you could bring them down under sort of like normalized environment? And then just lastly, a small clarification. When you talk about the NII pressure, is that including the benefits from the TLTRO or excluding?

Steven van Rijswijk

Yes. Yes. Thanks, Anke, for — at least, it’s good that you said that you’re going to ask the question in a different way. But I said down. So I didn’t say flat, I said down. The nose needs to come down, and it will come down. On NII, currently, it is excluding the TLTRO, the benefit of that when we take it because that’s towards the end, and that’s also what it says. You need to meet it at the end, and the end lies in 2021, so in March. So if we book it, it will be then.

Anke Reingen

So you — so the excluding — so is it fair to assume the TLTRO might offset the structural pressure on NII?

Steven van Rijswijk

Well, it does not offset at all, but it gives us a benefit given the amount that we got from TLTRO. So — and that’s a significant amount. I think, Anke, we disclosed already earlier, the amount of that benefit will be €300 million.


Next question is from Daphne Tsang, Redburn Europe Limited.

Daphne Tsang

Two, if I may. So on — first, on NII, can you give us some color on where you think NIM will go from here? I mean, quarter-on-quarter, it’ pretty weak, but the denominator effect from picking the sizable TLTRO III is certainly a big factor there. But just thinking about — now that you have lower capital ambition and that you — it means that you have high competitiveness, does it mean that you’re happy for NIM to come down going forward to stay competitive, assuming the profitability angle still fits your criteria? And also, as part of my NII question, if I can say that, what is the additional or incremental negative charge coming next year versus this year? Because some of the lower threshold and the charging — the new charge on more customers are actually effective from January next year. So regarding the €140 million that you mentioned earlier, is it the annualized amount next year or this year? Just trying to think if there is any tailwind. So that’s my first question on NII.

And then secondly, on costs. I totally get what you’re saying about taking a look at the cost base and see where you can see more initiative with higher — with high execution certainty that — at which point you will announce. But actually, taking a look at Q3, what have you done in Q3 to lower cost? Because quarter-on-quarter, even adjusted for the impairments, you are kind of flat. Year-on-year, you’re up. Assuming KYC cost is there, but you’re — surely, you have taken some underlying costs out. But can you give more color on what actually happened in Q3 on your costs?

Steven van Rijswijk

Yes. Thank you very much. I think that on costs, I mean please note that you need to continuously look at where you cut since CLA’s costs will increase every year. So to maintain flat, you need to cut. But as you may have seen in July of this year, we have been announcing that we will close a number of branches in the Netherlands. COVID has shown us that the digital direction that we have is proving to be the right one. Clients have actually increased with higher speed digital interaction that they have had with us. So we will continue to look at our branch footprint, and we’ve also done so in the third quarter. And hence, you see the costs being largely flat, but that includes also a provision for branch closures.

With regards to NIM and the €140 million annualized negative charging, I’ll give the floor to Tanate.

Tanate Phutrakul

Thanks, Daphne. I think if you — let me kind of break it down with respect to the 6 basis points reduction that you see in our NIM this quarter. I think about 2 basis points is the impact of the arbitrage between FX, the interest rate arbitrage U.S. dollar, Turkish lira against the euro. So we expect that 2 basis point reduction to be the end of it given the fact that these rates are already in our numbers as of Q3. About 2 basis points is related to the balance sheet extension because of TLTRO. But of course, we don’t book the income there. So that represents another 2 basis point of reduction. And the third is a combination of the negative rates, margin compression in our deposits and somewhat lower volume. So you can see that is the 3 legs of why our net interest margin is down by roughly 6 basis points.

We, of course, over time, would expect to try to increase our net interest margin through various different actions that we discussed, whether it’s pricing discipline, whether other actions. And in terms of potential charging of further negative rates, we don’t comment on that. We will announce as we take decisions, of course. And as Steven mentioned, the effects of actions we’ve already taken is approximately €140 million on an annualized basis.

Daphne Tsang

And that’s €140 million on an annualized basis for next year?

Tanate Phutrakul

It starts now, in fact. So it’s over Q4 into next year, yes.


And we have a follow-up question from Benoit Petrarque, Kepler Cheuvreux.

Benoit Petrarque

On the collective labor agreement for the Netherlands for 2021, what can we expect? Because that’s been pretty negative in ‘19 and ‘20 in terms of salary inflation. What is your pitch to unions going forward?

Steven van Rijswijk

Well, the pitch is clear because that has been in the newspapers. And so the pitch was 0% increase. And the unions have reacted differently. But those discussions are just starting, so we need to go through those discussions first.


And we have a follow-up question from Robin van den Broek, Mediobanca.

Robin van den Broek

Sorry to come back in the queue again. Just one conceptual question for you, Steven, because I feel bad that I directed all my questions to Tanate. But Lagarde is thinking about digital currency. So I was just wondering if you could highlight your, I don’t know, the opportunity sort of headwinds that could come out of that for ING specifically?

Steven van Rijswijk

I’d rather have Tanate’s question asked to be honest. So thanks, Robin. So — I mean on digital currency, I think that what the — what the intent of it is that it is a backup in case there would be a nonfunctioning banking system. So that is actually a — it deals with, let’s say, we would call it, a tail risk. In case banking system, for whatever reason, would stop functioning, then how can people still get money? And that is the background of the digital currency initiative. It, of course, also has its backdrops because does it then also mean that central banks need to retain certain levels of capital, and to what extent do you then make — give access to consumers and to what extent not? So, I think that we’re following the idea with interest. And of course, also part in working groups to give feedback on that. But that was the idea about that. It was not so much meant as using it as a Bitcoin or something like that, but much more as, I think, a backup in case there was a systemic risk for all the banks not to function anymore at the same point in time.


And we have a follow-up question from Stefan Nedialkov.

Stefan Nedialkov

Me again. Just a quick one. I think this question got asked earlier, but I might have missed the answer. Are you planning on having a sort of Investor Day/Capital Markets Day in the next few quarters?

Steven van Rijswijk

Yes. Well, the question was asked before, not exactly in the same way, but we have currently not necessarily any intent to do so, to have that Investor Day, but I already said to one of the previous people who asked the question, I will defer this to Mark Milders, the Head of Investor Relations, to actually contact you to see when and if that will be appropriate.


We have no further questions, sir. Please continue.

Steven van Rijswijk

Yes. Thank you very much. Then I will wrap up. So summarizing again, we continue to help our clients. We had good underlying results. We have announced a new CET level and dividends. I will thank you for all your questions today, and I will speak to each other next quarter. Thank you.


This concludes the quarter three 2020 analyst call. Thank you for your attention. You may now disconnect your lines. Thank you, sir. Bye, bye.