ING Groep Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 15 speakers on the call.

Operator

Good morning. This is Laura welcoming you to ING's Q1 2024 Conference Call. Before handing this conference call over to Stephen Van Rysweck, 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 statements 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 statement 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.

Operator

Furthermore, nothing in today's comments constitutes an offer to sell or good morning, Stephen. Over to you.

Speaker 1

Thank you very much. Good morning and welcome to our results call for the Q1 of 2020 4. I hope you're all well. And as usual, I'm joined by our CRO, Liliana Chortan and our CFO, Tanet Putra Gul. In today's presentation, I will inform you about the fundamental drivers of ING's excellent start of the year, both in terms of our commercial performance and our financials.

Speaker 1

Deneth will walk you through the financials of the quarter and the resilience of our net interest income also in a lower rate environment. And at the end of the call, we will be happy to take your questions. Now let's move to

Speaker 2

slide. As you can see on this slide, we

Speaker 1

achieved a very strong commercial performance in the Q1 with growth across the board in customers, lending and deposits. We added 99,000 primary customers comprising both new and existing customers who have chosen us as their primary bank, and a primary customer base now amounts to over 15,400,000 primary customers and we are well on track to reach our target of €17,000,000 by the end of 2025. We've also been able to grow our lending book following a strong 4th quarter. Our mortgage book grew by €2,400,000,000 this quarter. Most of this growth was visible in the Netherlands, where we further increased our market share and in Germany.

Speaker 1

In Wholesale Banking, we were also able to capture loan demand, while we continued focusing on capital efficiency. On the deposit side, we had successful campaigns to raise new funds in Germany and Poland. And also in Italy, we were able to further grow our business as evidenced by the deposit inflow this quarter. Now this strong commercial growth contributed to an excellent start of the year, which we highlight on Slide 3 and can summarize in 4 main points. Number 1, NII was strong.

Speaker 1

We have been able to keep our lending and liability margins relatively stable and benefit from the growth in volumes. When excluding the increased impact from accounting asymmetry, our NII rose compared to last quarter. 2, our focus on fees is clearly paying off. Income from fees has grown by double digits versus both comparable quarters. As mentioned during our Q4 2023 earnings call, we are benefiting from more customers choosing ING for their banking products and from increased package fees.

Speaker 1

Also, the new commission structure for independent brokers in Belgium is resulting in lower fees paid. So market dynamics have also become more favorable, leading to positive impacts on fees from investment products and lending. As such, we remain confident in our ability to grow fees by 5% to 10% this year. Number 3, operating costs, they were on track. Operating costs increased by 5%, which was mostly attributable to the impact of inflation on staff expenses and the implementation of the Danske Bank ruling on VAT.

Speaker 1

However, when taking the lower regulatory costs into account, total operating expenses were 1.4% lower than last year. And then we have number 4, we in 2023, the high quality of our loan book continues to be reflected in low risk costs, which came in at only 16 basis points this quarter, and this has all resulted in another quarter with very attractive returns. Our 4 quarter rolling return on equity was 14.8% and we have achieved this while operating on a high CET1 ratio of also 14.8%. Then we turn to Slide 4. As you can see on the top graph, we are in a very predictable rhythm of announcing distributions to our shareholders.

Speaker 1

And I'm pleased that we have announced another €2,500,000,000 share buyback today, which is a next step in converging our CET1 ratio towards our target of around 12.5%. Including this buyback, we have returned almost €26,000,000,000 to shareholders since 2018 and over €5,000,000,000 in 2024 alone, also including the final cash dividend over 2023, which will be paid tomorrow. With a pro form a CET1 ratio of around 14.1% and continued capital generation, we have ample capacity to continue providing an attractive return. And we will update the market at the time of announcing our Q3 2024 results. Before Janette takes you through the financial results in more detail, I will spend some time on the progress we're making on the On Slide 5, our purpose and strategic priorities are shown.

Speaker 1

The first priority is to deliver a superior customer experience that is personal, easy, relevant and instant. And this is highly valued by our customers as evidenced by our Net Promoter Scores where we are ranked number 1 in 4 of our 10 retail banking markets. One example of how we offer this excellent experience is the launch of a feature in our banking app that allows customers to immediately check whether a caller who contacts them is actually an ING employee. This will protect both the customer and ING from fraud. In Romania, we expanded our instant lending proposition by introducing an instant overdraft product in addition to term loans.

Speaker 1

And in Wholesale Banking, the ING Insight Business Portal now includes a portfolio insights tool that saves clients' time by giving them real time insights into their lending portfolio. Our second strategic pillar is putting sustainability at the heart of what we do. And we continue to support our clients in their transition to a low carbon economy. In the Q1, we achieved a volume of sustainable finance mobilized of €24,700,000,000 an increase of 13% from the same period last year and we closed 156 sustainability transactions, 59% more than in the Q1 last year. In Retail Banking, we provide sustainable mortgages in several countries and we're also working to help connect customers with services to undertake our sustainable home renovations.

Speaker 1

For example, in Germany, where we started a pilot in the Q1, where customers can give advice can receive advice and connect to partners specialized in sustainable solutions such as heat pumps, solar panels, installation services and subsidy advice. And looking at sustainability and ESG more broadly across the bank, we released publications on human rights and nature. On the next slide, I'll give you some insight in the key themes of our Capital Markets Day. As you know, we'll host a Capital Markets Day on 17th June, and obviously, I will not reveal too much now, but can give you a broad outline of what we intend to discuss. First, we will update you on the next phase of our strategy.

Speaker 1

In addition, we will highlight how capital will be allocated going forward and how that results in further growth and diversification of our business. We will discuss how we leverage our operational excellence. And lastly, we will update you on the targets for the next few years. Now I will hand over to Tanate, who will take you through the results in the Q1 in more detail starting on Slide 8.

Speaker 3

Thank you. As Stephen mentioned in his introduction, net interest income was strong again this quarter. Lending NII increased for the 4th consecutive quarter, driven by increased volumes at a higher interest margin. Liability NII continued to be resilient with a margin above our historical average. We did not increase our core rate this quarter.

Speaker 3

We reinvested part of our replicating portfolio at higher rates and benefit from the positive impact of these actions. The overall net interest margin, which was taking in developments in the total balance sheet into account decreased by 3 basis points. This is fully driven by lower net interest income for Financial Markets following an increase in accounting asymmetry. I'll give you more details on the next page. On this slide, there are 2 messages I want to get across.

Speaker 3

First, note that when excluding the increased impact of accounting asymmetry, our net interest income increased compared to the previous quarter. However, which lowers net interest income in Group Treasury and Financial Markets with, of course, an offset in other income. This quarter, this accounting symmetry increased, particularly in Financial Markets. The second point that I want to make is that we have clearly benefited from improvement in the curve since our Q4 results presentation, and this will also positively impact the development of our NII in 2024. The normalization of our liability margin is likely to happen more gradually compared to the scenario we gave in February.

Speaker 3

While there's no reason to change the assumptions from lending growth and other NII, As a result, we now expect to end up at the high end of the range given in February. On the next slide, we see the resilience of our net interest income also in a decreasing rate environment. Slide 10 illustrates our ability to maintain a strong liability NII also in a lower rate environment. The graph on the left shows the improved forward curve as per the end of March compared to the end of December with rates moderating the long term rates moderating around 2 20 basis points. These continued positive rates benefit our gross replicating income, as you can see in the graph in the middle of the slide.

Speaker 3

Then when you assume a scenario in which the pass through gradually increases over time to 50%, the liability NII for our retail euro zone deposits net of deposit costs remain at a strong level. The pass through on total retail euros on deposit was around 30% in Q1 2024. Under this scenario, the liability margin is expected to stabilize at a level of around 100 to 110 basis points. Now moving to Slide 11. This show the development of our core lending and deposits.

Speaker 3

In Retail Banking, mortgages continue to increase with growth mainly visible in the Netherlands and in Germany. In Wholesale Banking, we were also able to capture growth opportunities while we continue to focus on capital efficiency. On the liabilities, we saw core deposit increase by €13,500,000,000 in the first quarter. It was mainly due to another successful promotional campaign in Germany, but we also see growth in Poland as well as in Italy. Wholesale Banking also recorded a small inflow, mostly driven by Financial Markets and Bank Maniscans, where we offer cash pooling for our clients.

Speaker 3

Now turning down Page to Page 12. You can see that our focus on fees is clearly paying off as income has grown by double digit versus both comparable quarters. Roughly half of this growth was driven by growth in the number of customers, our own pricing actions, the new commission structure in Belgium is also resulting in lower fees paid to independent agents. On top of this, we saw the market dynamics has also improved, leading to positive impact on fees from investment products as our customers start to trade more and asset under management increase. At the same time, in the Wholesale Bank, our global Capital Markets team has all had a very successful start for the year.

Speaker 3

With that in mind, we remain confident in our ability to grow fees by 5% to 10% this year. On Page 13, we continue to be disciplined on costs. Excluding regulatory costs, incidental items, operating expenses were up 5% year on year, which is in line with what we said during our Q4 earnings call. Reflecting indexation and CLA increases across most of our markets. We also had to pay higher value added tax following the implementation of the Danske Bank ruling in the Netherlands.

Speaker 3

Regulatory costs are also seasonally high in the Q1, but were significantly lower than last year because no contribution is required to the Eurozone Single Resolution Fund this year. The additional bank taxes in the Netherlands will be paid in the Q4 as per normal. As Stephen said at the beginning of the presentation, the total expenses, including regulatory costs and incidental items, decreased versus both comparable quarters. Now on to risk costs on the next slide, Slide 14. Total risk costs were CHF 258,000,000 this quarter or 16 basis points of average customer lending, well below our through the cycle average and demonstrating the quality of our loan book.

Speaker 3

In Wholesale Banking, risk costs including additions for a number of individual files in unrelated industries that were newly provisioned in Stage 3. This was however offset by releases in Stage 12. In Retail Banking, risk costs were predominantly driven by Business Banking and Consumer Loans, while mortgages, our largest book, continue to perform well. Looking at the different stages, addition to Stage 3 provisions were DKK368 1,000,000, but in Stage 3, the ratio remained stable at 1.5%. Risk costs for Stage 12 were a negative €110,000,000 reflecting an update of better macroeconomic forecasts and releases of management overlay.

Speaker 3

We still have a stroke of overlays amounting to €533,000,000 All in all, another benign quarter in risk costs, and we remain confident in the quality of our loan book. Now Slide 15 shows the development of our capital ratios, which increased further to a very strong 14.8% driven by inclusion of the net profit for the quarter after reserving for dividend. Risk weighted assets increased by CHF 3,900,000,000 including CHF 1,000,000,000 of FX impact. Credit risk weighted assets increased by $3,000,000,000 mostly driven by an increase in exposure and some model changes. These factors were partly offset by a change in the overall profile of the loan book.

Speaker 3

Both operational and market risk weight was stable. Share buyback announced today will have an impact of approximately 77 basis points on the core Tier 1, which will be visible in the Q2 numbers. We will again update the market on our capital plans with the disclosure at our Q3 results in early November. Then on Slide 16. As Stephen and I has explained today, ING had an excellent start to the year with good commercial and financial performance as we have executed on our strategy.

Speaker 3

Total income grew with strong NII, double digit fee growth. The development of operating costs were in line with our outlook we gave, while regulatory costs decreased significantly compared to last year. Our 4 quarter rolling ROE remains very attractive at almost 15%, while our core Tier 1 ratio further strengthened to 14.8%. This has allowed us to announce another sizable share buyback program which has started today. We will update the market again at the time of announcing our Q3 results.

Speaker 3

The strong Q1 performance give us further confidence that we will reach above 12% return on equity target. In general, looking ahead, we are confident that we will continue to deliver robust financial results while successfully executing our strategy. We will take a long term view at our Capital Markets Day taking place in June. We look forward to discussing this with you then. Now on to the Q and A.

Speaker 3

Operator?

Operator

Thank you. We'll now take our first question from Terry Kilmajet with Bank of America. Your line is open. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking my questions and we're done on a good set of results. So the first question will be on capital and capital return. So you reiterated the 12.5% CET1 into 25%. So how do you read the increased scrutiny on capital and resilient bank and resilience in Europe with the chair of SSM talking a bit cautiously about buffers and your own Ministry of Finance issuing a report with more cautious kind of outlook on capital build and the Swiss Federal Council reports and the capital stock.

Speaker 4

So are you still comfortable to run to 12.5% CET1 that doesn't include any management buffer? And also, in terms of timing for that, I mean, once you announced 12.5% in 'twenty two, we didn't expect rates to go up so quickly and you've managed your RWA very well in the last 2 years. So would you probably need 2, 3 more years actually to reach 12.5 percent? And still on capital, I mean, latest deals, I mean, how do you see your business model? Is this business model that you think can participate in that, especially that you are you have plenty of capital?

Speaker 4

And I know I ask this question every call, but would that be almost necessary for you to fix your unbalanced fees NII mix that could put pressure in a normalized rate environment? And last question is on NII. I mean, I'm sure there will be many, many questions after mine. But just to get the trajectory, I mean, your Slide 10 is very helpful for the liability margin. Should we read that if we exclude the volume growth, 24%, you should see NII pressure for liability margin until, let's say, first half next year.

Speaker 4

And then the volume growth will be there supporting kind of a flattish level and will be more having recovery towards 27? Thank you.

Speaker 1

Thank you very much, Tarik. The answer on the third question is yes, but as Ned will elaborate, Ned will also talk about capital. I'll talk about M and A and fees. Look, clearly, we see that we have we see continued good growth in our customers, but also in our fee income. So autonomously, we are doing very well and we can also continue to grow very well.

Speaker 1

As I've also said, in local markets, in retail, scale is key because you can make more impacts. You can do that with better operational jaws and better operational leverage. You can offer better proposition. It's important that in every market in retail where we're active that we are sizable. Now in that sense, in case there would be opportunities to increase that size while fitting to our culture and our digital operations, we would look at it and that would be to increase size and 2, we would look at certain skill sets either digitally or fee related whereby I would say we can diversify quicker than we could do that on an autonomous basis.

Speaker 1

So the first strategy is continued to be autonomously. If there is in market consolidation or scale consolidation, then we will look at it.

Speaker 3

Hi, it's Eric. In answering your question, clearly, we are comfortable operating at around 12.5% core Tier 1 level. And I think what drives that confidence is the fact that we have a diversified business model. We have a gradual transition to a much more capital light revenue model. And the fact that we have, through the cycle, been able to manage our risk management in terms of risk cost, credit risk, market risk, operational risk well.

Speaker 3

So I think that gives us comfort that we can operate at the levels envisage that you see now, okay? The second point to make on the comfort that we take is that clearly every share buyback that we do would mean a consultation and a permission from the ECB to actually do the share buyback. And that has been granted. That's why we're starting the share buyback today. Now to your second question around NII on liability.

Speaker 3

Yes, we do expect in our simulation that rates will remain stable where they are now until the end of June and then gradually transition to a lower level somewhere during the course of 2025. So if these simulations come through, indeed, you will see a dip during the course of the second half of 'twenty four, stabilization in 'twenty five and indeed with volume growth, see accretion in terms of NII around tracking speed of deposit costs.

Speaker 4

Okay. Thank you very much.

Operator

Thank you. We'll now take our next question from Giulia Miotto of Morgan Stanley. Your line is open. Please go ahead.

Speaker 5

Yes, hi, good morning. And thank you for slide 10. I want to ask another question on this slide, please. The 50% assumption in terms of pass through on the savings rate, is that realistic? Or is it a bit conservative?

Speaker 5

Because it means that essentially you're not cutting savings rates as rates go down. So I would like your yes, to pick your brain on that one. And then secondly, I know that Russia by now is small for ING, but we have seen a pickup of attention from Europe in terms of reducing, getting out from that country. Any comment there, please? Thank you.

Speaker 1

Yes. I'll do the question on Russia and then Ed will talk about the pass through assumptions. Well, on Russia, like we said at the beginning of the war that we did not see a future for ourselves in Russia. Since then, we have been building down our loan book. It was about €6,700,000,000 at the time, it is now about €1,300,000,000 So we decrease this with over 75% and we will continue to do so.

Speaker 1

In that setting, also €600,000,000 is covered by ECA, European Credit Agencies or insurance. So we, in the meantime, took ample provisions and capital. So we're well covered for that book. And yes, of course, we see the attention, but there is not a particular attention to us. We are just continuing on our decrease and path what we have chosen already 2 years ago.

Speaker 3

Julia, to answer your question, clearly, deposit tracking is 1 of the, I would say, 2 major or 3 major assumptions that we make in this scenario, the forward curve being 1, then deposit growth being the 2nd and the tracking being the 3rd. Now the tracking, I think what I can say is the following. The tracking up until as an anchor point, We have done indeed a simulation for 50%. I think there's an element of prudence in there. But at the same time, we have also given you a sensitivity that every 10 basis points, it's around €400,000,000 So I think we've given all the major driving parts, and then you can take a judgment on that as well.

Operator

Thank you. Thank you. And we'll now take our next question from Sam Moran Smith of Barclays. Your line is open. Please go ahead.

Speaker 6

Hi, morning. Thanks. So one question on NII and one question on fees, please. So I appreciate there's going to be a lot of questions about liabilities. But on the asset side, the lender margin grew again Q on Q.

Speaker 6

Could you please talk about which geographies and products are driving that? And is it something that you expect to gradually tick up going forward? I appreciate you've given a lot of color on liability margins and your expectations there. So anything you can give on lending would be great. And then on fees, I'm just trying to understand if we should be expecting fees to kind of grow Q on Q from here.

Speaker 6

Because when I look at the mix, daily banking fees up Q on Q and next quarter, we'll have a full quarter of the package increases in the Netherlands. And then on Lending and Investment Products, you might expect those to grow as we approach lower rates. So is that the right way to think about it? Or am I missing something I can see on the insurance and financial market phase that they look a bit inflated perhaps this quarter? So just wondering how we should extrapolate that.

Speaker 6

Thanks very much.

Speaker 1

Okay. Thank you. On the lending margin, yes, the largest impact of that increase was in mortgages, also because there is a where most of our mortgages are funded a bit earlier. So with a decrease in the funding rates, there you see there an increase in the margin coming in. So that was the reason for the increase in lending margin.

Speaker 1

When we come to fees, yes, look, in the end what we want to do is to increase the all five, if you will. So which is, first of all, a growth in customers. Indeed, payment packages, indeed, increases this quarter will also filter through them for the full quarter in the second quarter. What we told you on the brokers in Belgium will continue. And of course, it is that continued also growth in a number of investment accounts that we have because once people have investment accounts with us, when the market is changing, which it has now done again, then we are going back to trade situation that we did see in the past.

Speaker 1

And of course, the past couple of years, it was a bit benign, which also therefore, caused the fees to be flatlining, if you will. So with that, the fact that we can grow our customers, the fact that there is a feed through of the increase in the payment packages for the next quarter, the fact that the contracts with the independent brokers in Belgium are there. And on top of it, therefore, with that increase in primary customers, the increase in the activities in investment products, in insurance and maybe more cyclical, Wholesale Banking makes us very confident to reach at 5% to 10% in

Speaker 6

2024. Thanks very much.

Speaker 7

It's Benoit Petrarque. So sorry to come back on the lending margin, because obviously you guide for, yes, a drop of your liability margin to the 100, 110 bps range. In your current interest rate scenario basically going to a Urebo at I think 2 point 3% by 27%. How much lending margin improvement will you expect in that scenario? That would be extremely useful to get a bit of details on that.

Speaker 7

I was also number 2 was on the replicating portfolio and the usual questions around the duration of it was 2.4 years last time and just wondering if that moved up a bit as, yes, obviously, you probably managed a bit the duration. And then just the last question, we saw an just

Speaker 2

wondering how much

Speaker 7

potential growth you see there. I'm just wondering how much potential growth you see there and whether that could be meaningful? Thank you.

Speaker 1

I'll take the question on RCO in Germany, and then Tene takes the other questions. Yes. Look, I mean, there is a lot of growth opportunity in Germany. We have just started with a digital SME offering. As in the past, when we came to Germany to say we only will do digital banking for private individuals, people said, well, that will not work in Germany.

Speaker 1

That's just not how the German culture and German construct works. You have to have branches, etcetera. And well, now we are 20 years further and then 9,000,000 clients further. And moreover, also Corona in that sense also really gave an additional impetus for people to do digital and even mobile banking, so only use mobile. In the beginning, digital in Germany was largely desktop and then greatly became mobile.

Speaker 1

Now since the last 2 years, we have said, okay, we can also do this for, let's say, smaller SMEs or self employed, smaller SMEs, small businesses, also build a fully digital offering for them as well. Most people don't necessarily want to spend a lot of time on banking. They want it to be easy, instant, safe, personal. And that's how we are offering that as well. It doesn't exist in Germany.

Speaker 1

We have launched it. It's currently small. In the end, we also want to test it also with the risk costs that come in. So you provide a savings account, a current account alone and then you calibrate your model and greatly we grow your business. But we have very positive views on how we greatly diversify that business.

Speaker 1

And moreover, with the learnings that we have in Germany, we then also intend to roll it out in other markets as well.

Speaker 3

Then some reflection on lending margin. I think we have seen the beginning of a quantitative tightening cycle. We have seen the fact that the TLTRO funding, dollars 3,500,000,000,000,000 dollars This is from us that lending margin should improve, right? But what I think is also important in terms of our lending NII is the fact that as rates move from 4% to 2% 20%, that they should stimulate more lending growth and that's what we see signs of already. So that's with respect to NII lending.

Speaker 3

So I do see potential upside from where we are today. Then to answer your second question, we did indeed give guidance on the weighted average duration of liability of 2.4 years, and that remains roughly the same in Q1.

Speaker 7

Great. Thank you very much.

Operator

Thank you. And we'll now take our next question from Benjamin Goy of Deutsche Bank. Your line is open. Please go ahead.

Speaker 8

Hi, good morning. Two questions, please. The first on cost. And you mentioned that in Q1, your expense growth is a bit below your target for full year. Just wondering why this should increase throughout the year or is it just the full year guidance a conservative element considering inflation came down in most of your markets already?

Speaker 8

And the second is with the accounting asymmetry, it's a bit more difficult to judge the developments across the country. Maybe can you comment on the moves in some of your key geographies, whether it was Netherlands, Also Germany, the Challenger markets Q on Q net interest income was underlying what was accounting as synergy driven, to the quarter on quarter move? Thank you.

Speaker 1

So on the cost, I'll take it. So basically what we have factored in, in let's say, the aducovar costs that we gave last quarter is also and the spillover of the CLA that the CLA increases that came from the past year into this year, but also the new CLA amendments that we will need to make in the second and third quarter. That's what gives you that guidance.

Speaker 3

And then on accounting symmetry, most of the accounting symmetry happens in Financial Market, which is a global business. So that is not linked to any particular country. And with respect to GT, it's the same. It's the global results, which are predominantly based in Amsterdam. So it's in our Dutch location.

Speaker 3

But we give you a bit more clarity in terms of what these asymmetries are on Page 22 of our results presentation as well, so you can see where the movements are.

Speaker 6

Okay. Thank you.

Operator

Thank you. And we'll now take our next question from Praful Mire of Autonomous. Your line is open. Please go ahead.

Speaker 9

Good morning, all. Just two questions, if I may. Firstly, the new liability margin guidance of EUR 100,000,000 to EUR 110,000,000 is obviously slightly higher. I just wondered if in very broad terms you can maybe split that between, say, the curve movement and the tracking speed assumptions. Feel like there's a little bit of both in there somewhere.

Speaker 9

And then with respect to the tracking speed assumption, it feels like maybe you've got to be more confident about tracking in certain places. And then secondly, the SEK 2,500,000,000 is another step in the right direction on the share buyback. But if I look at the CET1 ratio target of 12.5%, it would buy full year 25% for ING towards probably the lower end versus peer group. So can I ask, is that an outcome that ING would be comfortable with? And can I therefore look at the 12.5% as fully independent of relative peer positioning?

Speaker 9

Thanks.

Speaker 1

Okay. I'll take the second question and Danette will take the further the first question on even further splitting up Page 10, I guess. And the answer on the second question is yes. So yes, we are comfortable with our CET1 target of around 12.5%, which we have said all along. And we are a bank that operates in relatively low risk environments with low risk costs, with low NPL ratios, with either largely collateralized loans in the form of mortgages or senior or super senior loans also in Wholesale Banking.

Speaker 1

So yes, in that sense, we are comfortable with our 12.5%, and we're comfortable with our buffer.

Speaker 3

And to try to give you a bit more detail, I think it's a combination of tracking and of the curve. I think maybe three things to answer your question, Francois, is that we believe that we are reaching a point of stabilization in terms of our current account levels, right, which drives a lot of the margin improvement. And we see that as being structurally more stable given the higher number of primary customer. That would be 1. The second one is that we also see that in the picture we gave on Page 10, that the total liability margin also includes liability margin in non Eurozone countries and it also includes Wholesale Banking margin.

Speaker 3

And we see that the liability margin in our non Eurozone is actually holding up quite well and it's the same for liability margin in the Wholesale Bank. That gives us the comfort to give you this outlook of between CHF 100 and CHF 110.

Speaker 9

Thanks. That's really helpful.

Operator

Thank you. And we'll take our next question from Kiri Kiri of HSBC. Your line is open. Please go ahead.

Speaker 2

Yes, good morning, everyone. A couple of questions from my side. So you've given us refreshed guidance on the Basel IV for the day 1 impact. I wonder if there's anything new you can say or updated you can update us on the impact of the phasing from the output floors. I appreciate lots of moving parts, but just some color there would be helpful.

Speaker 2

And then secondly, just a more bigger picture question on the fees and investment products, because we think particularly in Continental Europe, that ETFs are getting more and more popular, particularly with your the younger customers that your target demographic. So how should we think about that? Is there some kind of structural margin pressure to think about on the kind of medium term view? Or is it more of a benefit for the likes of ING because you don't really have kind of legacy product factories that do traditional?

Speaker 1

I'll take the thank you, Thierry. I'll take the second question, and Liana will take the first question. On the fees, I mean, on the investments, product fees, clearly, we don't have these production engines. And we are we distribute. So we buy these ETFs or these funds and we distribute them in the markets and we come out of an environment whereby we were in a number of these banks were quite in countries were quite narrow as a bank.

Speaker 1

And some banks, people call us sort of a neo bank of Arnelleta in retail, where we are very big in number of clients, but our activity is still small. And a couple of years ago, we started to diversify that. And one of those diversification levers was investment products. Now we start we have started with that. So our total assets under management now is approximately €220,000,000,000 Please note, the largest part of that is still brokerage.

Speaker 1

So we provide very simple, very easy, very instant digital products, which we distribute, not produce. We do that now in a number of markets. But the number of clients that do this with us is still significantly lower than our primary customer. So we first have to make sure that we have our customers use these apps for these products because we're relatively new in that game. Secondly, because it's largely brokerage or self execution, if you will, we can still grow quite dramatically and move ourselves up the curve into really don't do or hardly do.

Speaker 1

So we are still moving ourselves up and we have not these benefits from, let's say, margin pressure on the EDS side.

Speaker 10

Good morning. On the Basel IV day 1 impact, as you've seen, there are no actually updates. What we are doing every quarter, as you noticed as well in our RWA moves, we are periodically updating our models and having some results for collaborations that can cater for the RWAs going up or down as you have seen throughout the quarters. That's why our, I would say, view on Basel for day 1 impact remains around 20 bps and it's driven by various drivers as a predominantly with operational RWA. When it comes to the output floor as well, I would say no update at this point of time.

Speaker 10

There are still some topics in the industry, as you know, that we are discussing and depends also on the national regulators and how are they going to tackle certain areas. We're going to update you in a due time. But so far, as I say, around 20 bps remains our guidance.

Speaker 2

Okay. Fair enough. Thank you.

Operator

Thank you. We'll now take our next question from Guillaume of BNP Pariburg Svein. Your line is open. Please go ahead.

Speaker 11

Yes, good morning. Thanks for taking the question. 2, please. Number 1 is on the lending margin again. I think historically you guided that the lending margin was around 150 basis points.

Speaker 11

So do you think you can revert back to it, but I guess not within 2 or 3 years, maybe longer term, but you think 150 basis points is still a reasonable long term lending margin. And the second one relates to the revenue to RWA ratio in the Wholesale division. You've done a good improvement in the last couple of years, both from the revenue side and from the denominator side. Do you think there's more to do on the denominator side? I know your RWA density looks slow, but that's due to mandate's gone to some extent.

Speaker 11

But do you think you can improve your density further? So thank you very much.

Speaker 1

Yes. Thanks very much. On the lending margin, no, in the past, we guided 4.50 basis points total margin, so not necessarily lending margin. So that was a total of it, so not on lending. On the revenue over RWA, look, I mean, and I think we said it also in the past quarters, we come out of an environment or as ING, we always have been a strong credit bank.

Speaker 1

And so we underwrite and then we hold. So our activities in secondary loan trading, packaging it, selling it, trading it have been very limited. And what we have been doing over the past one to one point five years is gradually build up that muscle in becoming better at when appropriate, also making sure that we use the capital more efficiently because arguably, Wholesale Banking uses half of the capital of the bank and we want to increase return on equity in Wholesale Banking. So we're training that muscle and step by step we're becoming better. So we will continue that is one of the key focus areas in Wholesale Banking to become better at it and increase that muscle.

Speaker 11

Thank you.

Operator

And we'll now take our next question from Johan Ekblom of UBS. Your line is open. Please go ahead.

Speaker 12

Thanks for taking my question. Just maybe to come back where we started on M and A in this sector. And just if you could maybe outline how you put further near term EPS accretion, etcetera, in terms of the criteria that you put up for potential M and A? And then just to come back on the fee income, I think you've flagged many times how successful the investment product build out has been in Germany. You said that there are potential in other markets.

Speaker 12

Can you give us a bit more color as to where we are in terms of the investment product? Please, how much comes from Germany today? What countries are the most underpenetrated in that sense in terms of giving us some confidence on the sustainability of the fee income growth?

Speaker 1

Okay. Thank you. When talking about M and A, yes, in the end, we will look at what does that do. EPS is a measure to value, but in the end, it needs to be beneficial for the value of the company in terms of ROE and profitability. That's how we will look at it.

Speaker 1

And therefore, we also find it important that when we would look at an acquisition that it has tangible benefits in terms of costs and potentially revenues, especially diversification of fees, that we are clear in how we would integrate acquisition. That would not take us too long. And that's why we have said we would unlikely focus on a company that is very much brick and mortar because then we're very much focused on very long integrations and then we go very inward focused and we have ample time ample ability to grow and focus externally also autonomously. So that's why we're careful. So but when we look at it, it means culture of it, quick integration, also clear digital angle in markets or let's say fee skills, because we want to focus on the growth that we currently have rather than being very inward focused.

Speaker 1

And in the end, it needs to help our profitability and ROE. When we look at fees, yes, that is successful in Germany, But the growth that comes from fees also in these accounts comes from various countries. It's not only Germany, but our countries like Belgium continue to grow. If you look at the Netherlands, we're actually quite underpenetrated. In Spain, we're growing our customer base very nicely.

Speaker 1

In Australia, we want to broaden our service offering there. We have still a narrow offer. So it's a true broad based universal retail bank. We're quite a narrow digital bank, and we're now gradually building this out in all the markets, not only in Germany.

Speaker 12

Perfect. Thank you.

Operator

Thank you. And we'll now take our next question from Arne Keirengen of RBC. Your line is open. Please go ahead. Thank you very much for taking my questions.

Operator

The first is on the pass through rates. I'm just trying to understand how conservative this is. In your assumptions of going to higher levels, are you assuming you're sort of like a price leader driving your strategy forward? Or is this largely driven by market trends? And then secondly, on capital distribution, you're thinking about buybacks versus dividends.

Operator

Would that have changed given your shares are now closer to book value and also probably considering that over a longer period of time, the €12,500,000 could be reached. So is there any thinking about considering changing the mix? Thank you.

Speaker 1

Thank you, Anke. I will do the question on pass through and Nate will talk about the form of capital distribution. Our pass through rates are dependent on our balance sheet In some markets where we're more an incumbent and we don't grow that much and the market doesn't grow so much, that we can and where lending doesn't grow so much, we will more likely be a follower if in a market we can use certain actions like, again, I don't want to mention Germany all the time, but let me do that one more time, where we and we did an additional marketing action earlier this year where in countries where marketing actions are popular, where it also leads to more customers, where there is still a big shift or a very dispersed banking landscape, okay, let's say Germany, then it would be likely that we will use some marketing actions to increase the number of customers. But we also did these promotional campaigns in Poland and Italy and also there we were very successful. So typically thinking about growth markets and challenging markets, which is the term that we typically use in CNG markets.

Speaker 1

There you typically see that we use promotions to increase the number of customers. And typically, these campaigns are successful because if you look at the last campaign in Germany, 2 thirds of the money then stuck was sticky with RNG, which then also helps to grow the primary customer. So it's a market by market strategy.

Speaker 3

Anke, just on our thinking in terms of how we distribute cash to our shareholders, probably driven by 3 things. The first one and the most important is our internal management view about the intrinsic value of ING, right? And that relates to book value or getting close to and potentially above book value. The second one that we look at is also the potential introduction of a share buyback tax in the Netherlands. That's still uncertain, but we take that into consideration.

Speaker 3

And the third is really making sure that we balance the interest of our stakeholders, particularly looking at the total return to shareholders

Operator

Thank you. We'll now move on to our next question from Hugh Moorhead of Berenberg.

Speaker 13

2 for me, please, 1 on speeds include conservative assumptions around future mix shift? And then on capital, outside of the Basel IV impact guidance, are there any sort of chunky model approvals pending with regulators? Or should we just expect that might lead to some sizable RWA movements in future quarters? Or should we just expect small movements Q on Q a bit like we've seen in Q1? Thank you.

Speaker 1

Okay. I'll give the question on the deposit mix to Tenet and then capital goes to Liliana.

Speaker 3

Reducing amount of current account going to savings and term deposits. I think given what we see in Q1, the level of competition in terms of rates on term deposit has subsided and that the rates are reflecting the yield curve that's coming up in terms of potential reduction. So we don't see at this time a further change in the deposit mix that we have at the moment.

Speaker 10

And then on the capital and RWA, correct for the around 20 bps when it comes to Basel for Day 1. And you've seen as well throughout the past quarters, but we can anticipate as well for the next quarters, we do have some volatility around amounts that are going up and down when it comes to the rating models. It is clearly subject to the approvals of the models by the ECB, but as well about performance of the models and calibration based on what we see historically and around us. So I would say no specific changes in this guidance. We will continue updating our models quarterly, but we do not expect higher volatility than what we've seen historically.

Speaker 13

Thank you very much.

Operator

Thank you. And we'll now take our next question from Mike Harrison of Redburn Atlantic. Your line is open. Please go ahead. Mike, would you like to unmute your audio from your end, please?

Speaker 14

Sorry about that. You think I'm about to do that by now. Apologies. Thanks for clarifying the duration of the replicating portfolio. I just wanted to ask a sort of more general question around how we should think about the duration and the mix of durations within the replicating portfolio evolving as and when the yield curve disinverts which the forward market say happens next year?

Speaker 6

Thanks.

Speaker 3

I think what we look at in terms of looking at duration, it's about managing our balance sheet and managing our interest rate risk, right? And if you look at the tracking speed in the past, the level of tracking has been below expectations. But I think at the end of the day, we will see continued shift between below 1 year and above 1 year as 2 distinct buckets,

Speaker 14

right?

Speaker 3

And that we continue to see accretion of income from the level of replication for the bucket that is more than 1 year. And then the bucket below 1 year will subside over time. It's like 2 pendulums on the opposite side. But as we've given the simulation, we think over that transition to 2 22 basis points, overall, the replication income will be accretive.

Operator

Thank you. There are no further questions in queue. I will now hand it back to Stephen Van Rysweck for closing remarks. Thank you.

Speaker 1

Yes. Thank you very much for your time and your questions. I'm sure that you will know to find how to find our Investor Relations team. And I hope to see all of you during Capital Markets Day on 7th.

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
ING Groep Q1 2024
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