ING Groep Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 11 speakers on the call.

Operator

Good morning. This is Laura for conference call. Before handing this conference call over to Steven Van Reisberg, 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, expectation 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 statement. 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 a solicitation of an offer to buy any securities. Good morning, Stephen. Over to you.

Speaker 1

Thank you very much. Good morning, and welcome to our results call for the Q2 of 2024. I hope you're all well. And as usual, I'm joined by our CRO, Lilianen Chortan and our CFO, Tene Pudrakul. In today's presentation, we'll discuss the strong quarter we had and I will inform you about how we're progressing on the priorities we set out during our recent Capital Markets Day.

Speaker 1

Tanate will walk you through the financial of the quarter and show you how we're performing compared to our targets. At the end of the call, we will be happy to take your questions. Now let's move to Slide 2. Before going through our strong results in more detail, let's start with a recap of the key messages from our recent Capital Markets Day. First, we've shown that our entrepreneurship, our relentless focus on our customers and our collaborative culture have made us a very successful bank delivering value for all stakeholders.

Speaker 1

This DNA enables us to capture opportunities in the highly attractive markets in which we operate. By executing our Growing the Difference strategy, we will capture this potential and we will accelerate growth, increase our impact and deliver value for our stakeholders. And I will now take you through how we have done so in the Q2. On Slide 3, we show how we are accelerating growth. After a successful first quarter, we again had very strong commercial performance in the Q2 with an increase in the number of customers in lending and in deposits.

Speaker 1

The number of mobile primary customers increased by almost 250,000 with increases in all countries where we pursue growth opportunities. And with this increase, we've grown the number of mobile primary customers by well over 900,000 customers in the last 12 months, and we're well on track to reach our target of €1,000,000 per annum. We have also grown our lending book with a particularly strong performance in mortgages where we saw growth across all markets. Growth in Wholesale Banking Lending was offset by loan sales as we continue to optimize capital usage. On the liability side, successful marketing efforts in Retail Banking and a stronger focus on deposit gathering in Wholesale Banking resulted in SEK 15,000,000,000 inflow this quarter.

Speaker 1

Annualized customer balance of growth, so that's lending and deposits combined, amounted to 6.2% in the first half year, exceeding the annual target of 4% we set during our Capital Markets Day. Then I'm moving on to slide 4 and there we show the increasing impacts for all our stakeholders. After growing by 430,000 in the first half year, we now have 13,700,000 mobile primary customers. And this growth reflects the appreciation of our products and services, 65% of our customers now only do business via the mobile and we are the most loved bank in many markets we operate with a number 1 net promoter score in 6 out of the 10 retail markets. We have a highly engaged workforce, and we're proud that we're seen as a role model in advancing LGBTQI plus inclusion in workplaces worldwide.

Speaker 1

The number of sustainable deals has increased further with €32,000,000,000 of volume mobilized in the 2nd quarter €57,000,000,000 in the first half year, which is €10,000,000,000 more than last more than 40% of the mortgage production in the Netherlands has at least an A label. And finally, we're showing excellent financial results for our shareholders. As a result of continued strong profitability, we have announced an interim dividend of €0.35 per share, bringing the year to date yields to over 13% already. Slide 5 lists how we are delivering value. Net interest income remained resilient with an increase compared to last quarter despite the negative impact of higher accounting asymmetry.

Speaker 1

Fee income was very close to €1,000,000,000 this quarter and we're well underway to reach the €4,000,000,000 this year that we stated earlier. Most of this growth compared to last year was driven by structural increases, as Tanate will show you in more detail later. Risk costs continue to be below our through the cycle average, and we remain comfortable with the quality of our loan book. And this has all resulted in a return on equity of 14%, and we're confident that we will end the year with a return on equity of more than 12%. We have achieved this return while operating at a healthy CET1 ratio.

Speaker 1

With the ongoing share buyback, we've made further steps converging our CET1 ratio towards our target level and we'll update the market on next steps with our Q3 results. Then slide 6. And on this slide, I would like to zoom in on an individual country and show how we're executing on our strategy in retail banking. In Romania, we've been the most preferred bank since 2016. And this appreciation of our digital products and services has resulted in strong growth in the number of total customers, and over half of these customers now use us as their primary bank.

Speaker 1

We've also been able to grow both sides of the balance sheet and make a very healthy return, and we firmly believe we can grow further and make more impact for our customers. For example, we completely redesigned our digital onboarding process that now really stands out in the country. And we've introduced a digital mortgage in Romania with digital financial approval and collateral appraisal. To increase presence in new segments, as we also talked about during Capital Markets Day, we have introduced dedicated value propositions for Gen Z, while we renewed our focus on the affluent segment. And we've increased cross sell within Business Banking so that more customers use our daily banking packages, which helps to further increase fee income.

Speaker 1

Overall, Romania is a great example of how we're growing the difference. And now, I'll hand over to Tanate, who will take you through the results of the Q2 in more detail starting on Slide 8.

Speaker 2

Thank you, Stephen. As Stephen mentioned in his introduction, net interest income was strong again this quarter and improved quarter on quarter despite a more negative impact from accounting asymmetry. Lending NII increased for the 5th consecutive quarter driven by higher volumes while the margin rose by 1 basis point. Liability NII continued to be resilient as the expected normalization of liability margin was almost fully compensated by higher volumes. The overall net interest margin which takes the development in the total balance sheet into account decreased by 3 basis points driven by the impact of increased accounting asymmetry.

Speaker 2

Now if you go to Page 9, I'll show you more details on this. The point I'd like to make here is that the structural drivers of net interest income developed very well this quarter. While reported net interest income increased by $5,000,000 quarter on quarter. However, when excluding the impact of 1 offs and the increased accounting asymmetry, our net interest income actually increased by a strong $65,000,000 compared to the previous quarter. As you know, the negative impact from accounting asymmetry on a net income is more than compensated by other income.

Speaker 2

I'll get back on this on Slide 12. On the next slide, we'll show you the strong volume growth in both core lending and deposits. The commercial momentum that we had in the Q1 continues in the second with strong net core lending growth of almost €8,000,000,000 We have been able to grow our mortgage book in all of our retail countries. This was just not driven by recovery of the market, but also by increasing our market share in some countries. In the Netherlands, for example, we have grown our market share in new production to over 16% on the back of providing an excellent customer experience.

Speaker 2

Growth in wholesale banking lending was offset by loan sales as we continue to focus on capital efficiency. On liabilities, we saw core deposit growth by $14,700,000,000 in the 2nd quarter due to strong performance in both retail and wholesale banking. In retail, we grew across many markets driven by effective marketing and supported by the inflows of holiday allowances in some countries. In Wholesale Banking, our focus on increasing deposit paid off with strong inflows in payment and cash management in particular. Now turning to Slide 11, fee income year on year was again double digit as we made almost €1,000,000,000 in fees this quarter.

Speaker 2

This is a record. The growth was particularly driven by retail banking as we were able to grow mobile primary customer, active investment product customer, lifting income from daily banking, investment products and insurance. In addition, we paid low commissions to independent agents and brokers in Belgium. We also benefited from favorable market condition that led to higher fees from mortgage brokerage and increase in the number of investment product trades as well. In wholesale banking, fees were slightly lower due to lending, was still at a strong level.

Speaker 2

Given the strong performance across the bank, we remain confident that we can reach our RMB4 1,000,000,000 fee income outlook this year. Now on Slide 12, we show what the developments in the different income lines in the first half of the year mean for our guidance for total income this year. We note that we previously provided an outlook for net interest income assuming a stable accounting asymmetry resulting in a range of between €15,000,000,000 to €15,500,000,000 However, as this asymmetry remained difficult to forecast, we have now excluded this impact from our outlook. Any impact from accounting asymmetry will be more than compensated in other income. As structural drivers of NII remain strong, we continue to guide for interest income excluding accounting asymmetry to end up in the upper end of the range.

Speaker 2

We are confident that the fee income will reach the RMB4 1,000,000,000 outlook. And as a result, we have increased income guidance this year from around 22,000,000,000 to more than 22,000,000,000. Now on slide 13, we'd like to explain a bit about the cost development. Total expenses in the first half of the year increased by roughly 3% compared to the 1st 6 months of 2023. In the same period, expenses excluding regulatory costs and incidental items were approximately 6% higher, which is in line with our outlook for 2024.

Speaker 2

This increase was mainly because of impact of inflation on staff expenses reflecting salary indexation and collective labor agreement increases across most of our markets. We also continue to invest in our business and had to pay a higher VAT following the implementation of the Danske Bank ruling in the Netherlands. Regulatory costs were significantly lower than last year because no contribution is required to the Eurozone Single Resolution Fund for 2024. For the full year, we continue to guide for our total expense base of around €12,000,000,000 Onto risk costs on page 14. Total risk costs were €300,000,000 this quarter or 18 basis points of average customer lending, still below our through the cycle average and demonstrating the quality of our loan book.

Speaker 2

In retail banking, asset quality continued to be strong and we benefited from strong improvement in the macroeconomic outlook for house prices. In wholesale banking, risk costs including additions to Stage 3 for a number of unrelated existing files, we have also transferred a part of the Russian related exposure Stage 2 to Stage 3, reflecting the worsening economic outlook in that country.

Speaker 3

At the

Speaker 2

end of the second quarter, we still have stock of overlays amounting to €415,000,000 Page 15 shows the development of core Tier 1 ratio, which was mostly impacted by the ongoing share buyback, which we announced last quarter. Core Tier 1 decreased by €1,700,000,000 as the buyback was partly offset by the inclusion of net profit for the quarter after reserving for dividend. Total risk weighted asset increased by 7,300,000,000 excluding 600,000,000 of FX impact. Credit risk weighted assets again excluding FX impact increased by $7,700,000,000 partly driven by an increase in exposure. A temporary increase from quarterly model updates had an impact of €6,500,000,000 for which the majority will be reversed before year end.

Speaker 2

This temporary increase has no impact on our capital outlook. Changes in the profile of the books resulted in a decrease of the credit risk weighted assets by 2,100,000,000. Operational risk weighted assets was stable, market risk weighted assets decreased by 400,000,000. The interim cash dividend of 0.35¢ per share will be paid on the 12th August and we will update the market with our Q3 results on the next steps in converging on our core Tier 1 ratio to our target levels of around 12.5%. Then finally on to slide 16.

Speaker 2

As Stephen and I resulted in a very successful first half year with good commercial and financial performance. Mobile primary customer increased by 430 1,000 as more and more customer choose us as their primary bank and increasing number of customers are using mobile as their preferred channel. Total income increased with strong NII, double digit fee income growth and we have updated our outlook for total income for the full year to end up above 22,000,000,000. The development of operating expenses was in line with our outlook while regulatory costs decreased significantly compared to last year. Core Tier 1 ratio continued to be high at 14%.

Speaker 2

Our 4 quarter rolling return on equity remains very attractive at 14% and we're confident we'll be able to provide an ROE of over 12% for the full year. Now on to the Q and A. Over to you, operator.

Operator

Thank you. We will now take our first question from Benoit Petrarque of Kepler Cheuvreux. Your line is open. Please go ahead.

Speaker 4

Yes. Good morning, gentlemen. Thanks for taking my questions. So the first one will be on net interest income, looking at the 2 main moving parts, so lending NII and Lebit NII. On the lending NII, obviously, very strong growth on the volume side.

Speaker 4

Yes, it sounds that you or at least I am more positive on the lending NII development going forward. Are you also a bit more positive on lending volumes for the rest of the year and also on lending margin developments? That will be the first sub question in NI. And then on NI, again, on the Page 22, you provide a very interesting sensitivity. Last quarter, you told us that based on the curve end of March, you expect to be between 100 and 110 bps on Vivity margin.

Speaker 4

I see a delta based on the current curve of $600,000,000 on interest income from replicating income in 'twenty six, which will be about 9 bps on the total customer deposits. So my question is, based on the current curve, are you maybe a little bit more also positive on this range of 100, 110? Are we more likely to be on the high end of this range based on the current curve? That's the question. And then just very tiny question on the asset sales.

Speaker 4

So world sale book is down €1,000,000,000 But how much is the kind of effect of the asset sales in, say, Q2 or H1? I just wanted to get the full picture on an underlying basis.

Speaker 5

And also,

Speaker 4

I think you talk about asset fees in the past and just wondering where you are on that. Thank you very much.

Speaker 1

All right. Thanks, Mona. I will do the one on asset sales and the NII, and then Ed will talk about the graph on Page 22. Talking about the NII, I think we also are quite positive. And if you look at the volumes in mortgages, to start with that, the volumes were good.

Speaker 1

You also saw, if you look at the market share of the new production in the Netherlands, it was 16% and higher, where our total market share is around 13%. So, we're doing very well. That also has to do, by the way, with our the strength of our digital channel and interaction with our brokers. So we're doing very well and very happy with that. You also, by the way, see it in our number of MPS 1 MPS position in this market.

Speaker 1

And also you see gradually increasing volumes in Belgium and Germany. And those markets are recovering a bit slower on the mortgage side. So they are still quite some way off of where their mortgage sales were or house sales were in 2022 2021 and before that time. So that recover slower, but also in the slower market we're doing well. So that gives us also confidence for the future.

Speaker 1

In Wholesale Banking, we saw also lending growth, but we also have a number of underwrites and loan sales. And therefore, Eileen, question 1 and question 3, we had about SEK 2,000,000,000 in loan sales this quarter. And therefore, you see the total going down. But we also have a number of committed facilities, which are undrawn. So we grow, but you don't see it in the numbers because it's not drawn at this point in time.

Speaker 1

But we see in our pipelines of deals that the market is becoming stronger. So from a volume point of view, we have a positive viewpoint on based what we see, the market shares in the market and how the markets in mortgages and Wholesale Banking are recovering. If you look at the margins, in Wholesale Banking, you already see a bit of margin expansion, okay, it's only 1 basis points, but it gives at least it has been stable And but you now see if the growth is coming back, when liquidity in the market should become a bit lower with quantitative tightening, That should have a positive impact on it. Let's see where that goes. But we saw, at least for this quarter, a limited increase.

Speaker 1

And deposit margin is holding up well in line with what we expected. But I'll let Sene talk about Page 22.

Speaker 2

Thank you, Benoit. I think we wanted to provide this mechanical replication of the U curve for the Eurozone deposit book. I think this is one determinant of where our net NII for liability will go. But I think there are 3 other developments. I think volume is clearly 1 in terms of deposits and you can see that we are quite optimistic about our momentum in terms of volumes given what we see in Q1 and also Q2.

Speaker 2

We also will be determined by the mix of our deposits between term deposits, savings and current account. And what we also saw is that the migration from current account to savings account has stopped, right. So that is a clear trend line which is also positive for NII liability. And the third is the deposit rates itself and that of course we do give forward guidance, but we reaffirm the guidance that going into 'twenty five the liability margin should be between 100 to 110 with some of those positive momentum that I mentioned.

Speaker 6

Thank you. Thank you very much.

Operator

Thank you. And we'll now move on to our next question from Giulia Bionotto of Morgan Stanley. Your line is open. Please go ahead.

Speaker 7

Hi, good morning. Thank you for taking my questions. The first one, I want to stay on the same topic and double click on the margins by country. Is it correct that Belgium is still under pressure probably on lending and deposits whereas Netherlands and Germany look better? Or any further color that you can give us by countering would be welcome.

Speaker 7

And then my second question instead goes on a different topic, capital. The €6,500,000,000 temporary model increases. So can you give us a bit more color there? What are those? And how do you why are they temporary essentially?

Speaker 7

How do you then offset them?

Speaker 1

Yes. On the margins, I will take the question and Lilian will take it on the €6,500,000,000 temporary increase. Yes, it is true that in terms of the countries, if you look at mortgage margins, that they are better in the Netherlands and Germany than they are in Belgium. So what we clearly do, of course, is when we look at pricing of our products and of our service to our customers, we look at where we do whether we make the right return on it, and we're a return focused bank. And if we are able to make a return that meets our internal return hurdles, then we'll do it.

Speaker 1

And if not, we don't. And that's also, therefore, how are you if you look at the expansion of the mortgage book, yes, you see a significant expansion in the Netherlands also as a result of the fact that that's an attractive market. But I must say that also the mortgage markets in Belgium and Germany are still a bit slow. So there is some recovery, but not to the tune that we have seen in the Netherlands already, which is now already back at the level of house sales as of 2022. That's where we currently are.

Speaker 8

Good morning, Giulia. On the models, yes, we have seen a temporary increase this quarter, which is a bit higher than usual of SEK 6,500,000,000 And we say majority of it will be reversed before the year end with no implications for our capital outlook. And what do we mean with that? You know that we execute in line with our ING model roadmap strategy. Every quarter the model updates.

Speaker 8

In some quarters, it goes up or down depending on the timing of the changes taken, but as well on the timing on the mitigating actions that are being taken in parallel in order to, I would say, work on that impact. What we have seen in the Q2 is the negative impact that you've mentioned. However, most of it will be taken through a different mitigating actions, primarily risk transfers that we use in order to, I would say, come to the structure level of RWA that we will operate at. If you look, for example, in the last six quarters, you will see a net impact of our model changes of around €1,000,000,000 to €1,500,000,000 which is the proof that we actively manage our RWA throughout the year in which some quarters might have the up sticks due to these changes. But then in the others taken risk mitigating action in place, they're going down.

Speaker 7

Okay. Thank you. So if I understand it correctly, this negative €6,500,000,000 impact will be offset by SRTs. Is that correct?

Speaker 8

Not just SRTs. There is a number of other, I would say, actions, which are insurance policies, derivatives hedging, so different risk transfers, mitigations. And yes, largely, it will be offset.

Speaker 7

Okay, perfect. Thank you very much. And if I can go back on the margin question, anything on the deposit margin by country, Ustel? Thank you.

Speaker 1

I'll give this to Denise.

Speaker 2

I think, as I mentioned already, Julia, deposit margin is depending on volume and on mix to be clear. And the mix, I think have seen favorable development in terms of stabilization of current account. So I think that's good on the mix. And I think in Q2, we had such a high inflows of deposits. So it moved the net interest margin down a little bit.

Speaker 2

We had quite a big promotions in Germany. So I think I just repeat the key drivers, replicated income, volume growth and mix, those are the key drivers for margins. But we stick with our guidance that we expect net interest margin for liability for this year to be above 110 and that it will be in the corridor of around 100 to 110 going forward.

Operator

Yes. Thank you very much.

Speaker 7

I was looking for more like comment by country, if you have any I don't know if any country is looking differently or if these trends are sort of similar across

Speaker 2

countries? I think limited change per country. What I can say is that the margin is actually expanding somewhat in the non Eurozone countries where interest rate environment are somewhat more favorable for us.

Speaker 7

Thank you.

Operator

Thank you. And we'll now move on to our next question from Tarek Elvijat of Bank of America. Your line is open. Please go ahead.

Speaker 6

Hi, good morning. Two quick questions, please. First, follow-up on the liability margins. One of the moving parts is the pricing on deposits. I understand you can't comment.

Speaker 6

It depends on competition and other factors. But can you, in your 3 main Eurozone retail markets, describe a bit the dynamics there in terms of competition and pressure on pricing there? And the second question is on costs. I understand your approach on costs, which being very kind of continuous and looking for opportunities to optimize costs as it goes. But what are the areas we could potentially look for in terms of finding some levers to offset the sticky high inflation in costs and help the jaws.

Speaker 6

And maybe you can just confirm that despite, I mean, looking at your guidance for costs and revenues, we should expect quite wide, still negative jaws this year and negative jaws next year with potentially slim to slightly improving in 2026? Thank you.

Speaker 1

All right. The cost question goes to Teneid, and I will say something about the liability margin. First of all, like Teneid already said, the margin is holding up well. So and there are different price points. So, in the Netherlands, the base deposit rate is relatively high, and that is a bit lower in Belgium and in Germany, but there you still see in Belgium they work with loyalty premiums, I.

Speaker 1

E, the longer you stay as a depositor in Belgium, the more you get. And in Germany, they work with marketing actions. So, what we currently see and you see it in the past quarters is that we, of course, we look at our own products, our own balance sheet, and we also look at how to grow in a profitable way our primary customers, and that's how we are also looking at deposit gathering. Now what we therefore especially see in Germany that with marketing actions and we saw it in the Q1 again as we have done in the Q1 also the last year, or maybe it was April last year, that we started a marketing action at the right point in a profitable way by which we got a significant amount of deposits in. And that's how we continue to look at how do you balance growth of customers, profitable growth of customers with balance sheet management and with getting more deposits in the bank.

Speaker 1

And there you see a bit more action in Germany than you see in Belgium and the Netherlands.

Speaker 2

Then a question, Tarek, on expense developments. As we kind of highlighted on Page 13, we do expect that the cost development for this year to be around 3%, a combination of regulatory expenses and operating expenses. We do expect that if you look at the first half of the year where the increase in business growth come from, Some of the big buckets are really as we mentioned on our Capital Markets Day, we have increased the level of customer acquisition costs. These include front office staff, marketing expenses to acquire customers and you see that the volume of new primary customer is developing nicely. This would be one of the big principal drivers of business growth that we see.

Speaker 2

And you're right that we don't take restructuring provision on a program basis, but as they come and in this quarter we took around 34,000,000 restructuring provision for restructuring in Belgium, which is related to reduction of our operational staff levels. To give you the comfort about the outlook for the future, we stick with our CMD guidance which is that cost income ratio is ready to rise to around 54% next year and gravitate back to 2027 of around 52% to 54% cost income ratio. So those would be reaffirmation of our guidance for the CMD.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. And we'll now take our next question from Sam Morin Smith of Barclays.

Speaker 3

So two questions on, I guess, either side of the balance sheet. So on assets, net core lending this quarter when annualized was above your 4% annual growth target, but also significantly above Eurozone system growth. When you entered Benoit earlier, you commented on the core retail markets, so Netherlands, Belgium, Germany. But it looks like the highest relative growth this quarter was actually in a challenging market. So perhaps you could give us some color on which markets you feel you're taking most market share and where you expect that to continue?

Speaker 3

And then my second question is on the liability side. You mentioned a couple of times your marketing campaigns in Germany. I appreciate the latest campaign started in Q1 and went into Q2. But when I look at net core deposit growth in Germany this quarter, it was actually quite subdued compared to other quarters where you've had those promotions. So should we think about that as a net number where you have had inflows, but you've also had outflows?

Speaker 3

And if so, are those outflows going to competitors? Or are they going into Asset Management products or a bit of both? Any color there would be really appreciated. Thank you.

Speaker 6

All right.

Speaker 1

So maybe on the marketing campaign in Germany, that led to a big inflow in Germany in the of €11,000,000,000 in the Q1. So, I was talking about that in the context of the Q1 inflow in Germany that was €11,000,000,000 And so indeed that it has not those levels in the Q2 because we did not do a market campaign this quarter. That was the last year where we did the market campaign in April, which then led to an inflow of, I believe, from the top of my head, €16,000,000,000 So this quarter is actually a deposit inflow all around in the various markets, But and depending on at which point in time we want to again push the pedal and to grow our customers, we'll do new marketing campaigns, but I cannot say anything about that. But now you see actually increase of deposits across the various markets in which we operate. Then and there was a bit of a static on the line, but I believe the first question was about where did you where do you see most growth in markets in lending?

Speaker 1

Is that correct? Can you repeat that question, Sam?

Speaker 3

Yes. Specifically in reference to your Challenger markets.

Speaker 1

To the Challenger markets. Well, I mean, also there, we see a significant growth in most of the markets. We also see a return of the market in Poland, whereby the economy is gradually improving again. And there, we see particular growth coming in that market as well. So next to the analysis that we saw is very strong gradually markets coming back in Belgium and Germany, but not to the level that we have yet seen a few years ago.

Speaker 1

We see a return of the growth in Poland, and we see also Italy doing particularly well.

Speaker 3

If you don't mind, if I could just quickly follow-up on German deposits. When you talk about marketing campaigns, if I was to go on your German retail banking website right now, I can still get, I think it's 3.3 percent. So the promotion is still there, but are we talking more specifically about actual marketing rather than just a higher bonus rate? Just to clarify, sorry.

Speaker 1

Yes. What we did really talk about when there is a marketing campaign, so that means that you are allowed to get a certain interest rate for a certain period. And when we talk about the campaign itself, it is about the start of that campaign. The start when we start to offer something new for a certain period, that is when you see a big increase in the deposits flowing in.

Speaker 3

Understood. Thanks very much.

Speaker 1

Thank you.

Operator

And we'll now take our next question from Benjamin Goy of Deutsche Bank.

Speaker 9

Yes. Hi, good morning. Two questions, please. So first, on costs, and thank you for the breakdown of the cost inflation. Now you have seen your 2 largest markets.

Speaker 9

You have essentially seen the CAs of the sector or of key competitors. So wondering if you can help us a little understand how your cost CAGR looks throughout the plan, was it slightly elevated initially given these CRAs? And then secondly, on the deposits, and particularly if you can share a bit more color on the current accounts, which were nicely up quarter on quarter, is that in the byproduct of these savings campaigns that people also bring over current accounts and use them more frequently? Or how can you explain the goals here?

Speaker 1

All right. I'll do the current accounts question, and then it talks about costs, as he typically does. So if you look at the current account growth, that indeed part of it is just growth of new customers coming in. You see 250,000 mobile primary customers. And with these customers, we do more.

Speaker 1

And they also typically keep more money on our accounts. But also, we have a current account growth on the back of holiday allowances amongst others in the Netherlands and Belgium and Spain. But also, we had a campaign in Italy this quarter as well. So that's what caused it as well. But typically, HOIE allowances cause current accounts to go up.

Speaker 1

The flip side of it is that what we typically also see in the Q3 of the year is that you see an increase of transaction fees in the Q3 on the back of the holiday period because then people start to spend that money, typically in our case by way of credit card fees, so that will then have a positive impact on the transaction fees. That's what we have seen over the past year. That's a bit hard work. 2nd quarter increased due to holiday allowances. 3rd quarter increase in credit card uses

Speaker 6

because of the holidays.

Speaker 2

Then, Ben, in terms of costs, particularly the collective labor increase, we do see the delayed impact in terms of wage inflation and that you have mentioned we watch our competitor in a number of markets like Germany and the Netherlands. So we do expect that the cost increase in the short term, so 'twenty four, 'twenty five to remain sticky, but that the normalization in terms of wage increase to become more prevalent in 'twenty six, 'twenty seven indeed. So more uptick in the first part of our planning period and more normalization in the back end.

Operator

And we'll now move on to our next question from Anke Rangan of RBC.

Speaker 10

Yes. Thank you very much for taking my questions. And the first is on the Slide 22 again. I'm sorry for following up. But in 2025, the €500,000,000 step up in the replicating portfolio income, Why should it not be a similar step up in the guidance you gave on the 4.4 percent post the deposit cost.

Speaker 10

Is there anything that would make the headwind larger? So it's not a €500,000,000 step up? And then secondly, on loan volume growth, I mean, it's really quite impressive and you mentioned market share gains. Can you elaborate a bit about what you're doing to grow faster than the competition? Thank you very much.

Speaker 1

All right. I'll talk about loan growth. Tanay talks about Page 22. Well, I mean, in the end, but I think we always highlighted that it's a matter of customer experience. And what we do is we build a very strong channels, like we talked also about Romania, for example, where we said we have digital approval or digital collateral valuation, and it just means that we continuously work very diligently, very focused on lower time to yes and lower time to cash.

Speaker 1

So how long does it take when you get an approval? How long does it take when you get your money? And in the Netherlands, we have with our brokers and the broker channel is the largest channel for mortgages, the time to yes is less than 24 hours, which is just very good, and I think it's the best in the market. You also see, and I don't know where you come from, but in Germany, we also there is being sold a lot through brokers. But also you see that in the way that we do it with our clients, we continuously work on do that fully digital as far as we can, as far as law permits us to do so.

Speaker 1

So in the end, it's creating an environment where there is more certainty for customers in a quicker and less friction type of way. So easy, instant, personal relevance, That's the name of the game and that's just hard work every day.

Speaker 2

Then, Enke, in terms of the step up on page 22, that's the replicated income. And I think the other legs of it which we don't we cannot disclose is what happens to customer rates, but we do give on that page a sensitivity analysis, right, that every 10 basis points of pass through has an impact of around €400,000,000 on NII. So that's the second leg. The only thing I would describe is that competition for deposits from what we see in the Q2 has remained benign, right, that we are able to gather quite significant volume in many markets that we operate in. So those are the missing pieces that you need to make your judgment is what is the outlook in terms of competition, in terms of retail deposits and what tracking do you assume in your model.

Speaker 10

Thank you very much.

Operator

Thank you.

Speaker 5

For taking my questions. One on fees and one on risk costs, please. So firstly, on fee income, strong performance in insurance this quarter. Is that sort of should we see that as being driven by one offs like a marketing campaign, for example? Or are we seeing a bit more of structural recovery in that business?

Speaker 5

If you could just give a bit more insight, that would be great, please. And then secondly, on loan losses, same cost of risk this quarter, excluding the overlay writeback is 25 bps, so a bit above your through the cycle guidance. Should we see how should we view this quarter in terms of risk costs normalizing? How are you guys thinking about the evolution of the overlay as the quarters come? For example, will you write that?

Speaker 5

Will you sort of continue to use the overlay to keep the cost of risk at around 20 basis points? And also, finally, sorry, are you able to quantify the Russia impact of the transfer of the Russia exposures from Stage 2 to Stage 3 as well, please?

Speaker 1

All right. So I'll give the question about the risk cost overlays, Russia trends to Liliana, and I'll talk about fees. That makes my job fun. So, well, I mean, there are many reasons why our fee performance is strong. It starts with getting more customers in the bank who do more with us, and we have 1,000 new mobile primary customers.

Speaker 1

Then it's about them doing more with us when they're in the bank. So if you look at the investments accounts, we increased and that totaled the Capital Markets Day, we have approximately 4,500,000 investment accounts on a total of approximately 40,000,000 customers. So that's only, let's say, 11%. So there's nothing wrong with it, but that means there's a lot of upside. And that grew over the past year with 8%, and this quarter with 3%.

Speaker 1

Then in insurance, yes, we're because we do more and we also made specific agreements with insurance providers in different markets for private individuals, but now also starting in business banking, still relatively small. We also now are selling more bespoke insurance products to our customers, which we did not do in the past. So we start from a very low base. And as I said previously, there is a lot more we can do with our customers. We just need to offer it to them and start offering it to them, which we started to do also a bit more in insurance fees, and that's why you see the increase coming from.

Speaker 1

And the same goes for daily banking, where in some countries, there were some increase in price packages. And then on top of it, that's more, let's say, the beta side of the story. Like I told you, there is some recovery in the mortgage markets, in the various markets and also in Germany and Netherlands. And therefore, you see that we have a bit more mortgage fees than we had in the previous quarter. So that's gradually recovering back.

Speaker 1

But a lot of things have to do, to summarize, by just doing more with our customers and offering more bespoke solutions to them in the fields of investments and insurance. Liliana, risk costs.

Speaker 8

Hello and good morning. Yes, the risk costs were €300,000,000 or if we look at the net amount, it's 18 bps through the cycle. Overlays are being made when we believe our models are not able to capture fully the risk that we see in the environment and they are to be used once these risks happen or they are to be released if we don't see these risks happen. So also the average calculation of through the cycle cost, risk cost includes always overlays. When it comes to the specific Russian impact this quarter, you have seen the up stick, I would say, in S3, so Stage 3 provisions.

Speaker 8

And from Russia, that up stick is approximately €100 and €33,000,000 on the side of the S3. So that's why increase. However, there is as well a partial offset on the Stage 2 impact. Net impact on Russia is €39,000,000 additional risk costs this quarter.

Speaker 5

Great. Thanks very much.

Operator

We will now take our next question from Farfir Mire of Autonomous. Your line is open. Please go ahead.

Speaker 6

Good morning all. Just two questions, if I may. Firstly, just going back on the model updates, €6,500,000,000 of RWA, which parts of the model or lending books did that come from? And in terms of the separate mitigating actions, could we just should we expect the cost from loans?

Speaker 8

Should we say cost?

Speaker 6

And then secondly, as we move into a cutting cycle, what's ING's philosophy going to be on deposit pricing? I think on the way up, you characterized it as slow follower. Is ING willing to move the other way on the way down?

Speaker 1

Thanks. All right. I'll take the question on the deposit cycle or the cutting cycle. And then Lilian talks about the model of this. I mean, clearly, we cannot say anything of our about our strategy in terms of our deposit rates going forward.

Speaker 1

Clearly, indeed, depending on whether we grow and want to grow in customers and make our income there, it's an economic position we take on it. So in the end, it's a balancing between do we want to have more customers on who we in total then because we have more customers make more money or do we have an impact by leaving rates as they are or lowering them and therefore make more money or less customers. That's just an economic equation, which we continuously calibrate. We have been in a period whereby rates moved up very quickly. And then at some point, competitors starting to move.

Speaker 1

And there we have seen that the markets where you typically see that as a challenger, we grow our customers very quickly. We start with marketing actions and sometimes rates higher a bit quicker to get those customers in. And in markets where that is not the case, we keep it much more stable. And we are in a good position in practically all the markets which we operate. So we will be nimble in terms of our approaches depending on where we want to grow and where we want to be stable in terms of our share or our total balance sheet.

Speaker 1

And that's how we take it. That's all I want to say about that going forward.

Speaker 8

Good morning. On the model update, yes, the update comes from actually various models, but the majority one comes from the low default portfolio in the wholesale banking space.

Speaker 6

Okay. And is there any cost to mitigating actions?

Speaker 8

There are risk transfer mitigating actions. As I say, those are the low default portfolio. So that's also there is a number of instruments available also in the market and internally to manage those.

Speaker 1

The question is, are there costs to the mitigating actions?

Speaker 2

Look Falko, we look at its 3 parts of our pyramid, right? We look at revenue trajectory, risk costs sorry, risk weighted asset and return on equity and we will find a way to optimize. We expect the impact from a revenue perspective to be minor in terms of managing our risk weighted assets on this particular point.

Speaker 6

All right. Thanks so much.

Operator

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

Speaker 1

Good. Thank you very much for listening in and for the call of the on the Q2 results 2024. I wish you a great summer. I hope that you still have some time to take some time off and go on holiday. And I'm sure we'll speak again on the Q3.

Speaker 1

Thanks very much.

Operator

Thank you. This concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.

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Earnings Conference Call
ING Groep Q2 2024
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