33 Fair value of financial assets and liabilities
The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Fair value of financial assets and liabilities
| Estimated fair value | Balance sheet value | |||
|---|---|---|---|---|
| 2007 | 2006 | 2007 | 2006 | |
| Financial assets | ||||
| Cash and balances with central banks | 12,406 | 14,326 | 12,406 | 14,326 |
| Amounts due from banks | 48,461 | 39,861 | 48,875 | 39,868 |
| Financial assets at fair value through profit and loss | ||||
| – trading assets | 193,213 | 193,977 | 193,213 | 193,977 |
| – investments for risk of policyholders | 114,827 | 110,547 | 114,827 | 110,547 |
| – non-trading derivatives | 7,637 | 6,521 | 7,637 | 6,521 |
| – designated as at fair value through profit and loss | 11,453 | 6,425 | 11,453 | 6,425 |
| Investments | ||||
| – available-for-sale | 275,897 | 293,921 | 275,897 | 293,921 |
| – held-to-maturity | 16,354 | 17,494 | 16,753 | 17,660 |
| Loans and advances to customers | 546,358 | 474,922 | 552,964 | 474,437 |
| Other assets(1) | 32,970 | 25,379 | 32,970 | 25,379 |
| 1,259,576 | 1,183,373 | 1,266,995 | 1,183,061 | |
| Financial liabilities | ||||
| Preference shares | 21 | 215 | 21 | 215 |
| Subordinated loans | 6,731 | 6,439 | 7,325 | 6,014 |
| Debt securities in issue | 66,555 | 78,265 | 66,995 | 78,133 |
| Other borrowed funds | 32,595 | 31,052 | 27,058 | 29,639 |
| Investment contracts for risk of company | 9,520 | 7,505 | 9,520 | 7,505 |
| Investment contracts for risk of policyholders | 14,132 | 13,245 | 14,132 | 13,245 |
| Amounts due to banks | 167,365 | 121,680 | 166,972 | 120,839 |
| Customer deposits and other funds on deposit | 522,859 | 496,077 | 525,216 | 496,680 |
| Financial liabilities at fair value through profit and loss | ||||
| – trading liabilities | 148,988 | 127,975 | 148,988 | 127,975 |
| – non-trading derivatives | 6,951 | 4,934 | 6,951 | 4,934 |
| – designated as at fair value through profit and loss | 13,882 | 13,702 | 13,882 | 13,702 |
| Other liabilities(2) | 35,724 | 29,656 | 35,724 | 29,656 |
| 1,025,323 | 930,745 | 1,022,784 | 928,537 | |
(1)Other assets do not include (deferred) tax assets, property held for sale, property under development for third parties and pension assets.
(2)Other liabilities do not include (deferred) tax liabilities, pension liabilities, insurance provisions, property under development for third parties, share-based payment plans, other provisions and other taxation and social security contributions.
The estimated fair values correspond with the amounts at which the financial instruments at our best estimate could have been traded at the balance sheet date between knowledgeable, willing parties in arm’s-length transactions. The fair value of financial assets and liabilities is based on quoted market prices, where available. Because substantial trading markets do not exist for all of these financial instruments various techniques have been developed to estimate their approximate fair values. These techniques are subjective in nature and involve various assumptions about the relevant pricing factors. Changes in these assumptions could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values.
The following methods and assumptions were used by ING Group to estimate the fair value of the financial instruments.
Financial assets
Cash and balances with central banks
The carrying amount of cash approximates its fair value.
Amounts due from banks
The fair values of receivables from banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates offered for receivables with similar characteristics.
Non-trading derivatives
The fair values of derivatives held for non-trading purposes are based on quoted market prices. For those securities not actively traded, fair values are estimates based on valuation techniques.
Financial assets at fair value through profit and loss
The fair values of securities in the trading portfolio and other assets at fair value through profit and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal valuation techniques.
Investments
The fair values of equity securities are based on quoted market prices or, if unquoted, on estimated market values generally based on quoted prices for similar securities. Fair values for fixed interest securities are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated using values obtained from private pricing services or by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investment.
Loans and advances to customers
For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash flows using interest rates offered for similar loans to borrowers with similar credit ratings.
The fair values of mortgage loans are estimated by taking into account prepayment behaviour and discounting future cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. The fair values of fixed-rate policy loans are estimated by discounting cash flows at the interest rates charged on policy loans of similar policies currently being issued. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying values of variable rate policy loans approximate their fair value.
Other assets
The carrying amount of other assets is not materially different to their fair value.
Financial liabilities
Subordinated loans
The fair value of the subordinated loans is estimated using discounted cash flows based on interest rates that apply to similar instruments.
Investment contracts
For investment contracts for risk of company the fair values have been estimated using a discounted cash flow approach based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. For investment contracts for risk of policyholder the fair value generally equals the fair value of the underlying assets.
Amounts due to banks
The fair values of payables to banks are generally based on quoted market prices or, if unquoted, on estimates based on discounting future cash flows using available market interest rates for payables to banks with similar characteristics.
Customer deposits and other funds on deposit
The carrying values of customer deposits and other funds on deposit with no stated maturity approximate their fair values. The fair values of deposits with stated maturities have been estimated based on discounting future cash flows using the interest rates currently applicable to deposits of similar maturities.
Financial liabilities at fair value through profit and loss
The fair values of securities in the trading portfolio and other liabilities at fair value through profit and loss are based on quoted market prices, where available. For those securities not actively traded, fair values are estimated based on internal valuation techniques.
Debt securities in issue and other borrowed funds
The fair value of debt securities in issue and other borrowed funds is generally based on quoted market prices or, if unquoted, on estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity.
Other liabilities
The fair value of debt securities in issue and other borrowed funds is generally based on quoted market prices or, if unquoted, on estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity.
The fair values of the financial instruments carried at fair value were determined as follows:
Methods applied in determining fair values of financial assets and liabilities
| 2007 | Reference to published price quotations | Valuation technique supported by market inputs | Valuation technique not supported by market inputs | Total |
|---|---|---|---|---|
| Assets | ||||
| Trading assets | 122,448 | 70,279 | 486 | 193,213 |
| Investments for risk of policyholders | 111,723 | 2,976 | 128 | 114,827 |
| Non-trading derivatives | 6,928 | 693 | 16 | 7,637 |
| Financial assets designated at fair value through profit and loss | 5,012 | 4,608 | 1,833 | 11,453 |
| Available-for-sale investments | 204,838 | 69,306 | 1,753 | 275,897 |
| 450,949 | 147,862 | 4,216 | 603,027 | |
| Liabilities | ||||
| Trading liabilities | 75,131 | 73,841 | 16 | 148,988 |
| Non-trading derivatives | 6,234 | 620 | 97 | 6,951 |
| Financial liabilities designated at fair value through profit and loss | 7,723 | 6,159 | 13,882 | |
| Investment contracts (for contracts carried at fair value) | 12,074 | 2,058 | 14,132 | |
| 101,162 | 82,678 | 113 | 183,953 |
Methods applied in determining fair values of financial assets and liabilities
| 2006 | Reference to published price quotations | Valuation technique supported by market inputs | Valuation technique not supported by market inputs | Total |
|---|---|---|---|---|
| Assets | ||||
| Trading assets | 150,986 | 42,718 | 273 | 193,977 |
| Investments for risk of policyholders | 109,465 | 813 | 269 | 110,547 |
| Non-trading derivatives | 2,611 | 2,671 | 1,239 | 6,521 |
| Financial assets designated at fair value through profit and loss | 4,343 | 1,036 | 1,046 | 6,425 |
| Available-for-sale investments | 219,967 | 73,230 | 724 | 293,921 |
| 487,372 | 120,468 | 3,551 | 611,391 | |
| Liabilities | ||||
| Trading liabilities | 87,374 | 40,601 | 127,975 | |
| Non-trading derivatives | 1,833 | 2,672 | 429 | 4,934 |
| Financial liabilities designated at fair value through profit and loss | 10,914 | 2,788 | 13,702 | |
| Investment contracts (for contracts carried at fair value) | 13,235 | 10 | 13,245 | |
| 113,356 | 46,061 | 439 | 159,856 |
Reference to published price quotations
This category includes financial instruments whose fair value is determined directly by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
This category includes instruments for which a model is used to determine fair value instead of using an externally available quoted price, but for which a quoted price is available and the outcome of the model is evaluated regularly against that quoted price, resulting in no or only an insignificant deviation from the quoted price. Furthermore, it also includes financial instruments for which it is market convention to price these based on a single published reference rate (e.g. a published yield curve in the case of plain vanilla interest rate swaps). Certain reverse repos with a very short tenor (i.e. a matter of days) for which the valuation is based on the actual prices on issuance and maturity, are included in this category on the basis that their valuation is highly objective and based on a third party source. In 2006, these were reported under ‘valuation technique not supported by market inputs’ (EUR 37,229 million at 31 December 2006), as ING then did not take into account market inputs becoming available at very short notice. Consistent with the classification in 2007, these have been reclassified in the 2006 comparatives.
Valuation technique supported by market inputs
This category includes financial instruments whose fair value is determined using a valuation technique (a model), where inputs in the model are taken from an active market or are market observable. If certain inputs in the model are not market observable, but all significant inputs are, the instrument is still classified in this category, provided that the impact of those elements on the overall valuation is insignificant. Included in this category are items whose value is derived from quoted prices of similar instruments, but for which the prices are (more than insignificantly) modified based on other market observable external data.
Valuation technique not supported by market inputs
This category includes financial assets/liabilities whose fair value is determined using a valuation technique (model) for which more than an insignificant level of the input in terms of the overall valuation are not market observable.
The total amount of changes in fair value estimated using a valuation technique not supported by market inputs recognised in net profit in 2007 was EUR 74 million (2006: EUR 19 million).
Sensitivities of fair values
Reasonably likely changes in the assumptions used in the valuation techniques not supported by recent market transactions would not have a significant impact on equity and net profit.
