Financial developments
ING Direct continued to invest to enhance commercial growth through geographical expansion and the roll-out of new products, despite challenging market conditions. Yield curves remained flat or inverted in all currency zones, while competition for deposits intensified as many banks faced tighter liquidity and increased funding costs on the wholesale markets. In this environment underlying profit before tax declined 23.6% to EUR 530 million, compared with EUR 694 million in 2006. Including the impact of the divestment of Degussa Bank, which was sold at year-end 2006, total profit before tax decreased 23.3%.
Total underlying income declined in 2007 by 1.7% to EUR 2,196 million due to an 8.1% lower interest result. The interest margin narrowed to 0.75% from 0.89% in 2006 as a result of higher central bank rates in the euro, British pound and Australian currency zones and the intensified competition for retail funds. The total client retail balances in 2007 grew EUR 28 billion (or EUR 35 billion excluding currency effects) to EUR 310.1 billion at year-end. This includes EUR 5.3 billion from add-on acquisitions in the fourth quarter. Commission income increased due to further growth in off-balance sheet funds. Investment and other income was up EUR 104 million, supported by higher gains on the sale of bonds and loans and increased net trading income. This was in part offset by an EUR 29 million impairment on asset-backed commercial paper in Canada in the fourth quarter of 2007.
Total operating expenses increased by 7.8% to EUR 1,598 million, reflecting higher staff numbers to drive the growth in mortgages and payments accounts, preparations for the launch of ING Direct in Japan (EUR 22 million start-up costs), the consolidation of Sharebuilder in the US, as well as costs for repositioning the UK business. The underlying cost/income ratio increased to 72.8% in 2007 from 66.4% in 2006.
The operational cost to client retail balance ratio, which excludes marketing expenses, rose to 0.37% compared with 0.36% in 2006. The number of full-time staff increased to 8,883 from 7,565 a year earlier.
The addition to the provision for loan losses increased to EUR 68 million from EUR 57 million reflecting the increased volume of the mortgage portfolio. The addition was 9 basis points of average credit-risk-weighted assets, up from 7 basis points in 2006.
The underlying risk-adjusted return on capital (RAROC) after tax improved to 14.3% from 11.8% in 2006, due to lower tax charges supported by a tax asset in Germany. The pre-tax RAROC decreased to 17.7% from 19.4% primarily due to a lower risk-adjusted profit, outweighing the 14% decline in average economic capital to EUR 2.8 billion from EUR 3.2 billion in 2006 as a result of improvements in RAROC methodology.
Country developments
ING Direct’s overall profit was driven by the business units in Germany, Australia, US, Spain, Italy and France. In Germany, profit before tax increased 11% to EUR 367 million from EUR 332 million in 2006. France and Italy posted increases of 35% and 14% to EUR 46 million and EUR 49 million, respectively. Profit before tax in Spain remained unchanged at EUR 55 million, while profit before tax in Australia declined slightly by 2% to EUR 84 million. In the US, profit before tax was EUR 78 million, a decline of 8% compared with 2006. In the UK, ING Direct posted a pre-tax loss of EUR 120 million compared with a profit of EUR 19 million in 2006, mainly caused by a 39% net outflow of funds entrusted from rate-sensitive customers. Profit before tax in ING Direct Canada declined partly due to lower interest results caused by an impairment of EUR 29 million on ABCP investments in the fourth quarter of 2007.
