Financial developments
Underlying profit before tax declined 5.0% to EUR 2,399 million. Higher profits were recorded in General Lending & Payments and Cash Management, Leasing & Factoring, ING Real Estate and Other Wholesale Products. Underlying profit from Structured Finance decreased 20.6% to EUR 409 million, including a markdown of EUR 29 million on the Leveraged Finance book in the third quarter of 2007. Financial Market profit declined 30.5% to EUR 354 million. The subprime crisis and related issues had a negative pre-tax impact on Financial Market profit of EUR 106 million in the fourth quarter of 2007.
Including the provisions booked as special items in 2007 and the impact of the divestment of Williams de Broë and Deutsche Hypothekenbank in 2006, total profit before tax decreased 8.9% to EUR 2,261 million. Total underlying income rose 1.0% to EUR 5,860 million driven by ING Real Estate and Other Wholesale Products, while income from Financial Markets activities declined 11.2%. Underlying operating expenses remained under control, rising 5.2% to EUR 3,576 million. Fast growing ING Real Estate contributed 2.8%-point to this increase. The underlying cost/income ratio increased to 61.0% from 58.6% in 2006.
Risk costs were again negative in 2007. The net release from the provision for loan losses was EUR 115 million compared with a net release of EUR 121 million in 2006. Gross additions remained low, reflecting the strong quality of the credit portfolio. The net release in 2007 equalled seven basis points of average credit-risk-weighted assets, unchanged compared to the net release in 2006.
The underlying risk-adjusted return on capital (RAROC) after tax from Wholesale Banking declined to 20.3% from 20.6% in 2006. Average economic capital decreased 4.6% to EUR 7.8 billion due to model refinements. All product groups are performing above ING’s 12% return hurdle, with the exception of General Lending & Payment and Cash Management. The after-tax RAROC of this product group increased to 9.7% from 7.3% in 2006.
Efforts to increase efficiency will also continue, with an aim to reduce the cost/income ratio to 55% by 2010 while further increasing the risk-adjusted return on capital. A number of initiatives were started in 2007 to stimulate growth and reduce operating expenses. Provisions totalling EUR 139 million before tax were booked as special items which are excluded from the underlying results.
ING Real Estate’s business portfolio increased by 18.2% to EUR 107.2 billion, driven by strong growth in the lending portfolio which increased 42.0% to EUR 32.1 billion. Underlying profit before tax from ING Real Estate rose 5.2% to EUR 664 million. Profit before tax of Investment Management increased 13.9% to EUR 156 million. The profit of the Investment Portfolio rose 31.2% to EUR 261 million reflecting higher realised gains and fair value changes on investments, while profit at the Finance activities increased 16.9% to EUR 214 million. Profit from Development declined to EUR 33 million from EUR 112 million in 2006 when profits included exceptionally high gains on the sale of completed projects. The after-tax RAROC of ING Real Estate decreased to 32.7% from 40.1% in 2006.
