ING reports on challenging fourth quarter

At a glance

ING in 2012

ING Group down 5.2% to EUR 2,603 million

Underlying profit before tax

Bank down 22.0% to EUR 3,219 million
Insurance EUR 311 million profit vs a EUR 325 million loss

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ING in the fourth quarter

Underlying profit before tax

Bank down 72.3% to EUR 184 million from the fourth quarter 2011
Insurance EUR 272 million profit from a loss of EUR 1,513 million

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Key points

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Against a background of volatile financial markets and an uncertain macroeconomic environment, ING Group’s underlying net profit in 2012 held up well at EUR 2,603 million, down 5.2% from a year earlier.

In 2012, results at the Bank were affected by higher provisions for loan losses due to weak economic and business conditions, de-risking actions and market related items. In Insurance, results were higher than in 2011 due largely to a lower impact from de-risking actions and lower market-related write downs.

In the fourth quarter of 2012, a solid result from Insurance helped boost ING Group’s underlying net profit to EUR 373 million from a loss of EUR 785 million in the last quarter last year.

The Executive Board will not propose to pay a dividend over 2012 at the annual General Meeting in May 2013.

A transformational year

Commenting on the fourth quarter results ING Group CEO Jan Hommen said: “2012 was a transformational year at ING as we worked decisively on the restructuring of the Group, preparing the Bank and Insurance companies for independent futures. In the fourth quarter we announced two major divestments of our Asian Insurance/IM businesses.

We filed the IPO registration statement for our US insurance business, and we reached an agreement with the European Commission which gives us more time and greater flexibility for restructuring. The Bank made strides in optimising its balance sheet and generating capital to meet Basel III requirements while funding a payment of EUR 1.125 billion to the Dutch state and upstreaming an additional EUR 1 billion to the Group to reduce core debt.

“Results for the year held up well, despite the sovereign debt crisis in Europe and the weak economic climate which persisted throughout 2012. Underlying net results for the Group were EUR 2,603 million, down just 5.2% from 2011, despite EUR 626 million of de-risking losses at the Bank, a EUR 175 million Dutch bank tax, and higher loan losses as the economy weakened. At Insurance, de-risking and low interest rates put pressure on investment returns, but underlying results recovered as market-related items diminished.

“As the environment around us changes, ING is also evolving as we work to meet our customers’ rapidly changing needs and to achieve operational excellence. In the Netherlands as well as in Belgium, we have made great progress in improving service and investing in IT as customers move swiftly towards mobile banking. As our business model evolves, so must our organisation. Retail Banking Netherlands is expanding the transformation programme started in 2011, leading to approximately 1,400 additional redundancies by the end of 2015 and reducing expenses by an additional EUR 120 million per annum from 2016 onwards. At ING Bank in Belgium, employee headcount is expected to decline by 1,000 FTEs by 2015, through natural attrition, leading to EUR 150 million in annual cost savings by 2015. These initiatives come on top of measures announced in Commercial Banking and Insurance Europe last quarter. Combined, all of these programmes accounted for EUR 452 million in after-tax restructuring provisions booked in 2012, but they are essential to drive future performance, reducing annual expenses by a combined EUR 1 billion by 2015.”

“Amid all of the changes we are going through, our employees have demonstrated consistent dedication and commitment to keeping our customers’ needs paramount. As we embark on 2013, the economic climate remains challenging, and we must be agile to respond quickly to the dynamic environment so that we can deliver sustainable results for the long-term benefit of all stakeholders.”

Bank

In 2012, ING Bank’s underlying result before tax was EUR 3,219 million, down 22% on EUR 4,128 million in 2011.

The bank’s 2012 result was impacted by higher loan loss provisions as a result of weak economic and business conditions, de-risking actions and negative credit valuation and debt valuation adjustments.*

For the fourth quarter of 2012, challenging economic conditions and incidental items weighed on results. ING Bank recorded an underlying result before tax of EUR 184 million, down from EUR 664 million in the fourth quarter of 2011. The quarter was affected by EUR 188 million of negative CVA/DVA adjustments* and a EUR 175 million charge for the Dutch bank tax as well as EUR 126 million in de-risking losses.

Excluding the Dutch bank tax, expenses were stable compared to last year reflecting strong cost control. They were up slightly on the last quarter.

Provisions for loan losses (risk costs) remained elevated amid the weak economic environment.

ING Bank improved its funding and balance sheet profiles, part of its Ambition 2015 priorities. The total Bank balance sheet declined following the sale of ING Direct Canada, and through the reduction of short-term professional funding and seasonally lower positions at Financial Markets.

The Bank’s funding profile improved as both customer deposits and long-term debt increased. The Bank attracted EUR 8.2 billion of net inflow of funds entrusted during the fourth quarter. Total net lending declined by EUR 2.5 billion due to moderate demand for credit and through pricing discipline.

ING Bank continued its de-risking initiatives, selling EUR 0.9 billion of mainly southern European debt equities.

Customer focus

ING Bank continued to focus on maintaining a strong relationship with customers by providing an easy to access service, innovative distribution, and offering fair and transparent pricing. During the quarter, ING’s banking businesses in the Netherlands and other parts of the world won awards. ING Private Banking won Best Private Bank in Belgium, ING Direct picked up several awards; two for its new low cost pension savings product, Living Super and one for its overall products and services, and ING-DiBa’s Interhyp in Germany was awarded the title ‘Fairest mortgage lender’ by financial magazine, Focus-Money.

Convenience in banking is a key priority for ING. In Poland, ING Bank Slaski introduced the country’s first contactless ATM machines. With a single swipe and keying in a PIN number, people are now able to withdraw money from the new ATMs in Katowice and Warsaw. It means faster withdrawals and lessens the risk of customers leaving their cards in ATM machines.

Mobile banking is very popular in both the Netherlands and Spain. ING Bank’s app in the Netherlands has now passed one million unique users (people who visit the site, maybe several times, but only one visit is recorded). Last October, IT specialists from ING’s banking businesses in Spain and the Netherlands shared their knowledge of best practices to develop a new mobile banking application feature for their respective countries.

The new feature enables payments processing for mobile banking 'apps' in both the Netherlands and Spain – it lets you pay for things with your phone. By scanning the item’s QR code, the payment screen on the 'app' is filled with the appropriate payment data.

Direct banking channels such as the internet are a very important part of ING’s bank distribution strategy, particularly in the Netherlands. So ING’s domestic banking operations were very pleased to have their local website, ING.nl, awarded as the most popular financial website in the country by Website of the Year 2012.

Insurance**

The 2012 operating result (result purely from operations) for Insurance was EUR 1,095 million, down 34% on 2011. The annual result reflected lower non-life insurance results, as a result of the recession in the Netherlands and higher total administrative expenses relative to the low cost base in 2011.

The underlying result before tax at Insurance (which includes market-related impacts) recovered strongly in 2012, as results in 2011 were severely impacted by writedowns as a result of changes to policyholder behavior assumptions on the US Closed Block VA. Furthermore, there was less impact from de-risking losses and lower impairments on debt securities in 2012.

In the fourth quarter of 2012, the Insurance underlying profit before tax improved significantly to EUR 272 million, reflecting a much lower impact from market-related items compared to the fourth quarter in 2011.

Insurance initiatives to lift sales continued to bear fruit with sales (Annual Premium Equivalent - APE) rising 12.7% on a constant currency basis. Sales at Insurance US grew 18.9%, fuelled by its retirement business. Central and Rest of Europe recorded a 13.3% increase in APE, driven by higher pension sales in Turkey and the Czech Republic. APE in the Benelux declined 18.6% due to lower sales of Individual Life products in the Netherlands and lower sales in Belgium following a reduction in guaranteed rates. Compared with the previous quarter, total Insurance sales jumped 23.6% at constant currencies, mainly attributable to higher sales at Insurance US and in Central and Rest of Europe.

Restructuring continues

ING Insurance/Investment Management’s restructuring continued apace.

In October, ING had reached an agreement to sell its life insurance, general insurance, pension and financial planning units in Hong Kong and Macau, its life insurance and investment management operations in Malaysia and Thailand, and a 33% stake in China Merchants Fund, an investment joint venture. ING completed the sale of its life insurance operations in Malaysia to AIA Group Ltd in December.

ING’s insurance and investment management business in the US took another step closer to its planned IPO with the filing of a registration statement with the US regulator, the SEC, in connection with the IPO.

ING announced a restructuring plan for its European insurance and investment management operations. This involves the acceleration of a transformation programme at Nationale-Nederlanden to sharpen its strategic focus and improve processes and systems.

Customer focus

In the quarter, Insurance received several rewards in recognition of its customer focus, which is a core component of its business strategy. Insurance Czech Republic won two insurance awards in the country’s Fincentrum Bank of the Year awards: one for its unit linked life insurance Smart product for the second consecutive year, and one for its pension fund business.

In line with ING Insurance/Investment Management’s mission to make managing and protecting finances easier for its customers, ING in the Czech Republic launched a unique breast cancer insurance product which goes beyond being a product and includes online access to information and help. The online component involves using social media to build a community for women to share health problems and to seek advice and guidance.

At ING Investment Management in the Netherlands, a new campaign was launched to raise awareness among its customers and investors generally about achieving investment outperformance while minimising risk. Dutch Olympic gold medal swimmer Ranomi Kromowidjojo and Dutch actor Thom Hoffman feature in the campaign.

ING IM’s strategy is to continuously improve performance and to produce superior products and services. At the BENCHMARK Fund of the Year Awards 2012 in December, ING IM won its third award in the Asian Bond category, taking an award for its Asian Debt Hard Currency Fund.

These awards are given to the funds that ranked highest across several performance criteria such as 1-, 3- and 5-year returns. To qualify for the award, funds must have been ranked in the top 5 amongst peers in terms of total returns for the 12 months ending 31 October 2012.

ING Insurance/Investment Management will continue to focus on providing first-class products and services to its customers, as it works towards a stand-alone future.

*CVA/DVA are adjustments to certain asset and liability items in the balance sheet that are measured at market value. CVA (on the asset side) refers to changes in counterparty credit risk, which are related to changes in the market value of derivative assets. DVA refers to changes in the market value of derivative liabilities and ING’s funding liabilities that are measured at fair value, resulting from changes in ING’s own credit spreads.

**Results have been restated to reflect that the Asia/Pacific Insurance and Investment Management businesses (and the Corporate Line results attributable to them) are now included under net result from discontinued operations. The sales process for these businesses has progressed to a stage that requires such classification under IFRS accounting.