ING Investor Day 2012: Balance sheet optimisation under Basel III


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by Koos Timmermans, Vice Chairman ING Bank

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ING Investor Day 2012: Balance sheet optimisation under Basel III

  1. 1. Balance sheet optimisation underBasel IIIING Investor DayKoos TimmermansVice Chairman ING BankAmsterdam – 13 January 2012
  2. 2. Priorities 1 Transition to Basel III 2 Balance sheet optimisation 3 Return on EquityING Investor Day - 13 January 2012 2
  3. 3. Strategy for the coming years is based on twophases2012 End 2013 2015Bank: Transition to Basel III Bank Standalone• Manage through the crisis • Grow deposits across the bank• Limit B/S and RWA growth  Basel III • Evolve ING Direct units towards• Execute B/S optimisation requirements mature business model using loans from Commercial Banking• Invest where needed to achieve met operational excellence • Grow the franchise without• Further simplify the business  EC growing the balance sheet portfolio and the organisation restructuring • Resume dividend after• Prudent approach to capital and and restructuring and State funding given unstable market Repayment of repayment conditions Dutch State completeING Investor Day - 13 January 2012 3
  4. 4. ING has a good starting position to reach Basel IIIcapital targets by 2013 Targets Actions Core Tier 1 • To be reached in 2013 9.6% • Strong continued capital 6.5% ≥10% generation and RWA 3Q08 3Q11 containment Leverage ratio • To be reached in 2013 • Further reduction via 57 < 25 29 balance sheet optimisation 3Q08 3Q11 LCR1 • To be reached in 2015 ~90% • Further optimising the > 100% investment portfolio 3Q11 • Implementation as of 2015 NSFR1 • Implementation expected as of 2018 ~85% > 100% • Uncertainty around definitions1 Excluding ING Direct US 3Q11 ING Investor Day - 13 January 2012 4
  5. 5. Core Tier 1 target of >10% to be reached in 2013 1.0% -0.3% -0.8% 9.6% 9.5% 10.0% 10.0% Sept. 2011 Divest- Basel 2.5 Basel III Capital 2013 2015 ments* GenerationStrong focus on core Tier 1• Strong earnings generation should enable ING to grow into Basel III targets before the end of 2013• A further review of non-core assets in the Bank may also accelerate repayment of the State• Dividend payments can be resumed post State repayment and restructuring* Divestments include part of REIM and ING Direct USAING Investor Day - 13 January 2012 5
  6. 6. Basel III capital impact a manageable 80 bpsby end of 2013RWA impact implemented in 2013* bps IFRS assets below 15% threshold -20 • Basel III impact in 2013 is expected to be -80 bps CVA and correlation -50 Mgt • This excludes currently identified Other RWA -5 actions management actions of +25 bpsCapital impact in 2013* 25 bps by 2013 -55 bps • Currently identified management AFS Revaluation reserve +10 actions include adaption and Minority interest -15 de-risking of Financial Markets platform Total 2013 -80 • -60 bps is expected to be phasedAdditional phase 2014-2018* in during the period 2014-2018 AFS Revaluation reserve and based on figures as of 30 September 2011 Pension fund assets • Total Basel III impact before Expected loss -12 bps per annum management actions amounts to CVA derivatives 2014-2018 -140 bps Intangibles • This does not incorporate 25 bps DTA impact, which is expected to be utilised before the end of 2013* Estimated impact based on figures as of 30 September 2011ING Investor Day - 13 January 2012 6
  7. 7. Further optimising the investment portfolio willsupport the LCRAutomatically growing into LCR1 target Based on indicative definition NSFR1 ~85% ~90% >100% ~85% >100% 3Q11 2015 3Q11 2018• Liquidity coverage ratio will force banks to hold • Net Stable Funding Ratio metric has an uncertain more cash, government bonds and covered status and is not expected to be implemented bonds before 2018:• Liquid asset definition is currently very restrictive, • BIS scheduled to be implemented with a which will likely impact margins for the industry binding minimum ratio• To increase the LCR to the targeted level, we will • CRDIV drafts of July 2011 do not contain • Reduce short-term funding NSFR calibration nor minimum requirement • Increase long-term funding • NSFR addressed via target balance sheet where long term lending and investment assets require • Replace maturing non-eligible investment stable funding in the form of funds entrusted, portfolio with eligible assets equity and long-term debt• Regulatory observation period has started. Revisions to LCR to be made by mid-2013. Implemented in 20151 Excluding ING Direct US ING Investor Day - 13 January 2012 7
  8. 8. Priorities 1 Transition to Basel III 2 Balance sheet optimisation 3 Return on EquityING Investor Day - 13 January 2012 8
  9. 9. Basel III is a catalyst to manage our balance sheet more efficiently30 September 2011 EUR 974 bln Other* Other* Banks Banks Assets Liabilities Increasing capital requirements will putLiquidity Coverage Ratio requires at FV at FV pressure on returnslarger holdings of government bonds Debt Equity securities LT & STand other liquid assets debt NSFR requires more long-term funding, putting pressure on margins Customer Customer lending deposits Increasing competition for savings will put pressure on marginsLimits on total asset leverageintroduced Assets Liabilities • Regulatory changes will put pressure on earnings and returns • We can offset part of the impact of Basel III by managing our balance sheet more efficiently* Other includes among others asset/liabilities held for sale ING Investor Day - 13 January 2012 9
  10. 10. While some constraints require an optimisation ofthe product mix…Basel III impact varying for different asset classes ROE Funding Leverage LCR DGA1 LT funding Mortgages Mid- corporate/SME lending Lending Corporates Specialised lending Trading assets Liquid investments1 DGA = Deposit gathering abilityNote: Constraints may differ per countryING Investor Day - 13 January 2012 10
  11. 11. Balance sheet can also be optimisedgeographically to improve efficiency Netherlands NV Belgium Germany ING Direct1 Funding gap due in part to international Funding Funding surplus Funding surplus Funding surplus assets being booked in Dutch NV Long liquidity in domestic bank Liquidity compensating for Long liquidity Long liquidity Long liquidity (CRDII) shorter liquidity in international banking activities Adequate capital on Higher capital on Higher capital on Branches low; Capital stand-alone basis local statutory basis local statutory basis Subsidiaries high1 Excluding GermanyING Investor Day - 13 January 2012 11
  12. 12. ING Bank has already significantly changed thebalance sheet Asset base carefully30 September 2008 30 September 2011 managed down EUR 1,076 bln EUR 974 bln • Balance sheet reduction Other Other Other Other achieved primarily through Banks Banks Banks Banks reduction of investment Assets Assets Liabilities portfolio and trading assets at FV Liabilities at FV at FV Debt at FV Debt Equity • ABS exposure declined Equity securities LT & ST securities LT & ST strongly debt debt • Including divestments of REIM and ING Direct US, Customer Customer Customer Customer total assets would be EUR lending deposits lending deposits 915 bln and leverage would be at 27 and core Tier 1 ratio at 10.6% Assets Liabilities Assets Liabilities CT1 6.5% CT1 9.6% RoE1 10.5% RoE1 11.4% LtD 1.04 LtD 1.15 Leverage 56.5 Leverage 28.81 Based on underlying net results and IFRS equity ING Investor Day - 13 January 2012 12
  13. 13. But there is further room for optimisation while keeping balance sheet growth flat30 September 20111 Indicative 2015 Optimisation ~ EUR 900 bln ~ EUR 900 bln Liabilities Other Other Other Other Banks • Continue strong deposit Banks Banks Banks Assets Liabilities growth Assets Liabilities at FV at FV at FV at FV Equity • Reduce short-term funding Debt Debt Equity securities LT & ST debt • Conservative approach in securities LT & ST debt long-term funding Assets Customer Customer Customer Customer • Replace low yielding assets lending deposits lending deposits with customer lending • Transform investment book into liquidity portfolio Assets Liabilities Assets Liabilities • Reduce (non strategic) trading CT1 10.6% CT1 ≥10% assets RoE2 10.0% RoE2 10-13% LCR ~90% LCR > 100% NSFR ~85% NSFR > 100% LtD 1.15 LtD < 1.1 Leverage 27 Leverage <251 Proforma excluding ING Direct US and part of REIM2 Based on underlying net results and IFRS equity ING Investor Day - 13 January 2012 13
  14. 14. Key priorities for balance sheet optimisation • Continue strong deposit growth at ING Direct and Retail Banking units Continue strong deposit • Increase market share in corporate and mid-corporate deposits by investing to growth improve Payments & Cash Management offering • Structurally reduce use of short-term professional funding Reduce short-term • Continue to increase and term out long-term funding as market conditions permit funding • Maintain diversified funding mix and conservative maturity ladder Replace • Reduce non-strategic trading assets to make room for growth in customer lending low-yielding • Evolve customer loan book towards higher-return businesses while keeping low assets with risk profile customer lending • Prudently re-price lending to reflect the higher cost of capital Transform • Maintain investment portfolio only as required for liquidity purposes investment book • Further shift to high-quality liquid assets driven by favourable maturity profile into liquidity portfolio • Eliminate cross-border inefficiencies by creating self-sustainable balance sheets Balance sheet which are locally funded integration • Income diversification enabling a more competitive offering for retail liabilitiesING Investor Day - 13 January 2012 14
  15. 15. Deposits – Continue strong deposit generationDeposit growth Invest in PCM network and increase corporate deposits EUR 470 bln ~ EUR 540 bln • Intensifying relationship management in Payment and Cash Management (PCM) services for (mid-)corporate CAGR clients 10 ~ 3% • Clear targets for commercial sales force 8 • Going for high liquidity value deposits 170 • Investments in trade and flow products (fee generating, low 151 capital intensity) • Supporting core Benelux franchise and network capabilities • Supporting deposit gathering by cross-selling 360 311 • Investing EUR 80 million in the coming 4 years Continue strong deposit growth in Retail Banking 3Q11 Indicative 2015 • Increase cross-buy by transforming ING Direct into a full retail bank Other deposits • Further innovative product offerings Corporate deposits • Introduce new savings products Retail deposits • Growth is largely driven by Germany, Belgium and NetherlandsING Investor Day - 13 January 2012 15
  16. 16. Reduction of short-term fundingReduce short-term professional funding Short-term debt in issueEUR bln • Short-term funding partly opportunistically used for short-term assets • Reliance on short-term funding is modest in relation to size and duration of total balance sheet (~5%) and versus EUR 155 bln eligible assets 55 • Both short-term assets and short-term funding will be reduced as we optimise our balance sheet: 30 • Reduction of opportunistic trading opportunities • Further increase of client deposits and long- 3Q11 Indicative 2015 term debt issuanceLowering amounts due to banks Amounts due to banksEUR bln • ING Bank is seen as a safe haven and strong credit, which is why other Financial Institutions deposited money with ING 87 • The excess versus EUR 55 bln ‘Amounts due from 60 banks’ was largely placed with Central Banks • Exposure will be reduced to optimise the balance 3Q11 Indicative 2015 sheet and reduce leverageING Investor Day - 13 January 2012 16
  17. 17. Conservative approach towards long-term fundingwith limited refinancing needsLong-term funding increase reflects Maintaining a diversified funding mix andconservative approach conservative maturity ladder EUR 96 bln ~ EUR 105 bln • ING Bank partly pre-financed 2012 funding needs 15 by issuing EUR 23 bln in 2011 versus EUR 10.7 20 bln maturing in full-year 2011 76 90 • ING Bank has EUR 18 bln of debt with tenor longer than 1 year maturing in 2012 • Year-to-date, ING Bank has already successfully 3Q11 Indicative 2015 issued EUR 2.75 bln Long-term debt in issue Subordinated debtLimiting refinancing needs (EUR mln)25,00020,00015,00010,000 5,000 0 2011 2012 2013 2014 2015 2016 2017 2018 >2018 Senior debt State guaranteed Lower Tier-2 Covered bonds RMBSING Investor Day - 13 January 2012 17
  18. 18. Reduce non-strategic assetsAssets at fair value Reduce repo exposure EUR 151 bln • Focus on client-driven business 13 • Lowering exposure to professional markets by reducing repo intermediation • Impacts both assets and liabilities 49 ~ EUR 100 bln 10 Reduce derivative exposure 30 • Regulatory changes impose a stricter capital regime for CVA under Basel III 89 • Product re-design can help mitigate the adverse 60 impact which will result in lower use of derivatives • Interest rates expected to increase post-crisis in the coming years to 2015 (more normalised 3Q11 Indicative 2015 circumstances), which will reduce the market value of the derivatives Other trading assets Reverse repos Other • Impacts both assets and liabilitiesING Investor Day - 13 January 2012 18
  19. 19. Transforming the investment book into a liquidityportfolioInvestment portfolio to be maintained for NIM not significantly affected whileliquidity purposes only liquidity values improve • NIM preserved due to low historical credit spreadEUR 115 bln • EUR 68 bln will mature before 2016 ~ EUR 100 bln • Re-investments in liquid assets deliver higher 17 Non-Basel 5 liquidity value III liquid Non-Basel 19 5 III liquid Investment portfolio actively transformed 25 • Proceeds used to: 28 • Fund client business • Redeem wholesale funding 65 • Re-invest in covered bonds Level Level 51 1+2 1+2 Pro-actively reduced periphery sovereign exposure and ABS • EUR 4 bln GIIPS sovereign sold in 2011 3Q2011 Indicative 2015 • GIIPS exposure further reduced in 4Q11 by EUR 1.1 bln Government bonds Covered bonds • EUR 4 blon ABS matured in 2011 Financials/Corporates ABS • EUR 0.6 bln ABS sold, preventing EUR 2.5 bln RWA migrationING Investor Day - 13 January 2012 19
  20. 20. Grow customer lendingProportion customer lending increasing Selective shift to higher-yielding assets ~ EUR ~ EUR • Balance sheet optimisation will allow us to 900 bln 900 bln continue to support our customers and grow our loan portfolio without growing the 36% balance sheet 41% • Targeting growth in long-term assets at shorter durations Replacing • Mortgage: non-strategic • Mainly grow in our home markets 64% trading assets by 59% higher-yielding • Divestment of WestlandUtrecht Bank customer lending should reduce mortgage portfolio of ING Bank • Focus on growing in key market and product positions with high return 3Q11 Indicative businesses and attractive risk / reward 2015 characteristics such as Structured Finance • Continue growth in SME and mid-corporate markets by using our international networkING Investor Day - 13 January 2012 20
  21. 21. Balance sheet integration to result in higher returnBalance sheet integration Eliminate cross-border inefficiencies• Align capital, assets and liabilities • Asset and liability generation to create locally• Reducing low-yielding investments with own- sustainable balance sheets originated assets to optimise returns • Income diversification enables more• Balanced growth in Commercial Banking competitive offering for retail liabilities assets via organic growth and selected portfolio • Diversified income drivers offering the full Retail transfers and Commercial Banking product rangeAssets Liabilities • Balance sheet integration Commercial Banking Commercial initiatives have delivered assets Banking EUR 23 bln and a further assets EUR 30 bln targeted Retail Deposits Deposits assets Retail • An optimised balance assets sheet should result in a Investment ST funding ST funding higher return on assets portfolio Investment • Within regulatory portfolio LT funding LT funding Money constraints market Money market Equity Equity 2011 Optimised 2011 OptimisedING Investor Day - 13 January 2012 21
  22. 22. Priorities 1 Transition to Basel III 2 Balance sheet optimisation 3 Return on EquityING Investor Day - 13 January 2012 22
  23. 23. An optimised balance sheet should result in anattractive ROE of 10-13% under Basel III Balance Sheet X Interest Margin ~ Income1 C/I - 50-53% Risk Expenses profile - 40-45 RWA Risk Costs bps/RWA - Leverage CT1 <25 Tax ≥10% = Capital ROE2 Result 10-13%1 Income includes interest, commission and other income2 Based on IFRS equityING Investor Day - 13 January 2012 23
  24. 24. Basel III will put pressure on margins in the shortterm until assets re-priceLonger-term NIM should increase to 140-145 bps 3 bps 140-145 bps 4 bps 137 bps -3 bps 6 bps -4 bps 3Q11 Direct USA Higher funding Optimilisation Asset re-pricing Other Indicative 2015 costs and volume growthBalance sheet optimisation and re-pricing to support NIM improvement• In short term, margins are expected to come under pressure as funding costs and deposit rates increase• Over time that should be offset as low-yielding trading assets are replaced by higher-yielding customer lending, and as assets are re-pricing to reflect higher capital and funding costsING Investor Day - 13 January 2012 24
  25. 25. Repricing and deleveraging are supportive for NIMReplacing low yielding trading assets Re-pricing mostly in business lendingwith higher yielding customer lending • Pricing discipline (centralised pricing• Historically, repos and derivatives are model) for new production and existing generating 2-3 bps of net interest income portfolio• Replacing (part of) these activities with • Review of non-core (low returning) client customer lending will result in an relations estimated 6 bps net interest margin uplift • In Structured Finance, pricing is increasing again since June 2011Other positive factors• The investment book was largely built up Run-off loan book in years where yields were low (~ 11 bps (by contractual maturity) on average) Loan book (%, September 2011) ~ 55%• Replacing these assets will result in a comparable spread and higher liquidity ~ 15% ~ 25% values ~5%• Higher retained earnings to meet higher capital requirements will earn an additional 2011 2012 2 -5 years over 5 margin yearsING Investor Day - 13 January 2012 25
  26. 26. Optimised balance sheet still translates into40-45 bps loan loss guidanceGood risk profile Risk costs at 48 bps of average RWA• Conservative risk approach as risk costs declined 120 (bps of RWA) while coverage ratio improved: 80 • Risk modelling 87 40-45 bps • Underwriting practices 40 52 48 • Portfolio management 40 0 • Collection and arrears -40• Regional diversification: 2008 2009 2010 9M11 • Larger lending exposure to developed Gross additions Releases Net additions countriesLoan loss guidance unchanged at 40-45 ING Bank coverage ratio (EUR mln, %)bps of RWA over the cycle 16,000 50%• Selective shift to higher-yielding assets 45% 12,000 (e.g. Structured Finance) 40% 8,000 35%• RWA to increase due to Basel III 30% 4,000• Risk costs guidance maintained at 40-45 bps 25% over the cycle 0 20% 4Q08 4Q09 4Q10 3Q11 Provisioned loans Total provisions Coverage ratioING Investor Day - 13 January 2012 26
  27. 27. Risk costs may increase in the short-termbecause of economic uncertaintyUncertain economic environment Muted outlook Eurozone GDP (%, YoY)1• Very uncertain economic outlook for GDP 1.8% growth in EU, US, Asia 1.5% 1.1%• Volatility in financial markets• Sovereign debt crisis ongoing -0.4% 2010 2011F 2012F 2013FEarly signs of weakening in the same portfolios as earlier in the crisis2 NPL NPL 1.0% 1.0% NPL NPL 147 155 4.1% NPL NPL 2.0% 2.2% NPL 7.2% 5.8% 65 54 41 33 19 Dutch Other SME SF GL REF Leasing mortgages mortgages1 ING Economics Bureau2 Based on credit outstandingING Investor Day - 13 January 2012 27
  28. 28. An optimised balance sheet would have higherearnings and less leverage Assets • Balance sheet to remain stable NIM/assets • Re-pricing and deleveraging to support NIM to 140-145 bps C/I • Cost/income ratio to decline to 50-53% in 2015 Core Tier 1 • Above ≥10% in 2013 RoE1 • Return on Equity to be in the range of 10-13% over the cycle LtD • Loan to Deposit ratio to decline to below 1.10 LCR • Liquidity coverage ratio to move >100% in 2015 Leverage • Leverage to decline below 251 Based on IFRS equityING Investor Day - 13 January 2012 28
  29. 29. Balance sheet optimisation has been translatedinto KPIs to guide business line management Maximise Capital Generation • Increase profitability while minimising RWA growth Core Tier 1 ≥10% • Capital generation to fund repayment to Dutch State, grow into Basel III capital requirements Increase Efficiency • Continue to improve efficiency through strict cost control and focus on Cost / Income operational excellence 50-53% • Re-price assets where possible and diversify income Improve Local Funding Profiles • Grow deposit base in Retail and Commercial Banking Loan to Deposit <1.1 • Optimise balance sheet by bringing assets to funding and capital-rich countries Increase Returns • Optimise returns by allocating capital to higher-return businesses and ROE ensuring pricing discipline 10-13% • Mitigate impact of Basel III on RWA where possibleING Investor Day - 13 January 2012 29
  30. 30. DisclaimerING Group’s Annual Accounts are prepared in accordance with International Financial Reporting Standardsas adopted by the European Union (‘IFRS-EU’).In preparing the financial information in this document, the same accounting principles are applied as in the3Q2011 ING Group Interim Accounts. All figures in this document are unaudited. Small differences arepossible in the tables due to rounding.Certain of the statements contained herein are not historical facts, including, without limitation, certainstatements made of future expectations and other forward-looking statements that are based onmanagement’s current views and assumptions and involve known and unknown risks and uncertainties thatcould cause actual results, performance or events to differ materially from those expressed or implied insuch statements. Actual results, performance or events may differ materially from those in such statementsdue to, without limitation: (1) changes in general economic conditions, in particular economic conditions inING’s core markets, (2) changes in performance of financial markets, including developing markets, (3) theimplementation of ING’s restructuring plan to separate banking and insurance operations, (4) changes inthe availability of, and costs associated with, sources of liquidity such as interbank funding, as well asconditions in the credit markets generally, including changes in borrower and counterparty creditworthiness,(5) the frequency and severity of insured loss events, (6) changes affecting mortality and morbidity levelsand trends, (7) changes affecting persistency levels, (8) changes affecting interest rate levels, (9) changesaffecting currency exchange rates, (10) changes in general competitive factors, (11) changes in laws andregulations, (12) changes in the policies of governments and/or regulatory authorities, (13) conclusions withregard to purchase accounting assumptions and methodologies, (14) changes in ownership that couldaffect the future availability to us of net operating loss, net capital and built-in loss carry forwards, and (15)ING’s ability to achieve projected operational synergies. ING assumes no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information or for any other reason. Thisdocument, and any other document or presentation to which it refers, do not constitute an offer to sell, or asolicitation of an offer to buy, any Investor Day - 13 January 2012 30