ING Groep N : Analyst call transcript 1Q2023

Transcript Analyst Call 1Q2023

Presentation

Operator

Good morning. This is Marian welcoming you to ING's First Quarter 2023 Conference Call. Today's conference is being recorded. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements, such as statements regarding future developments in our business, expectations for our future financial performance, and any statement not including a historical fact.

Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you.

Steven van Rijswijk

Good morning and welcome to our First Quarter of 2023 Results Call. I hope that you're all well. As usual, I'm joined by our CFO Tanate Phutrakul, and our CRO, Ljiljana Čortan. I'm pleased to take you through today's presentation, and after that, we will take your questions.

We started 2023 with a very strong quarter in both our Retail and Wholesale business, by keeping focus on our customers and delivering value and demonstrating stability in a rather turbulent time for the banking sector.

We continue to record organic growth and added another 106,000 primary customers who choose ING for our superior customer experience. This is supported by our digital-onlymobile-first strategy, as evidenced in the large share of mobile-only customers.

Another achievement was the growing volume mobilised to help our wholesale banking clients transition to a more sustainable business model. At €22 billion, the volume mobilised was up by more than 25% compared to the first quarter of 2022.

In our P&L, we continue to see the benefits of the current rate environment, both on our retail customer deposits and our wholesale payments and cash management business. This comes on top of the structurally higher fee base. A strong performance on total income with year-on-year growth of 23%.

For the quarter, we realised a strong 13% ROE, increasing our four-quarter rolling average ROE to 9.7%.

All of this has enabled us to announce an additional distribution in the form of a €1.5 billion share buyback, which will kick off tomorrow.

We accomplished all this in another exceptional quarter. Although, honestly, there has not been a dull moment since I became CEO almost three years ago, and I'm proud that our performance has been strong throughout these years, and I'm confident we will continue to deliver our value.

This confidence is underpinned by my belief that we have the right strategic focus and a fortress-like balance sheet with a strong funding and liquidity profile, which provides a robust foundation to build on. Before we go on to the financial results, I want to spend some time on these topics.

Slide three shows our strategic priorities and focus for 2023.

One priority is to deliver a superior customer experience, a key differentiator for customer growth. Our other priority is sustainability, where an important aim is to support our clients in their transition to more sustainable business models.

A superior customer experience means easy, relevant, personal, and instant. And a key enabler for this is the seamless digital

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delivery with minimal human intervention. This requires straight-through processing of customer journeys. Getting a mortgage is an important customer journey where being quick and predictable can be more important than price. Increasing the level of STP (straight through processing) helps us with that. For example, in Germany, we have reduced the time-to-yes for brokers from 4 to 2 days. In Italy, we improved all aspects of the mortgage process with a faster time-to-yes and time-to-cash and a higher first-time-right.

Streamlining how we interact with our customers is another important element of our customer experience. As an increasing part of that interaction is through chatbots, we use AI to make the interaction more effective and a more personalised experience.

For KYC, the foundation is in place, now the focus is on how we can be more effective and efficient. And aside from combining efforts with other banks and supervisors, the focus is on working smarter internally. For example, grouping the assessment and documentation of multiple individual transaction alerts for one single client, which broadens the view on a client's behaviour and increases the number of alerts that can be handled by one specialist.

On female representation, last year we set a target of at least 30% by 2025 for our top 400 leaders, and we have extended that target to at least 35% by 2028. To reach that, we've also set a target to increase the share of women in the group of around 5000 employees just below top management, from 27% at 2022 to at least 30% by 2025.

In Sustainability, the financing of renewable energy is an important focus area. As the shift to renewable energy needs to go faster, we set a target on new loan growth for renewable energy. In 2022 this book grew 10% and we aim to continue this growing trend. We combined this with further restricting the financing of new oil and gas fields, by extending the existing restrictions for upstream to the infrastructure activities that unlock new fields.

Finally, we work to broaden the scope of Terra, and like we have done for steel, we are part of a working group to develop a framework for aluminium. In oil and gas, we are developing metrics and targets for mid- and downstream, and we will cover an additional part of the value chain by including Trade and Commodity Finance in our reduction targets in 2024.

Then to our strong funding and liquidity profile on slide four. On the funding side, 60% of our balance sheet consists of customer deposits. The vast majority comes from our retail customers who keep €549 billion in deposits with ING. This is a highly granular deposit book as it represents a large retail customer base spread over ten countries. 73% of these deposits are insured, forming a stable basis, which has been steadily growing over the years. More details can be found in the appendix of this slide deck.

As you can see from the recent NII development, in a positive rate environment our deposit base has a material embedded value that will support our revenues in the coming years.

On the liquidity side, our Group LCR stood at 134% on a four-quarter rolling basis and at 137% at the end of the first quarter of 2023. And these ratios exclude any local liquidity surpluses that are not transferable across border and are based on a sizable High Quality Liquid Assets book of €187 billion. And in addition to HQLA, we have large amounts of readily available ECB- eligible retained assets and other non-HQLA liquid assets, bringing the total level of available liquidity resources to €268 billion. In combination with our strong and stable deposit book, we feel very comfortable with this level of liquidity.

Then I move to slide five. Over the past years, we have built a solid track record of delivering an attractive return for our shareholders. ING continues to be a strong investment case as the best European universal bank with consistent strategy execution, income growth, discipline on expenses, and strong asset quality.

Combined with our strong capital position, we are in a position to return capital to our shareholders. Including the share buyback we announced today, our shareholder return for 2023 already stands at an attractive 8%.

Slide six shows our financial targets for 2025 and our first quarter 2023 performance. On fee growth, in daily banking we see further room to increase or introduce fees. In investment products the continued growth of accounts is a strong base for fee growth when market confidence improves, and this confidence will also support growth of lending fees.

Higher fees will support total income growth, though for 2023 the main driver will continue to be liability NII. And while there are some uncertainties such as further central bank rate increases, deposit tracking, and customer behaviour, the tailwind from liabilities will continue.

We expect total income growth of more than 10% for 2023 with lower growth in 2024 and 2025, reflecting the flattening of

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the curve. And this income growth will support an improvement of our cost-income ratio. On the cost side, we see the pressure from high inflation and we continue to invest in our business and to execute our strategy, which will bring benefits in the longer term.

On our CET1 ratio, we intend to move to our target CET1 ratio of around 12.5% through our 50% pay-out of resilient net profit combined with additional distributions, in roughly equal steps.

On return on equity, with the targeted development of the cost-income ratio, our low through-the-cycle risk costs and a CET1 ratio target of around 12.5%, we have confidence we will reach our targeted 12% ROE by 2025.

Now we're going to move on to the first quarter results on slide eight. The first quarter of this year showed a strong performance of our pre-provision profit. When excluding volatile items and regulatory costs, pre-provision profit was up 31% year-on-year and 11% higher quarter-on-quarter. And I will address the underlying P&L lines in the following slides.

Slide nine shows the continued strong development of NII. This was driven by liability NII, reflecting rate increases, limited deposit tracking, and a continued deposit inflow. The positive impact was also clearly visible in Wholesale Banking, with our Payments and Cash Management business benefiting from higher interest rates.

In lending NII, we saw year-on-year pressure on mortgage margins due to rising interest rates, as client rates generally track higher funding costs with a delay, as well as declining income from prepayment penalties. Quarter-on-quarter, these effects stabilised, and lending margins slightly increased.

Furthermore, on both comparable quarters, we saw the impact of a temporary shift of NII to Other income in Treasury and Financial Markets. In Treasury, this reflected activities to benefit from prevailing favourable FX swap interest rate differentials, while in Financial Markets, this was due to the impact of rising rates on hedge positions. And as I mentioned on the previous slide, the boost in Other income was further driven by Financial Markets benefiting from good client flow and market volatility.

Excluding the net TLTRO impact and the Polish mortgage moratorium, our net interest margin for the quarter increased by 11 basis points to 159 basis points, mainly reflecting the higher NII on liabilities.

Slide ten shows net core lending growth. We are pleased to continue to support economic growth and our clients in meeting their demand across our businesses and regions.

In Retail, mortgages continued to grow, although at a lower pace, reflecting an overall slowdown of demand, driven by uncertainty and higher interest rates. Higher net core lending in Business Lending was mainly visible in Belgium.

In Wholesale Banking, loan growth was visible in Lending, which was more than offset by lower utilisation in Working Capital Solutions and lower lending volume in Trade & Commodity Finance, reflecting lower commodity prices.

Going forward, with still heightened macroeconomic uncertainty, we expect loan demand to remain subdued.

Net customer deposits growth was €1.3 billion, fully due to Retail and mainly reflecting inflows in Poland, Spain, Belgium, and Germany, partly offset by an outflow in the Netherlands, mainly due to operational payments made by our business clients and an internal shift from savings to Assets Under Management from our private banking customers. Assets Under Management further increased driven by external flows. Wholesale Banking recorded a small outflow visible in Financial Markets.

Turning to fees on page 11, we showed resilience despite uncertainty continuing to affect the appetite for both investments and lending. Compared to a very high fee level in the first quarter of 2022, fee income was down year-on-year. Daily Banking fees continued to grow, this quarter by 13%, and this reflected growth in primary customers, the increase in payment package fees and new service fees. Lending fees were lower year-on-year, mainly due to lower demand for mortgages. For investment product fees, we continue to see the effect of lower stock markets and less trading activity, although the opening of new investment accounts continued and AUM increased.

Sequentially, fees were up, reflecting growth in Financial Markets, and higher fees in investment products and Daily Banking in Retail. Lending fees in Wholesale Banking were lower after a strong fourth quarter.

On slide 12, excluding regulatory costs and incidental items, operating expenses were up, mainly visible in staff costs due to the full-year effect of high inflation coming in via salary indexation and CLA increases.

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This included a 10.5% automatic indexation in Belgium and an accrual for the CLA increase in the Netherlands. And furthermore, there was a one-off energy payment in Germany and a more frontloaded accrual of variable remuneration in Wholesale Banking. Next to this, legal provisions and energy costs were at elevated levels in the first quarter of 2023.

We also have to continue to invest in our business. This includes marketing campaigns as well as digitalising customer journeys. We do this to ensure we keep increasing the number of primary customers, thereby expanding the base for future growth.

At the same time, as I mentioned at the start of the presentation, investing to be more digital, to increase STP, and to make processes smarter helps us to be more efficient and to reduce our cost-to-serve.

Taking all this into account, and with inflation rates declining, we expect cost growth for 2023 to be more subdued than the year-on-year development suggests.

Regulatory costs were down year-on-year, mainly due to a lower SRF contribution. The quarter-on-quarter increase reflects the full payment of several annual contributions due in the first quarter of the year.

Then we move on to risk loss on the next slide, which were €152 million this quarter, or nine basis points of average customer lending, and this included a €67 million increase of management overlays, bringing the total of management overlays built up at the end of Q1 to €521 million.

Risk cost in Wholesale Banking included a further release of €118 million in stage 2 for the Russian book, reflecting a further reduction of our Russia-related exposure, which we will continue to bring down.

We saw some collective provisioning in Retail Banking, which included additions related to model adjustments and consumer lending, while we also booked an additional provision related to Swiss franc-indexed mortgages in Poland.

The lower stage 2 ratio mainly reflects the decreasing Russia-related exposure and the stage 3 ratio remained low at 1.4%. All- in-all, a very benign quarter in risk costs, and we remain comfortable with the quality of our loan book.

Slide 14 shows our CET1 ratio, which increased to a very strong 14.8%. CET1 capital was €600 million higher, mainly due to the inclusion of 50% of resilient net profit for the quarter. Furthermore, RWA were €4.1 billion lower, including minus 1.4 billion of FX impacts.

Credit risk-weighted assets were down when excluding FX impacts, reflecting an improvement of the overall profile of our loan book and of course the lower Russia-related exposure. Operational risk-weighted assets were flat, while market risk-weighted assets were slightly higher.

On our distribution plans, the final 2022 dividend was approved at our AGM and has been paid out on the 5th of May. And in line with our ambition to converge to our CET1 ratio ambition, we will distribute an additional €1.5 billion in the form of a share buyback, which will start on the 12th of May, which means tomorrow.

This additional distribution will bring our CET1 ratio to 14.4% on a pro forma basis. I'm pleased that we take this additional step in returning capital to our shareholders and optimise our capital structure. We expect to further update the market on our distribution plans at the third quarter of 2023 results presentation.

We wrap up with the highlights. Overall, in a turbulent quarter, we have delivered a very strong start of 2023. Our people make a big effort every day to build a superior experience for our customers and to support the transition to a more sustainable society. We see these efforts positively reflected in primary customer numbers and volumes mobilised in transition finance.

Our financial results show that accelerating NII momentum is a clear tailwind, while fee income has proven to be resilient. Expenses reflected the inflationary pressure, especially on staff costs, but also on our continued investments to realise our strategy.

Our capital position remains very strong and we have announced an additional €1.5 billion distribution. Going forward, I'm confident that we will continue to deliver robust financial results and successfully execute our strategy. And with that, I would like to move on to Q&A. Operator.

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Q&A

Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two. In the interest of time, we kindly ask each analyst to limit yourself to two questions only. Again, it's star one to ask a question. The first question comes from Raul Sinha from JP Morgan.

Raul Sinha (JP Morgan)

Good morning, Steven. Good morning, everybody. Thanks very much for taking my questions. I guess the first one is around capital distributions. Thank you for the new slide on the withholding tax mechanics and also for the clarity on the next decision date.

I guess my question is around how did you decide the size - is this the right size of the buyback? Just, you know, it looks like you seem to have a good problem in that your capital ratio is not changing much even after a 50% dividend accrual and the share buyback. So, are you expecting a rebound in RWA growth or capital consumption later in the year? I guess they're all related.

And the second question is just on costs. You're at 55% cost-income in Q1 and obviously, you're not reiterating this 55-56% that you said last quarter for the year. I was just wondering how to read this. It looks like it's a bit easier now for you to get to your 50-52%. And is that why you're not reiterating the 55-56%, because you're already at the lower end? Thank you.

Steven van Rijswijk

Okay. Thank you, Raul. I will answer the question on costs and Tanate will answer the question on the decision on how we decide the size of share buybacks or capital distributions.

On cost, and I said that during my presentation - we saw the quarter-on-quarter cost rise by 10.7%. That had to do with, first of all, the fact that there were salary indexations and the CLA that came in this quarter, but were not there basically at that level in the first quarter of last year. Two, we had a number of specific cost items that we moved forward, such as the CLA agreement that we have for later this year and some other costs in Wholesale Banking, as well as a legal provision that we took. So, we took some additional costs in that sense in the first quarter and we continue to invest in marketing and in our digital experience.

And so, we say that basically, therefore, this means that you should not take that 10.7% and extrapolate that over the year. We've previously given a cost guidance of 55% to 56%, but actually, we do not currently see the 55% as a floor. That should give you some guidance.

Raul Sinha (JP Morgan)

Thank you.

Tanate Phutrakul

On capital, I think we look at three things. The most important of which is the level of capital generation in our franchise. That would be the first factor in looking at capital. The second we look at is stress testing, making sure that we capture all the macroeconomic situations into our numbers when determining the level of additional distribution. And then we look at any specific event risk that may occur at any point.

And the other thing is really the fact that we have split our capital management announcements, in terms of providing this clarity in Q1, and based on certain calibration of outlook another announcement in Q3. So that's a bit how we do the decision- making around the level of capital distribution.

Rahul Sinha (JP Morgan)

Thanks very much. And RWA growth, are you expecting a rebound?

Tanate Phutrakul

At this point in time, no. The level of negative risk migration, despite the situation, remains benign.

Operator

The next question comes from Jon Peace from Credit Suisse.

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