Ing Groep NV Q3 FY2021 Earnings Call

Good morning. This is Anita Hila, welcoming you to ING's Q3 2021 Conference Call. 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 involving 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 statements 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.

Thank you, operator. Good morning, and welcome to the third quarter '21 results call. I hope you're all well. I'm joined by our CFO, Tanate Phutrakul, and our COO, Ljiljana Cortan. I'm pleased to guide you through today's presentation. After that, we will take your questions. As we are in November reflecting on '21 so far, I see two significant themes. One is our adaptation to COVID-19 and the effect of economies closing down and rebounding quickly. The second theme is climate change and the urgent need to accelerate actions towards transitioning to a low-carbon society. We support this acceleration where we can make the most impact as a bank, primarily through assisting our clients in their transition. Now, regarding our quarterly results. Our pre-provision result was strong, with continued robust performance in fees, resilient net interest income, and effective cost management. I’m pleased that we report such impressive results despite the challenges to liability income. Higher swap rates are encouraging; however, as I mentioned earlier, the positive effects take time to materialize, and overall rates remain negative. We will continue to grow in lending and mortgages. On the business front, we observed some recovery in demand from mid-corporates, while repayments in Wholesale Banking were elevated. Year-to-date, we are experiencing an annualized 3.8% net core lending growth, in line with our loan growth ambitions, though we see room for improvement in the business side. Risk costs were €39 million, reflecting part of the management overlays applied in the previous quarter, related to strong GDP forecasts and better risk indicators in our loan book. Overall, asset quality remains robust, with limited risk costs in individual instances and a low Stage 3 ratio of 1.5%. We are closely monitoring our portfolio, especially with ongoing supply chain issues and rising prices. Our CET1 ratio is 15.8%, with 50% of the third quarter net profit earmarked for future distribution. Although not a third quarter event, it's important to note that we paid out a €0.48 dividend in October and initiated a share buyback program, which is progressing well. Before moving to this quarter's figures, I want to discuss our commitment to the green transition and our strong performance in challenging times. Climate action needs an urgent acceleration, and we continue our efforts by reducing our footprint and aiding clients in their transitions. We manage the operational impacts of climate change by integrating climate risk management into our organization. In September, we published our clients' report that reflects our progress in aligning our loan book to net-zero ambitions and implementing climate risk management. We are on the right track regarding climate alignment and have increased our net-zero ambitions, advancing our target to 2050, as we had stated in 2018. This has translated into a new net-zero target for upstream oil and gas, a sector actively transitioning. Additionally, we have moved our target date from 2040 to 2025 for direct steering, emphasizing immediate action. The net-zero target setting for other sectors will follow as transition pathways become available. One of the biggest challenges is the availability of transition scenarios, which are necessary for steering activities and require government guidance. I recognize that this is complex and that scenarios can change, but they are essential for the market to align in the same direction. I'm proud that our clients choose ING to support their sustainability and transition efforts; we saw a nearly doubled number of sustainability deals in the first nine months compared to 2020. We highlighted our transaction with Alliance, which is our fourth sustainability-linked deal in a year, supporting their efforts to address challenges in data center sustainability and transition to green facilities. This demonstrates the strength of our ESG commitment and our clients' confidence in us. It’s key to understand that transitioning takes time and that transitional efforts are recognized in regulatory frameworks. For example, we’re discussing an adjusted green asset ratio or transitional asset ratio that acknowledges progress not only in green but also in transitional directions. This supports our inclusive approach to accelerating the transition. Our pre-provision profit, excluding volatile items and regulatory costs, increased about 10% compared to the previous quarters, with a noticeable shift in NII contributions. Over recent years, diversifying our income has been a strategic focus, and I’m happy to report strong fee growth across various sectors. Regarding whether this higher level will sustain and if we see room for further growth, I can affirmatively say yes. This quarter’s fee levels were supported by growth in primary customers and structural increases in daily banking fees. Investment products maintained high fee levels due to a rising number of accounts and assets under management, despite a lower nimble trace compared to the high level from the first quarter. For future fee growth, we anticipate returning to pre-COVID levels for international transactions, with lending fees still under historical levels. Key drivers include the ongoing growth of our primary customer base and further potential for banking fee increases in our largest markets where fee levels remain low, especially as peers increase their fees. Additionally, we are working on improving offerings across various products. For instance, our digital investment proposition in Germany is showing positive results. Although the share of NII has decreased due to ongoing pressure on liability margins, we believe we have managed this pressure effectively by implementing negative rates for retail customers. We expect contributions around €220 million for '21 and €300 million for '22, while also focusing on maintaining healthy margins and recovering loan growth in the business segment. This quarter, we noticed an increase in negative interest rate charging in Retail Benelux, which started on July 1, and relatively high prepayment fees in the Netherlands helped bolster NII. Despite rising swap rates, liability margin pressure persists, and the quarterly impact is not linear. Cost control has been effective over recent quarters, reflecting various actions taken after reviewing our businesses. Overall, our performance has been commendable during these dynamic and challenging times. Now, turning to slide five. As highlighted earlier, the pandemic continues to pose challenges. However, thanks to improved risk parameters in our loan book and a robust macroeconomic outlook, we have released part of the management overlays from previous quarters. We will maintain monitoring for the remaining overlays and vulnerable sectors as we check the impact of ending government support schemes. The economic recovery brings new challenges, and while we haven’t fully seen this in macroeconomic forecasts yet, we remain vigilant regarding our loan book, especially for sectors or clients more susceptible to current market dynamics. Our experience managing loan books through previous cycles, supported by a prudent risk framework, has shown effectiveness. We've retained our risk appetite during COVID and continue to be confident in asset quality, supported by a diversified, senior, and well-collateralized loan book alongside a careful provisioning process. Now, let’s review our third quarter results starting on slide seven. Third quarter total income year-over-year was bolstered by strong fee growth, including an €84 million TLTRO benefit. Other income was higher, as the previous year included a €230 million impairment related to our stake in TMB. Investment income included the annual dividend from our stake in the Bank of Beijing, which is received every third quarter, along with an estimated €34 million loss related to the previously mentioned agreement to transfer our retail banking operations in Austria. Sequentially, fee income and NII increased, with the level of the included TLTRO benefit comparable to the second quarter, and higher investment income was attributed to the previously mentioned dividend from the Bank of Beijing. Now, turning to NII on slide eight. Year-on-year, NII without TLTRO was lower mostly due to the ongoing negative rate environment impacting liability margins, although we saw substantial liability inflows. Negative interest rate charges contributed to this margin pressure, as thresholds in the Netherlands have gradually decreased, while Belgium introduced charges at the start of this year. NII from lending increased, reflecting higher margins and average volumes. Compared to the previous quarter, NII excluding TLTRO improved due to higher NII from lending and the lowering of thresholds affecting negative interest rate charging in Retail Benelux at the start of the third quarter. This helped mitigate the pressure on liability income this quarter. I'm pleased we managed to grow NII this quarter and will continue leveraging all available tools to counter pressure; however, I want to caution against prematurely concluding a change in trend. In the next quarter, we might not see a further uptick in negative interest rate charging contributions, and prepayment penalties in the Netherlands could decrease, while liability income pressure will persist. I want to emphasize that the rise in swap rates is beneficial; nonetheless, rates remain below the five-year rolling average and primarily stay in negative territory. We invest in maturities ranging from overnight to over ten years. For practical purposes, about 20% of our replicating portfolio is invested yearly, so any improvements will take time. As noted previously, we benefit most from a steeper yield curve in medium-term durations and an overall positive curve. Our net interest margin for the quarter increased by 2 basis points to 138 basis points, primarily driven by higher lending margins while the increase in negative interest rates absorbed most of this quarter's liability margin pressure. On to slide nine, we see net core lending growth. Overall, there was strong growth in mortgages, with some repayments in wholesale banking at lower levels than the previous quarter. Mortgage volumes remain robust, especially in Germany, Poland, and Spain, being the main driver of retail growth, alongside some growth in consumer lending. In wholesale banking, we noted a higher level of repayments on short-term facilities, although there was some increased demand for working capital. Given the Delta variant, uncertainty regarding the pandemic continues. While we observed some loan demand in a few business segments this quarter, overall investments and working capital needs have not returned to pre-COVID levels. When that demand resumes, our geographical and product diversification will position us well to assist our customers in capturing future growth opportunities. Lastly, net customer deposit growth was down €600 million, primarily driven by €1.9 billion in reduced savings in retail due to actions aimed at reducing inflows, particularly in Belgium and Germany, while wholesale banking deposits saw a slight increase. Page 10 discusses fees. Fee income increased by 20% year-over-year, with growth in both Retail and Wholesale Banking. Retail fees rose by 22%, with a remarkable 31% increase in daily banking fees, reflecting growth in primary customers, rising payment package fees, and a further recovery in domestic payment transactions which returned to pre-COVID levels. However, international payment transactions remained subdued. In investment products, fees rose by 22%, driven by growth in accounts and assets under management. Banking fees also saw a 17% increase across segments. Sequentially, retail fees rose by 6%, propelled by daily banking and lending, while investment product fees remained stable despite seasonal lower levels in the third quarter. Banking fees slightly declined owing to lower fees in financial markets, although lending fees increased from growing syndicated deal activity. Slide 11 shows expenses, which included €233 million of incidental items this quarter, reflecting a €180 million provision for compensation to retail customers on certain Dutch consumer credit products and €53 million for impairment and redundancy costs. Excluding regulatory costs and incidentals, operating expenses have remained controlled. We successfully offset increases in CLA, both year-on-year and quarter-on-quarter. Year-on-year costs for third-party services, professional services, and marketing decreased, while this quarter saw a slightly lower VAT refund. Regulatory costs decreased quarter-on-quarter, primarily due to additional DGS contributions in the previous quarter; however, year-on-year regulatory costs increased slightly because of a higher level of car deposits. Given evolving requirements for risk model redevelopment and KYC, we expect related expenses to stay elevated. As mentioned last quarter, unforeseen costs are expected, including VAT charges on intercompany services following a recent court ruling related to one of our competitors, which will build up over upcoming quarters to about €125 million per year, and we will need to manage this over time. Overall, I'm pleased with cost developments, reflecting the effects of measures taken so far; we will always focus on optimizing our capital investments, and there may be further measures to consider. Looking ahead, we also need to invest in areas that yield the best returns. My focus during these investments is on projects that enhance customer experience and cost efficiency. For example, we're improving our mortgage process in the Netherlands, successfully reducing approval times from an average of 18 days last year to seven days in September, while making the process more efficient allows us to increase volumes or reduce costs. We prioritize projects that enhance customer experiences and enable profitable business growth. Turning to risk, the cost was €39 million, or 3 basis points of average customer lending, which includes a €96 million partial release of management overlays for Stage II. This release reflected improved risk parameters in our loan book, analysis of sectors vulnerable to COVID, and strong macroeconomic forecasts. Beyond these releases, risk costs in Retail Benelux primarily stemmed from a model update in Belgium and some individual Stage III releases. In Retail Challenger and Growth Markets, risk costs included collective provisioning, especially in Spain and Poland. In Wholesale Banking, Stage III risk costs remained low due to minimal additions. Lastly, both Stage II and Stage III ratios decreased due to lower outstanding amounts in both levels. The next slide illustrates that our CET1 ratio has increased to 15.8%. CET1 capital rose by €600 million, mainly attributed to the inclusion of 50% of net profit for the quarter, while the other half is reserved for future distribution according to our policy. Risk-weighted assets increased primarily due to higher credit RWA, boosted by €11 billion for model impacts from ongoing model redevelopments and EBA guidelines, which were somewhat offset by an enhanced collateral profile in the loan book. This quarter's small impacts on regulatory RWA, in light of the 2025 Basel IV implementation, have been almost completely integrated. We still anticipate an RWA impact from the postponed implementation of a risk floor for mortgages in the Netherlands, estimated at around €8 billion, though we expect this to be temporary as it is front-loaded into Basel IV. We will continue to see changes in risk-weighted assets from regular model updates as needed. Finally, we have commenced optimizing our capital structure with a €1.7 billion share buyback program that began on October 5. As shown on slide 14, our CET1 ratio exceeds our target, and we see improvements in ROE with a stronger focus on cost and capital optimization. With growth returning, we maintain our goals and are committed to providing an attractive total return. To summarize the quarter, addressing climate change is urgent, and we continue to support our clients in this transition. Our performance was strong this quarter, achieving record fees, growing our mortgage book, and managing NII pressure while keeping expenses in check. Risk costs were €39 million, and we released some management overlays, indicating a strong GDP forecast and improved risk indicators in our loan book. The quality of our loan book remains confirmed with very limited risk costs and a low Stage 3 ratio of 1.5%. We remain vigilant in monitoring challenges related to supply chain issues and rising prices. That concludes my presentation, and I am now happy to take your questions. Thank you.

Thank you, sir. The first question is from Mr. Benoit Petrarque at Kepler Cheuvreux. Please go ahead.

Yes. Good morning. Thanks for taking my questions. The first one is on lending growth. So we have seen some repayment of short term facilities in the wholesale banking segment. I wanted to try to get a kind of underlying view on the current loan growth in wholesale banking. Could you help us on that one? And also, looking at lending fees up 20% Q-on-Q, I assume that your pipeline for the fourth quarter is quite good. So just wanted to have your view on well, lending growth also beyond Q3? And then second question is on NII. Looking at the two main moving parts, and I will be the first one, the drag from the replicating portfolio. I think you guided for front book, back book gap of 25 bps on the yield. Just wondering where you are today. And at the current interest rate level, do you expect, let's say, the drag to be offset by loan growth? Or we still have still kind of at a still decent level in terms of pressure from low rates. So I just wondering where you are now. And then maybe on NII, just sub question on that. On the negative charging of EU, I think you guided for an incremental of €120 million in 2021. I was wondering if that's still the kind of overall guidance for 2021? Thank you.

Okay. Thank you very much. We are riding the operator said to when you came five questions, so I have to ride quickly. So let me take the mortgage questions and then on NII and the gap yield to the direct drag that we still experience, I will give that question to Tanate. So first of all, Benoit, on your question on the net interest rate charging. So the guidance for the next year, we have up to €300 million. That was initially €20 million believe, and that is now up to €300 million. If I look at loan growth in Wholesale Banking, for this quarter, we had a growth in trade commodity finance, we see already growth in syndicated loans that also came out in our fees because part of the growth in fees came from syndicated loan fees. These are not only yet booked, but we do see an increase in those fees, and that shows that the syndicated loan market is coming back again, at least for now. And on the flip side, we do see that the number of short-term facilities have been decreased and being repaid. So we still do see a mixed picture. And like we said, if we were helped, of course, by the economic developments and by the growth in GDP in 2021, and that growth will need to continue, and it's currently being expected to continue in 2022. That will also help to resume loan growth in wholesale banking. If you look at the lending fees, I mean, like I said, the question is, am I optimistic in one of my presentations that there is more that there can be more to come? And we believe so. And why do we believe so? We believe so because we see a growth in our primary customers and our prime - that was 95,000 this quarter. The primary customers is the first indication because as long as we can grow our number of clients, but also with clients who take more than one product from us, it automatically means that we're able to grow our fees because with those clients, we have more quantitative but also more qualitative interactions, more smart, more easy, more personal. The second lever is the fact that we're still active in a number of markets where we are big, but also others are big, whereby fees are relatively low. We have seen that in the pressure of the interest rate environment that fees are increasing and competitors are either starting or following each other. In other markets, especially in chosen growth markets, we still are on a number of products are levying fees that are still quite a bit below what others are charging, and I need to be specific for exactly the same products. The third lever is the fact that we are developing a number of new digital propositions because we have been a low fee bank that we are rolling out, such as the digital investment proposition that we have in Germany, and we also start to roll out elsewhere. Those are the three elements on the base of which we're confident. Last but not least, what we also see, that the payment levels are back to pre-corona crisis levels. However, not the international payment levels and the international payment levels are important for us to make our fees on payments, and that needs to resume to get back there. Also, lending fees are still below the levels that we typically saw before corona. Then I will give the floor to Nate on NII and a gap the drag.

So Benoit, thanks for your question. I think if we don't give guidance specifically on NII, but kind of input factors into sustaining our NII, which is the fact that we need to have somewhere around 3% to 4% loan growth. And so far, with some patches here and there, we're confident that that loan growth at that pace will resume. The second thing that we rely upon is the fact that our origination margin on loans remains robust, and that is the case during the course of Q3. We also rely on to a certain degree of negative interest rate charging. As Steven has mentioned, basically, this year we made €220 million from negative rate charging, which will rise to €300 million based on action already taken this year. So those are key components. And then the last component is really about how the financial markets are moving at the moment and how the yield curve is affecting us. Quite frankly, high yield curve is beneficial for us and that we replicate approximately 20% of our savings book on an annual basis. It has taken time for the replicated impact to come down, it will take a certain amount of time for the replicated benefits to come up as well. It will be a gradual process. The only caveat I would make is, of course, if short-term rates were to move fast, and it could have a more immediate impact in our results. To give you a couple of moves that we already saw in October. Poland has, for example, today, increased their rates. Romania has increased rates. These are small markets for us. But that, for example, would have immediate beneficial impacts on our results in a sooner period than what I just described. Okay.

Great. Thank you very much, guys.

Thank you.

The next question is from Ms. Giulia Miotto, Morgan Stanley. Go ahead, please.

Yes, hi. Good morning. My first question is on costs. So I believe that ING wants to lower the underlying cost base, excluding the greater cost, excluding one-off, excluding business access. However, the wage market and the labor market in the Netherlands and the core European market is going pretty strong, and we see inflation basically everywhere. So what are you seeing in terms of cost inflation? And how do you expect that to develop next year? So that's my first question. And then in terms of the deployment of capital, I just want to confirm that I understood it correctly. So I think you said that you intend to return excess capital via specials. Was that specifically pointing to special dividends rather than buybacks or the excess capital can be returned with a mix of special dividends and buybacks? Thank you.

Thank you very much, Giulia. On costs, and look, we will I will continue to be disciplined on costs. We do reinvest part of the savings that we got from the actions that we have taken, but the discipline will continue. And therefore, we also continue to monitor the right direction of our cost trajectory. We still intend to bring the cost down. In the past, we have been able also this year to absorb inflation also in the Netherlands, but also in other jurisdictions. We'll take that on the chin and we'll continue to see how we will be able to compensate that. On capital, there, you ask whether that is probably means of dividend or by a share buyback or capital distribution, we don't know it yet. We will give you more information about the specials at the first quarter results 2022.

Okay. The next question is from Mr. Stefan Nedialkov, Citi. Go ahead, please.

Thank you very much. Good morning, guys. A couple of questions on my side. On capital, I am not 100% clear how to square the comments on Basel III/IV being fully absorbed and an additional €8 billion coming out. Is the €8 billion from the mortgage floors going to be offset by a release of some of the RWA top-ups you took this quarter? If you can just kind of explain the moving parts there. And also to confirm that based on the European Commission draft legislative proposal of Basel III that was published at the end of October, based on that proposal, you're not seeing any sort of incremental impact. So that's on capital. And a second question on Turkey. Can you update us on the intragroup funding into Turkey as of Q3, please? Thank you.

Thank you very much, Stefan. On the intergroup funding, that has come down from last quarter by €600 million to now €500 million. So that has come down by €100 million. Then on Basel IV, what I meant to say was that we still have the mortgage floor that will kick in in 2022 in the Netherlands that we estimated at €8 billion currently. That is what we call a prelude to Basel IV. When Basel is introduced, it will have the same effect as the €8 billion. So it is not being taken off the table, but Basel IV will not add anything else because by means of this floor that measure then already is taken for our mortgage portfolio in this country. With regards to the EC legislation and the legislative proposals regarding Basel III, that does not mean further incremental capital increases for ING.

Thank you. Just to confirm, when you made the comment that the regulatory impacts have been mostly absorbed, you meant except for the €8 billion?

Yes, I'm sorry, indeed, except for the €8 billion.

The next question is from Mr. Omar Fall, Barclays. Go ahead, please.

Hello. I have a few questions regarding the numbers. Can you provide an estimate for the prepayment penalty amount for mortgages in the Netherlands? Also, I may have missed it, but could you clarify the quarter-on-quarter negative charging benefit? Additionally, regarding the restructuring costs for the businesses in runoff in the Czech Republic and Austria, is that mostly complete and is France the only remaining concern? Moving beyond the numbers, I would like to ask about fees and commissions. Can you specify, by region, what changes are still pending for daily banking fees? I remember you mentioned Southern Europe last quarter, but it’s somewhat unclear how your prices compare to local competitors. Is the difference mainly between pricing for new versus existing customers? It would be really helpful if you could provide details on specific regions and products where there is still a significant difference in pricing. Thank you.

Thank you, Omar. I'll take the questions on restructuring costs and fees on prepayment and near quarter-on-quarter, I will leave it to Tanate. First of all, on the fees, I can be specific on is that we already announced further payment package increases in the Netherlands, which will start as of January 1, 2022. There are also some small ATM increases in Australia that we will be going through. We will have announced several things. As soon as there is more to announce, we will let you know, but I cannot make forward-looking statements. But like I said, the lever that we have to pull in terms of the growth of our primary customers, the fact that we are still operating in low fee markets that were still behind the number of products for other markets and we can still develop new services that were rolling out is helping. We have been increasing our fees everywhere around the globe in all markets. On restructuring costs, the restructuring in the Czech Republic is complete. Austria is nearing completion, but not quite there yet. In France, you know that we are currently having a review of Payvision. We just made the announcement on the provision, but the restructuring in that sense still needs to happen. The rolling off of Payvision will happen in the course of 2022. So most of it is currently ongoing, but not completed yet. Tanate?

Omar, to answer your question on the first prepayment fees on mortgages, just to clarify from an accounting perspective, these prepayment fees appear in our net interest income line, right? Just to not confuse about fees because we talked about prepayment fees. The amount of prepayment fees in the Netherlands is approximately €49 million, which is €10 million higher than the same period last year. That's to address your question on prepayment fees. And on the negative interest rate charging, as we mentioned, the full-year impact is about €220 million, of which the Q-on-Q increase is approximately €30 million, okay? So that's addressing your first question.

Perfect. Thank you.

Thank you, Omar.

The next question is from Mr. Johan Ekblom, UBS. Go ahead, please.

Thank you. If we can just continue on the net interest income for a second. This increased guidance on negative deposit pricing for next year, does that mean that there is an incremental benefit into Q4 or into Q1 on the kind of Q3 run rate? So that would be the first part. And then secondly, you spoke briefly about the gearing to higher short-term rates. If we look at the...

Johan, your...

I'm afraid he has lost his connection. I will go to the next person for now. That's Mr. Tarik El Mejjad, BoFA. Go ahead, please.

Hi, good morning. Two quick questions please. First of all, in the cost of risk, you’ve mentioned your guidance of I think below or around 20 basis points, 20, 25 basis points. I want to know, you are thinking to change this guidance for this year and next, and if you can give us elements of if not why would you have any concerns on picking up sketch fee provisions in Q4 onwards? And then second question on actually timing of your investor day next year, mid-June, are you waiting for more reduction in the regulatory? I would believe you would like to quickly give us more short-term guidance on the high more normalization of your excess capital. Just to understand why this need to mid-year, next year?

Thanks. I think that the main reason for the date is because we want to pick a date in 2022. We saw that it was a good date, and we want to give you a further update on our strategy and the direction and the progress that we're making in the direction of the bank. The months of April and May are typically also busy and all kinds of other internal strategic meetings. That's why we chose June, and there are no other reasons behind it, and we are very keen to see you there. On cost of risk, I give the floor to Ljiljana.

Good morning, Tarik. Let me reconfirm that our risk costs for '21 will remain well below the through-the-cycle average. We are feeling very much comfortable about it based on the strong quality of our loan book and also risk management frameworks in place. As mentioned before, that haven't changed during the pandemic or post, and we continue our prudent approach there. So no reason to see the fourth quarter different than what we've seen so far.

Okay. Thank you very much. Sorry, operator, do we go back to Johan? Is he back? Or do we move forward?

Mr. Ekblom is back on the call. I will go to him a moment, please. Mr. Ekblom, your line is open once more.

Thank you for having me back. I apologize for the interruption. To address the first question, is there any additional sequential benefit to expect from the deposit repricing? Or should we anticipate its full-year impact next year instead? The second question relates to Poland. Looking at your Polish subsidiary's results, I noticed that net interest income increased by 5% quarter-on-quarter. Can you clarify the timing of the benefits from the rate hikes there? Does this reflect the complete impact of the first 50 basis points, and can we consider this as an indication of the recent rate hike? Or should we expect some delay and additional benefits in the future?

Thanks, Johan. I think on NII charging, as we mentioned, it's about the first of all action we already announced and taken. It's not about any future actions that may take place just to clear that up. The second one is, of course, that as things take place, for example, negative charging in the Netherlands and Belgium started in July; negative charging for a certain high net worth individual in Germany starts in November. These will affect the results going into next year. It's not that you see the bump in Q3, and it stays at this level. There's a gradual increase because of the time delay of the calendar year. So that's to address your first question. The second question with respect to Poland. The impact of the rate hike is not in our numbers because it's recently announced. I think the strong drive in terms of NII in Poland is much more to do with the strong commercial growth, strong loan growth that we see in Poland at good spreads and that we are doing quite well, in fact, very successful in terms of market share in Poland.

Perfect. Thank you very much.

Thank you. Okay, now we move on.

The next question is from Mr. Kiri Vijayarajah, HSBC. Go ahead please.

Yes, good morning, everyone. A couple of questions, if I may, on the gearing to higher oil and energy prices that we're seeing. Firstly, to what extent does that feed through potentially into wholesale banking volumes from bigger ticket sizes and potentially more energy CapEx you're seeing in the pipeline? Or is it more a case that you're still somewhat cautious on growing the energy commodity side of things, I guess, particularly with ESG considerations, etc. And then in a similar vein, in terms of asset quality, does the higher oil price give you scope for maybe more provision releases, I'm thinking particularly on the Stage 3 book and also what kind of timing should we see that potentially with Q4? Is that more of a kind of 2022 thing? Is that higher oil and energy prices be through into your provisioning models? Thank you.

Ljiljana will address the question regarding provisioning levels and the quality of our portfolio. In terms of oil and gas, we have noticed a slight increase in traded commodity finance due to the rising oil prices. This growth in the portfolio is attributed to those higher prices. We are also observing a gradual rise in working capital needs, which could benefit that business moving forward. This ties into your ESG inquiries about the upstream oil and gas sector. We have made a commitment to reduce our exposure to this sector by 12% by 2025, a target we advanced from 2004, as we aim to align with a net-zero pathway. Now, Ljiljana will discuss asset quality.

On the asset quality and impact from the high energy prices. Yes, we are monitoring our portfolio very closely, and we are engaging with our clients in order to understand their positions. I can confirm that so far, we haven't taken any additional provisions based on that, as we have not released any provisions based on that. Looking forward, we will continue engaging with our clients in order to understand their needs and clearly to assess eventually identify the risks in those portfolios. So far, there is no guidance or view on whether it's going to be further released. What we can say is that clearly, as for parts of the economy, high energy prices will present benefits, but for some other parts, clearly, there will not. We are looking at an overall picture and clearly, we will also assess our strategy going forward over this sector.

Thanks.

The next question is from Mr. Jean Neuez, GS. Go ahead, please.

Good morning, and thank you for taking my question. I have two queries. The first is about fees and deposit pricing. With the implementation of new negative rates for clients and certain products, I’d like to know how these fees and deposit pricing will hold up in a rising rate environment, similar to what you have experienced in some of your growth and challenger markets. Will these new fees remain consistent if the conditions that prompted their introduction change in the future? My second question pertains to your comments on the reduced time to approval, which I found quite interesting. I would like to know how your performance compares to your competitors. Have you experienced any benefits beyond customer satisfaction, such as gaining market share or improved pricing due to the faster process? Additionally, are there any risk parameters that you might need to simplify or overlook while streamlining this process? Thank you.

Thank you very much. On customer experience, what we do measure, and we have specific measurements in the organization is how we measure easy, smart, and personal. We have specific metrics to how we deal with that in each market. We also look at mobile sales, for example. We also look at the time and the easiness that we then do business with our clients. One of the metrics here is time to approval, and we also have time to cash. We also look at how much of our loans can be pre-approved, what's the percentage greenest, the percentage red, and then the percentage of gray which is a fallout to someone that then has to intervene. So then personally, there are personal interventions. We have all these metrics to improve our customer experience and to make it smart, personal, and easy. We do that because we believe that the differentiation of that customer experience will also be the differentiator in doing business. Therefore, we measure at the same time Net Promoter Scores, not only at an overall customer satisfaction level but also at a product or even at a, I would say, if you look at AI, a bot satisfaction level. How satisfied are you with the usage of this chatbot in your conversation? We mention that continuously because that customer satisfaction helps to improve our experience and with that mobile sales. What we do see is that our MPS is still at very high levels. We find that important because that's we believe that customer satisfaction will drive our revenues as well.

Jean, to address your point with respect to fees and rates movement. I think fees, as Steven mentioned, our fee levels for comparable products are due low compared to competitors. So I think with rising interest, we believe post remains good value and remains sticky for our customer base. Then on the rates itself, I think just going back even 18 months ago during the COVID period, our retail deposit book is one of the most stable and sticky parts of our balance sheet. It's one of the great strengths of ING. As long as the rate hike by central banks is gradual, we think that we can reprice our assets ahead of our liability book. We're confident that the deposit book will not lose its value and keep those asset prices rising beyond the liability side.

Okay. Thank you very much.

The next question is from Mr. Raul Sinha, JPMorgan. Go ahead, please.

Hi, good morning, all. Some of us probably don't want to wait until June next year. I wanted to ask you about the 12.5% ambition again. We see the gap keeps expanding every quarter as you build capital. Maybe to ask it slightly differently, Steven, consensus currently models your CET1 ratio reducing to 14.9% next year but remaining stable at 14.9% in 2023. Do you think that appropriately captures the pace at which you want to normalize to your ambition?

Right. Okay. So basically, from what I got, Raul, your question is for me to comment on the consensus of the pace of the capital decrease. Is that what the question is?

Yes. Basically, we are expecting the some total of expectations in the market is that your CET1 is still going to be almost 15% till 2023. Is that fair?

Yes. I want to emphasize that we have taken a significant first step with our share buyback, which we haven't done in a while, and we have received approval for it. After we complete this buyback, we will introduce new specials. I understand that our dividend policy, which is based on 50% of resilient profits, requires us to pay a substantially higher amount to reduce capital. While I cannot discuss our discussions with the supervisor, I can highlight the positive outcome and the constructive dialogue we've had regarding the share buyback we are currently implementing. I look forward to taking further steps when we discuss the specials that could elevate us to 12 to 12.5% over the next few years.

Okay. Did I hear you correctly, when you said you will update on the next distribution in Q1 2022, does that mean we should expect an update at full year results?

That means that you should expect some update at the first quarter results 2022, yes.

The next question is from Mr. Robin van den Broek, Mediobanca. Go ahead, please.

Yes. Morning, everybody. Thank you for taking the questions. First question is on the flexible credit compensation that you took in cost. I'm just wondering, I mean, you have more variable rate products in your product portfolio. Could you just talk a little bit about what kind of tail risk you could see on those products and now there are some consumer claims or some claims organizations still out there that are paying the drums on that? Secondly, in your RWA waterfall, you have €11 billion of ongoing redevelopments of internal models and EBA guideline impacts. The work ongoing, I guess, is just a reflection that you'll have ongoing internal model redevelopments, but not necessarily of negative impact as big as we've seen in Q3. I was just wondering if you could comment a little bit on that. Lastly, I want to speak to your Investor Relations department this morning. They also mentioned that you had a change in tax rate guidance planned for this fall. I think I haven't heard that yet. So just wondering about that. Thank you.

Okay. I'm now looking fondly at Mark Milders. What are you been telling? But I will pass that question to Tanate. The other two, if you talk about KiFiD basically we are following the KiFiD independent mediator, which looks at complaints of clients and comes to a verdict very quickly so that those elements can be considered by banks and then if need be compensated to customers. We follow these guidelines of KiFiD. Based on those guidelines, we want to compensate our customers for a market rate that was not a consistent market rate in the past; the information provision to our clients was not sufficiently clear. Therefore, we then use the market rate that we should have used to compensate our clients on the basis, in line exactly with what that body is saying. We are currently also talking to consumer organizations to see how to best do that and then contact our clients as of December to then pay these amounts in 2022 and then be done with it in 2022. This is our current best estimate. We have taken all elements of KiFiD into account, and that's where we currently are. So for as far as we can see, we have provided prudently for that. With regards to our models, yes, you're right. There are always model updates. We have a number of rating systems, which consist of PD, LGD, IFRS, EAD models, and so forth. I can bore you with this for ages. Ljiljana looks very enthusiastic. She wants to talk about this. We will not do that. Still, we have regular model updates, and sometimes it will be up and sometimes it will be down, but there's just nothing out of the ordinary. So €11 billion was, in that sense, a special event. What we meant with the EBA guidelines is that we need to have certain compliance here with model redevelopments as per the first of January 2022, and that is now being taken into account. Tanate, what the hell that Mark Milders is saying?

Regarding the tax rate, I understand that you need to calculate our net profit after tax using the weighted average tax rate, as well as our return on equity. At times, we provide guidance on the effective tax rate. Previously, we indicated that we expected our effective tax rate to be between 28% and 30%. Now, we are revising that guidance and anticipate that our effective tax rate will decrease to a range of 27% to 29% in the upcoming periods. This adjustment is a result of changes in deductibility for certain items and the geographic distribution of some of our profits, which have shifted to regions with lower tax rates. We wanted to bring this shift in tax rate to your attention.

Thanks. So Steven, just one follow-up on the KiFiD. I was also referring to other products at variable rate, like mortgages or SME loans, where the pocket range for the KiFiD where you may not have to reflect the reductions in market rate to your clients appropriately. Do you see any fill rates coming on that side…

No, okay.

Something you worry about?

No, I'm not so worried about that because on mortgages in these types of private individual products, they were all linked to public market rates. For some of the variable loans or credit cards, there was no public market rate that was referred to. Therefore, banks referred to an internal rate that was not clear to customers, but that's not the case with mortgages.

Okay. That’s very clear. Thank you.

Thank you.

Ladies and gentlemen, this concludes the conference call. Thank you for attending. You may now disconnect your lines. Have a nice day.