Ing Groep NV Q2 FY2023 Earnings Call

Good morning. This is Marion, welcoming you to ING's 2Q 2023 Conference Call. This 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 involving a historical fact. Actual results may differ materially from those projected in any forward-looking statements. 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 is posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation on an offer to buy any securities. Good morning, Steven, over to you.

Good morning, and welcome to our second quarter '23 results call. I hope you're all well. I'm joined by our Chief Revenue Officer, Ljiljana Cortan, and our Chief Financial Officer, Tanate Phutrakul. I'm pleased to present today's information, after which we will take your questions. The second quarter was strong for ING, delivering good results despite ongoing macroeconomic and geopolitical challenges. Our focus on providing superior customer experience led to solid organic growth, adding customers, particularly in Germany, the Netherlands, and Spain, where many chose ING as their primary bank. The proportion of mobile-only customers has increased, with 60% of our retail customers now conducting business solely via mobile, our main channel. In Wholesale Banking, we are committed to helping clients transition to more sustainable business models, achieving €47 billion in the first half of '23, a 17% increase compared to the same period in 2022. We benefited from a positive rate environment, which led to a 23% year-on-year increase in total income, primarily due to higher interest income on liabilities. Our rolling four-quarter average return on equity rose to 11.7%, while we maintained a healthy CET1 ratio of 14.9%. We plan to pay an interim cash dividend of €0.35 per share on August 14, totaling about €4.5 billion in distributions to shareholders this year. Before we dive into more detailed financial results, I want to highlight our progress in executing our strategy and related goals. On our strategic priorities, the first is to provide a superior customer experience, which is crucial for attracting and retaining customers. To support this growth, we continue to invest in our technology and operations to ensure a seamless digital experience. In the first half of this year, we increased the automated processing of Retail customer journeys to 69%, approaching our 2025 target of over 75%. Another achievement this quarter is that 63% of our new clients in the Netherlands were onboarded digitally, up from 52% at the end of last year. Our second strategic focus is on sustainability, where we aim to facilitate our clients' transitions to more sustainable business models. Our employees are vital to implementing these sustainability initiatives, so we organized our first Global Sustainability Week in June, with colleagues participating in over 80 sessions to share knowledge and inspire each other on making a difference. We also expanded our product offerings to support clients in energy-efficient renovations, including a new eco-renovation loan in Belgium for business banking clients. Moving to our overall performance in a positive rate environment, it's clear that our focus on income diversification and our capability to capture loan growth during economic cycles has helped us maintain steady income. With interest rates now positive, the strengths of our business model are coming to the forefront. We benefit from an appealing funding structure, with over 60% of our balance sheet financed by stable customer deposits. Our ability to grow our customer base and attract deposits was evident in our successful promotional campaigns, especially in Germany, which demonstrated significant deposit inflows. Despite a decline in transactions in the mortgage market, we achieved €2.7 billion growth in mortgages this quarter. These positive results are already reflected in our profits, and we anticipate continued benefits from higher rates, given our portfolio's structure. Approximately 55% of our €480 billion portfolio is reinvested for over a year, allowing us to reprice at higher rates in the future. We also expect a resurgence in loan demand and improved asset margins will contribute to future income growth, along with an increase in fee income. Our financial targets are set for 25%, reflecting our performance in the first half of this year. We see opportunities to raise or introduce fees in Daily Banking and anticipate fee growth in investment products as market confidence improves. Higher fees and ongoing investment in income diversification will assist total income growth, with liability net interest income remaining the primary driver for 2023. While there are uncertainties related to central bank rate changes and customer behavior, the advantages from our portfolio will persist. Our income growth is helping us improve our cost-income ratio, which has fallen to just over 54% on a rolling four-quarter basis. We are managing our costs effectively despite inflation pressures and are continuing to invest in strategies that will yield long-term benefits. We aim to surpass our CET1 target of around 12.5% in a measured approach combined with a 50% payout of resilient net profit. Our next update will coincide with our third quarter '23 results. A significant development is the Dutch Central Bank's reduction of ING's systematic risk buffer requirement from 2.5% to 2%, while they raised the Dutch countercyclical buffer from 1% to 2%. As a result of these changes, our fully loaded SREP requirement decreased by approximately 32 basis points to 10.7%, allowing us to maintain our CET1 target. Although risk costs are below our average and we see no notable trends in provisions, we remain cautious as our customers face rising living and business costs. Given these factors, we are confident in reaching our target of 12% return on equity. Moving on to the second quarter results, we see continued growth in net interest income, with liability net interest income exceeding expectations due to accounting adjustments shifting some income around. This increase reflects further interest rate hikes and positive flow, although some offset occurred from rising core rates in retail markets. This positive trend was also evident in Wholesale Banking, particularly in Payments and Cash Management. In Lending, while we experienced margin pressure on mortgages from rising client rates, this began to stabilize sequentially. We also saw a shift of some income to other categories due to favorable market activities in Treasury. The net interest margin decreased slightly, driven by an overall increase in the balance sheet. In retail, mortgage growth continued, especially in Australia, the Netherlands, and Germany, despite reduced transaction volumes in those markets. Loan growth was evident in Wholesale Banking but was mitigated by lower utilization in working capital and reduced activity in Trading Commodity & Finance. Overall, with macroeconomic uncertainty persisting, we expect loan demand to stay subdued. We gained from our diversified model, seeing net customer deposits rise by €17 billion, largely due to successful campaigns in Germany. On the fee side, we noted year-on-year growth driven by increased deal flow in Wholesale Banking, though in Retail, primary customer growth was countered by declining fees for investment products due to reduced trading activity. However, new investment accounts continued to open, leading to an increase in assets under management, which will boost fees as market activity recovers. Sequentially, fee growth was also reflected in Wholesale Banking. In terms of operating expenses, excluding regulatory costs and incidental items, there was a year-on-year increase due mainly to high inflation on staff expenses and continued investments in growth, though there were some offsets from positive currency impacts and exits from certain retail markets. Quarter-on-quarter expenses saw a slight decrease, despite higher staff costs, with previous legal and restructuring provisions contributing to fluctuations. Regulatory costs dropped year-on-year as last year's second quarter included contributions that were not present this year. Looking at risk costs, we reported €98 million this quarter, falling below our through-the-cycle average. This included management overlays considering current inflation and interest environment updates. In Wholesale Banking, specific files impacted risk costs but were offset by releasing provisions related to reduced exposure in Russia. Overall, this quarter showed positive trends in risk costs, with confidence in the quality of our loan portfolio despite rising costs for customers. Our CET1 ratio stands strong at 14.9%. Though CET1 capital decreased due to dividend payments, we saw reductions in risk-weighted assets from model updates and disciplined management. We plan to distribute an interim cash dividend of €0.35 per share and will share future distribution plans during our third quarter results update. In conclusion, we had a robust second quarter with strong results reflecting the execution of our strategic priorities. We grew primary customers and volumes while financing transitions to sustainability initiatives. Our financial performance validates our business model amid a favorable rate environment, with total income rising across segments and expenses maintained well. Our strong capital position allows us to continue providing attractive returns to shareholders, and I am confident in our ability to deliver solid financial results while advancing our strategy. Now, let's open the floor to questions.

Thank you. We'll take the first question from Jon Peace from Credit Suisse.

Thank you. Good morning. So my first question, just on net interest income. I realize the Treasury swap reallocation to other income can be volatile from a quarterly basis. But should we be just adding on that reallocation to the current quarter's NII and seeing €4.4 billion of NII as really a sustainable base for the second half of the year and for 2024 given your comments about the tailwind from the replicating portfolio? And second question, please, just on the cost of risk. Any guidance you might give us for the second half of this year relative to your through-the-cycle rate? You're obviously still carrying quite a degree of overlays and I just wonder if there's any pressure to utilize those, which might keep the cost of risk very low. Thank you.

Thank you very much. Jon, I give the first question to Tanate and then the second one to Ljiljana.

Thanks, Jon. Just on NII, in particular, the two abnormalities is really our positions on Treasury and our position on Financial Markets. As we have given you in the last quarter, we guided that trades in Treasury were likely to be about the same in Q1 and Q2, and that has been the case. Our expectation is that the opportunity will exist going into the second half of the year, but the impact will start to decline a bit in Q3. And in Financial Markets, it really just depends on our trading position. That's too volatile to predict.

Good morning, Jon from my side. With respect to the cost of risk guidance, as you know, we generally do not guide on that category, and we refer to our low through-the-cycle 25 basis points average compared to customer lending. However, as you've seen the first half of this year has been very good for the, also, quality of our portfolio has proven the resilience of quality of our portfolio. But also as CEO mentioned, we remain vigilant with respect to the uncertainty in the environment, and that's why we are sticking to our through-the-cycle average.

Thank you.

The next question comes from Giulia Miotto from Morgan Stanley. Please go ahead.

Hi, good morning. My first question is on NII as well. You mentioned tailwinds still to come, 55% of the replicating portfolio has a duration longer than one year. Given that we expect the ECB rate to peak and then start decreasing next year, when do you think your NII will peak essentially, so also timing of the peak of NII is my first question? And then the second question on asset quality at the moment remains very benign. But is there any portfolio that you're watching more carefully in particular, on the commercial real estate side, for instance, or residential market in the Netherlands or Australia? Thank you.

Yeah. Hi, Giulia. I'll give the second question to Ljiljana and the first question, I'll do. To some extent, a similar question as the previous as Jon. But look, I think the good thing is that we are operating in a number of markets. So it's diverse and we continue to attract deposits. So one of the elements that's important is, are we continuing to be able to get clients in? And are we continuing to be able to attract deposits? The second is, okay, what is the competition doing in these different markets? And the tracking speed so far has been around 20%. We will see how that develops, but it's still significantly lower than we've seen in previous cycles. Of course, it also depends on the increase in interest rates that we see with the ECB. Now it's hard to predict what exactly will be, but people expect either one or two more hikes. But that competitive impact will remain to be seen, and we will play our role to see how do we balance it out in terms of the role that we play in different markets, but typically more of a follower in, let's say, the incumbent markets in which we're active and where we grow the number of clients in the, let's say, the challenger markets. There we sometimes do marketing actions to attract customers like we have seen now in Germany, for example, and that led to also an incredible amount of €16 billion additional deposits. The good thing is that interest rates at some point will rise, but we have a replicating portfolio whereby the majority indeed, 55% of our euro-denominated deposits is replicated for longer than one year, and that will be a good support even when competitive pressure increases to further benefit from this interest rate environment, and what that level exactly will be we will need to see depending on the market circumstances.

Good morning, Giulia from my side. Correct. Our asset quality remains strong and resilient as well in the second quarter. We do see some better prospects eventually for soft lending in some of the geographies we operate in. However, this uncertainty is still there. Thus, as said, we remain vigilant when it comes to the higher interest rate and inflationary environment and specifically across the portfolios that are experiencing higher, I would say, cost of doing business or higher borrowing costs, but as well for private individuals' cost of living. That means that the focus is on the more cyclical parts of the portfolio. Clearly, we are looking at the commercial real estate and acquisition finance but as well as some other steel energy-intense manufacturing parts of our portfolio. So far, we do not see structural deteriorations there, but that's also one of the reasons why we proactively take the measures in order not to allow those to become visible. Thank you.

Thanks.

The next question comes from Raul Sinha from JPMorgan.

Yeah. Good morning, everybody. Thanks for taking my questions. Two from me as well. The first one, Steven, I was just wondering if you think you have seen the peak in inflation pressure on the cost side? And the reason I ask that is because I think costs came in slightly below where the market was expecting. They seem to be annualizing just below where consensus is sitting for the full year. Would you expect perhaps there to be more or less cost pressure in the second half of the year compared to what you've delivered here? That's my first question. And then the second question, just coming back on NII. Some of the other banks, which do have financial markets businesses where the funding cost of the Financial Markets business is still booked in NII are moving towards banking NII definition, in particular, HSBC and Standard Chartered in the UK. So I guess you guys have the same accounting asymmetry. So I was wondering whether you considered perhaps at your end to refine the definition of NII or perhaps give us another measure in terms of banking NII. Thank you.

Thank you. Maybe I'll do the second question first. We're currently not considering refining the definition, but I can see that it requires some explanation because it indeed moves from NII to other income. And Tanate, I'll give you the first question.

Hi, Rahul. Regarding cost development in the second quarter, there are three important points to highlight. First, regulatory expenses have decreased by €247 million, which indicates a positive trend. We have already informed the market that by the first quarter of 2025, we anticipate regulatory expenses to be €400 million lower than current levels, as compared to 2021. For this year, we expect regulatory expenses to be roughly €180 million lower than last year. Moving on to operating expenses, we are noticing a decrease in inflationary pressures. The announced indexation in Belgium has reduced from 10% in December to about 4%-4.5% by June this year. While this pressure is alleviating, we are also investing more in client acquisition and advertising, which is reflected in our numbers. However, a clean operating expense growth of 7% adjusted for volatility is a solid indicator of our operating expenses in Q2.

Thank you.

The next question comes from Tarik El Mejjad from Bank of America. Please go ahead.

Good morning. I appreciate the opportunity to ask a couple of questions. My first question is regarding revenues. To summarize some of the points made earlier, I noticed in your Q2 slides that you've removed the target for total income growth above 10% for 2023. However, consensus expectations are double that, and you appear to be showing strong trends. Could you provide an update on that guidance and share your thoughts on where you see fees and net interest income going from here? My second question is about capital and distribution. I understand you will provide an update in Q3, but this has been a concern for some time as you are generating more capital than you can distribute, which is a positive challenge. However, given the 2.5% return on conversion you reiterated last Friday, how do you plan to significantly increase distribution in a special way starting from Q3? Is this possibility realistic? Additionally, how do you intend to accomplish this considering the liquidation of shares? Will there also be cash distributions or just buybacks on top of the current rate? Thank you.

Thank you, Tarik. I'll start with the capital distribution. Our capital has indeed increased due to the positive results and strong capital management, particularly in Wholesale Banking this quarter. As mentioned in the presentation, we will provide an update in the third quarter, and we aim to move to approximately 12.5%, which remains unchanged. This implies that the steps we take must align with the higher capital we have. I believe we are on the same page considering this calculation. Regarding revenues, we are not offering additional guidance, but I can confidently say that it is above 10%.

The next question comes from Benoit Petrarque from Kepler Cheuvreux.

Yeah, good morning. Thank you for the presentation. Now just to first come back on the accounting asymmetry, which creates a lot of noise, obviously and maybe focusing on the financial market NII, clearly quite difficult to estimate. But I understand that the trend was very much linked to the kind of ECB rate hike cycle. So when this cycle will kind of stop or we get probably a cut even at some point, it's fair to assume that the NII from the Financial Market will recover sharply potentially back to the previous level. But I wanted to check that with you first. And then on the stress test outcome, sorry to come back to that. But it was 550 negative on your TRIM and adverse scenario. I think you were ending at just below 9% in the adverse scenario with a starting point at 14.5. So can you really bring the CET1 ratio back to 12.5 given your sensitivity to an adverse scenario according to the ECB that will be the other question? And also linked to the capital distribution, I was wondering if you think we can plug payout ratio kind of blended, including buyback above 100%, if technically, there's no issue because obviously, if you want to bring your capital down, we have to think about payout ratio above 100%. So I wanted to make sure we can do that without much problems.

Okay. Let me answer the question on CET1, and then Tanate will talk about the financial markets NII ratio. With regards to CET1, and you mentioned the stress test, it was, of course, a very insightful stress test. There's also quite a static stress test. The input factors of that stress test this time had their impact on banks with presence more in the northern part of Europe and that's what you see reflected. The stress test does not talk about how would you respond to this stress, which typically is being done, but this is just a stress test, which is good, and we do many stress tests. Then separate from that, we have very good capital of 14.9%. We have a targeted capital ratio of 12.5% that we've also, at the time, agreed when we set it and agreed with the ECB and we are confidently moving in roughly equal steps to the 12.5%. That also means, and you're right that in that mathematical calculation, that means that on aggregate we need to pay out more than 100% of our profit to get there. So we are calculating as well and giving you an update in the third quarter.

And Benoit, just on NII, it really is more volatile and harder to predict, but it depends really on two factors. The first one I think will be sustained for some time to come, which is that the absolute cost of fund is higher, right? That clearly will be visible in coming quarters. But at the same time, it also depends on our trading strategy and the product mix demanded by our customers. So I think it remains a volatile line item from an NII FM perspective.

And if you think about 2024 on the FM NII kind of do you think we can go back to the €300 million run rate? Or will that be kind of too positive?

No, I think it's harder to predict. But as I said, the big driver is that the absolute level of borrowing cost is higher, given Central Bank rates, and it depends on the product mix from our clients.

Okay, thank you very much.

The next question comes from Benjamin Goy from Deutsche Bank.

Yeah, good morning. Two questions. One follow-up on 12.5%, is there any material risk weight inflation left from a regulatory point of view in your view? And so say, by 2025, would you keep a buffer for cyclical deterioration when your risk rates increase in that? And then secondly, a bit more high-level or bigger picture question. Anything on AI you would like to flag you're currently doing or opportunities to see going forward?

Sorry, the second question?

Generative AI. Artificial intelligence.

You want me to talk about AI. Okay. So let me start with the second point. We currently use AI in several of our processes, including contact centers, collections, and marketing propensity models, which is beneficial. It can also enhance decision-making if done in a fair and transparent manner, which is critical, particularly with AI. Regarding generative AI, that is indeed new. At ING, we have currently prohibited the use of generative AI in our processes. We will conduct experiments with two initiatives in a controlled environment to better understand the potential benefits and how to manage it. We will not implement it organization-wide until we can ensure proper control. We will first test it separately, as we typically do with innovations, and then determine how we will incorporate it within the organization. As for capital, concerning risk-weighted assets, there are two aspects. If you are asking whether we are maintaining a buffer in risk-weighted assets, I believe you may be inquiring about our consideration of countercyclical buffers in our capital levels, which currently stand around 12.5%. We have taken that into account. You also mentioned Basel IV or its regulatory impact on risk-weighted assets. For that, I will hand it over to Ljiljana.

Thank you, Benjamin. As we've mentioned several times, we have absorbed most of the expected regulatory RWA inflation ahead of the 2025 base implementation through our models and overlays. However, as I have noted before, there are some quarterly adjustments that arise from the normal lifecycle of the model, which may involve methodology or policy updates or recalibration of existing models. These impacts can cause volatility that may fluctuate or revert. Nevertheless, over the cycle, we have already accounted for the majority of this impact in our existing numbers.

Thank you. So I believe it's 100% payout to get to decide it. Thank you.

The next question comes from Kiri Vijayarajah from HSBC.

Good morning, everyone. I have a couple of questions. First, regarding the deposit campaign in Germany, could you provide more insight into the rationale behind it? Was the aim to boost the primary customer count since there seemed to be a slight loss of momentum compared to the previous year's run rate during the first quarter? Or was it more focused on managing overall deposit numbers, particularly given some outflows on the wholesale side? Should we consider this campaign a one-time effort, or might we see similar deposit campaigns in other regions? Secondly, on the loan growth front, the performance appears strong and well-distributed across various divisions and locations. Is the goal to quickly utilize the deposits for loan growth, suggesting you might anticipate a rise in that area, or are you content to let that cash flow into the replicating portfolio? Ultimately, how reliable do you believe these new deposits will be in terms of redeployment? Thank you.

Thank you, all right, good asked questions. Thank you. Now the deposit campaign in Germany was focused on gaining customers. I don't know how many of you know, but we have a stated ambition of getting to 10 million customers in Germany by the end of 2025. We're currently at 9 million. Of the deposit inflows, over two-thirds came from existing customers, which is good. Typically, customers that are already existing and they bring more money to the bank are more sticky. So that's helpful. We will always, like we've done also and how we have a lot of experience with marketing campaigns over the past number of decades with, of course, a big part of our business, Retail Banking in many countries. In countries where we want to grow our customers, we now are at again have promotional rates, so not core rate increases, but promotional rates to attract customers, and we do that as well as we can time moment. And in this case, we were the first big bank who starts a campaign with us very well timed because then it caught the attention of the public, and that's how we are looking at it. Whenever there are opportunities, we will look at it further in all the markets in which we're active. In general, I said, typically, in the incumbent market of the Netherlands and Belgium, we will be more of a follower and we can be more assertive in these other markets, but that really depends on the circumstance. When it comes to loan growth or putting these deposits to loan growth, look, in the end, we are really focused on being prudent here. What you see is that the mortgage market has come down in the biggest three markets which were active. That was about 80% of our total mortgage portfolio of a bit over €300 billion comes from the Netherlands, Belgium and Germany. In these markets, the new dwellings that are being sold are down between 40% and 50%. So in that sense, the market is benign or is not actually active. What was good is that we were able to increase the number of mortgages sold and increase our books, but on a relative scale, it is limited. The focus is on making sure that people can repay and we do not loosen our credit standards because we now have more deposits, and we remain very vigilant of what's going to happen in the next quarters.

Great. Thank you.

The next question comes from Amit Goel from Barclays.

Hi, thank you for taking my questions. I've got a few just relating to the Slide 16 replication portfolio. One, I just wanted to check on the size of the book, it seems to have gone from about €460 billion in Q3 to €480 billion. So it's outpaced the growth in the deposits, so just curious how you're driving the size of that portfolio and the incremental piece, how you're reinvesting that. Secondly, in terms of the 55% of the book, which is greater than one year, can you give us some idea of what the duration is on that part of the portfolio or how that's structured? And then lastly, just on the pass-through, just curious, I guess, relative to the average rate of 20% during the quarter, how that's kind of tracking towards the end of the quarter and into the start of Q3? Thank you.

Tanate, this seems like a lot of questions for you.

Well, Amit, thank you very much. The level of deposit growth is really something that is driven by customer growth, customer activities and the prevailing market. So from that perspective, the growth in liability is actually welcome from that perspective. Unlike when we were in negative rates, liability replication was actually P&L negative, but now replication is P&L positive. So that's a good sign. We have given you this guidance on replication of 45-55. From that perspective, we see that we replicate about that same level depending, of course, on different markets as well. The pass-through rate, we are at about 20% as of the end of Q2, but we expect that year-to-date, it's around 29%.

Okay, thank you. Just on the size of the replication portfolio. I guess just what I was checking there was when you gave the disclosure, I think, at Q3 '22 you said the size of the book was about €461 billion. So obviously, that's grown from 461 to 480 now. It seems like the book growth has outpaced the kind of the growth in actual customer deposits. So I just wanted to check what's driving the size of the replication portfolio? And can we expect that portfolio to continue to grow or be stable or maybe come down in the future?

It's driven by flows by our customers. So I think the expectations is that as maybe the market starts to slow down on deposit growth, then the replication portfolio will be less, and like we see in Q2, demand for deposits continues to come into the bank, then it will be more.

Got it. You're seeing that pass-through, I think you said of 29%. Is that correct? Right?

Yes, Year-to-date.

The next question comes from Flora Bocahut from Jefferies. Please go ahead.

Yeah, thank you. The first question I had is actually around the ROE target of 12%. I think this is a target you have on the CET1 that would be 12.5%. You're obviously at 12% over the last four quarters, but that kind of CET1 that is north of 14.5%. So the question here is really why stick to that target? I know you don't like to update those targets too often, but you know we've had many other banks updating ROE targets this year. So is there anything that's holding you from upgrading the ROE target towards 2025. Is there anything negative that you expect will change the picture? And then the second question is regarding the ongoing share buyback. I've been surprised by the speed at which it's been conducted so far in that sense. I know it's not in your hands that there is a mandate towards another investment bank. But in the sense that at this pace of buying just €4 million a day, it would take beyond the deadline. So can you just confirm that, with certainty, the €1.5 billion buyback will be finished at the deadline even though that implies a significant increase in the daily volumes that need to be bought until the deadline of October 18? Thank you.

Okay. Thank you, Flora. On the share buyback, we can confirm with certainty the share buyback will be finalized in October. On the ROE targets, look, we have said that we gave indications at the investor presentation, and that if we will give an update, we'll do that once a year after the fourth quarter results. That's how we do it. Otherwise, we need to give up this every quarter, so we stick to the yearly cadence.

We'll take the next question from Guillaume Tiberghien from BNP Paribas Exane.

Good morning. Thanks for the question. So the question relates to the RWA in the Wholesale division. I understand the amount is weak and you expect it to remain subdued. I understand your models can go up or down depending on the model cycle. But I'm more interested in how you think about the strategy for the RWA development in the CIB. What do you actually want to do? Do you want to continue to lend with lower density? Lend less? So can you just elaborate a little bit about your strategy for growth in RWA in Wholesale? Thank you.

Okay, thank you for the question. Clearly, we are a bank that is focusing on very strong large corporates, and we have strong knowledge in a number of sectors. We have had it for decades. We stick to those sectors and we stick to those corporates. There is not a change in risk structure or in risk appetite. At the moment, we do see some lending pickup in large lending deals. At the same time, due to lower commodity prices, we also saw an impact in lower Trade & Commodity Finance, which outpaced that lending income. Markets remain relatively uncertain given also the economic outlook. But what we do work on is, first of all, to continue our strides to help customers transition to more sustainable business models in light of the prior. That's what we focus on. Secondly, we're still very much an underwrite to hold bank, and we also work on better capital velocity, which basically means that we will increasingly also underwrite and then sell. That's what you have also partly seen now in the second quarter coming in. That part of the decrease in RWA in the Wholesale Banking was because we started in our strategy with also moving and doing more in capital velocity. Last but not least, we also have further deleveraged our exposure in Russia. We continue to do that. Currently, our total exposure in Russia is €1.7 billion, but came down from a couple of hundred million higher earlier this year, and that has also led to some RWA release. Those are two factors. I mentioned already the strategy we have regarding the Wholesale Banking lending and capital velocity.

Thank you. Can I just do a small follow-up on the deposit beta? I didn't hear earlier, did you say you were at 29% at the end of the quarter?

So until now, we had 20%. But with the rate increase in the Netherlands as for August 15, the tracking would be 29%.

The next question comes from Chris Hallam from Goldman Sachs. Please go ahead.

Good morning, and thank you for taking my questions. I have two inquiries. First, regarding capital allocation, you've discussed distribution extensively, but it seems your businesses are performing well above the 12.5% ROE target in the first quarter. With a very low cost of risk and the overlays still in place, are there any business areas where you're considering deploying more capital compared to when those targets were first set, particularly in capital-intensive areas? You mentioned this for the CIB, but I'd like to hear about the broader group as well. My second question is a follow-up on deposit growth in Germany. Can you provide any details about the marginal cost of attracting those deposits? I understand there are significant deposit offers from other players in Germany, and I'm curious about how we should view the marginal deposit funding cost in relation to the overall cost.

On capital allocation, we will always strive to optimize it. We have return equity targets for Wholesale Banking, Business Banking, and Retail Banking, and we focus on pricing the marginal deal. We will stick to this approach regardless of having more capital. Our goal is to grow prudently in all the markets where we operate, with a significant emphasis on expanding in Germany and increasing Retail customers. We aim to enhance our position as a wholesale bank globally, but we will do this within the framework of pricing the marginal deal to its returns. If we cannot achieve that or if we cannot ensure a sufficient return for the client, we will not proceed. There will be no exceptions to this. Regarding deposit growth in Germany, the marketing campaign at that time achieved a return of 103%, and we profited from that campaign since the ECB rate was already higher at that time.

The next question comes from Farquhar Murray from Autonomous. Please go ahead.

Good morning, all. Two questions, if I may. Firstly, on capital management, kind of two competing signals in recent months. One, the cut in the O-SII buffer and the other the heavy drawdown on the stress test. I just wondered if you could outline how those play through into the discussions on the Q3 update and more generally the dialogue with the ECB. On paper, I think the stress test should feed into the P2G in some way, so I wouldn't mind just some color around that. And then secondly, just coming back to Benoit's question on the Financial Markets NII. If I look back more than a decade, I don't have a period where FM NII was negative, though it is volatile. Your answer to Benoit seems to suggest that if I think rates remain more normal from here, I should build in a structurally negative NII for FM with a positive counterpart in other. Are we understanding you're right there? How do I square with the history? Thanks.

Thank you. Regarding the lower capital buffer of the DNB at the time that, that buffer came in, that was at the time that there was no three-pillar system in Europe. The ECB hasn't started this yet. There was no SRB and no European deposit system. In that setting, local supervisors increased buffers for their large banks. Let's put it, a too-big-to-fill buffer. Increasingly, banks have increased their own capital, and there is now that three-pillar system in Europe, as a result of which, that has undoubtedly weighed for DNB to, in the end, decrease the buffer. That means that the capital requirements I just said moved to approximately 10.7%. Therefore, that's in line with our around 12.5%. Regarding stress tests, the stress test is a stress test as there are many stress tests. We do a number of strategies internally as well that we share with the ECB and with other supervisors. That has no bearing currently on our 12.5% target, and we'll remain in positive discussions with the ECB about the next steps that we would then take, we will update you for in the third quarter.

Then Farquhar, on NII in Financial Markets, maybe a bit more nuance in the answer. It's three things, right? The absolute rates are higher, but it also depends on the product mix. Also, it depends on the differences between major currencies, the arbitrage between euro and dollar, for example. I wouldn't call it that you should be looking at a structural increase in NII of that such, but I remain that funding cost is higher, but that it just depends on these three things, which remain volatile in the financial market results.

But just a more general question. If I think of things as normalizing from here, should I build in a structurally negative NII for FM? Is that the kind of permanent structural outcome?

No, I think it just depends on movements, right? You have, for example, opportunities, trading opportunities, product mix from customers. So I wouldn't structurally put it in like at the levels that you see in Q2, but at the same time, funding costs are higher.

Equally, should I maybe transition back to history? Would that be a more reasonable guesstimate?

I would not say that, that would be a good guidance in light of current interest rate environment.

The next question comes from Matt Clark from Mediobanca.

Good morning. Two questions, please. Firstly, on risk-weighted assets, looking at template CR8 in your Pillar 3 disclosure. You've had kind of a tailwind for IRB risk-weighted assets from asset quality in the past few quarters and also a tailwind from the other category there of a couple of billion per quarter. I was just hoping you could give some explanation there about why your asset quality is getting better to the counterintuitive and what the other benefits to your risk-weighted assets, which has been quite meaningful, has been? And then secondly, on the kind of cross-currency interest rate arbitrage trades. If this impact started around third quarter last year and you seem to be saying it's going to last a bit more into the third quarter this year, is it the right conclusion to draw that you put these trades on with a kind of 12 months duration? Just trying to work out how long you're willing to tie up your balance sheet for in these trades as a general rule when the opportunity arises. Thanks.

Okay. Tanate, the Treasury cross FX rates.

The trade and the conditions for that trade are still present, but they are expected to decrease over the next three months. However, looking ahead 12 months, there are too many variables to consider. So, while the trade remains, it is likely to see a decline in the third quarter.

But if I understand it right, you put these trades for a defined term and you kind of lock in at the inception, the economics spread will be defined at the outset.

I understand your question. These trades are tended to be short in duration.

And by short you mean?

I don't think we're going to give our trading positions on an analyst call. Let's say that the trade exists; it will decline in Q3, and that's our guidance.

Okay. Ljiljana, RWA.

Thank you. The size and dynamics of Risk-Weighted Assets (RWA) are influenced by various factors and can be volatile due to both internal and external influences. The decrease you've observed, related to asset quality, is attributed to several reasons. The most significant factor is the successful reduction of our exposure to Russia, which significantly decreased our RWA in 2022 from €13.5 billion to €4.5 billion. Another factor is the structure and quality of our loan portfolio, which affects RWA based on the duration of our short-term versus long-term exposure and the collateral held. Additionally, there is a shift in our portfolio with repayments from lower-rated assets being replaced by higher-rated ones. Collectively, these factors may have mitigated some of the negative impacts from external conditions, such as housing prices. However, we also have protective measures in place for certain portfolios, so these negative environmental impacts may have already been addressed. Overall, that summarizes the situation.

Thank you. Specifically, this other line that's also been quite meaningful on that table, €1.7 billion of benefit this quarter.

You would have to be more specific. Which exactly line because I do not have a template in front.

Why don't we come back to that?

Okay. I'll take it offline.

Yeah. We take off-line with media relations. Thank you. Sorry, Investor Relations, I've been corrected.

We will take the next question from Anke Reingen from RBC.

Thank you for taking my question. Just two small ones, please. On the capital distribution. Is there the comment about the roughly equal steps, could that be under review on the Q3 update because the commentary seems to be a bit more that it could potentially a bit more? And then secondly, on the cost, do you think the 7% growth year-over-year is a good indicator for the full year trend? Thank you.

With regard to the equal steps, we meant that they are roughly equal in terms of CET level moves. To clarify, if there is a significant difference between 12.5% and our current capital position, we need to make larger CET adjustments to decrease that gap. Other colleagues have mentioned that mathematically this implies that achieving those roughly equal steps requires more effort. I have confirmed this calculation as well. As for the 7% run rate, that is indeed accurate. The clean cost increase for this quarter compared to the same quarter last year is 7%, reflecting inflation and our investments in digitalization, marketing, and customer growth efforts. This trend appears to be positive.

Thank you.

As there are no further questions, that will conclude today's question-and-answer session. I will hand the call back to Mr. Steven van Rijswijk for any closing remarks.

Yeah. Thank you, operator. That's the end of the analyst call. But not before I thank Marieke Bakker because she has been working vigilantly over the last number of years to keep us sharp and also have good conversation with all of you and make all these fantastic presentations. So I would like to thank her. She's going to move on in ING. She's going to work in another part of ING, and we're very happy that she remains with ING, but I want to express my appreciation for Marieke. And I would like to thank you all for again listening and for your questions. I wish you a great day and also wish you a great summer. Thank you.

Thank you. That will conclude today's conference call.