Earnings Call Transcript - ING Q1 2023

Operator, Operator

Welcome to the ING's First Quarter 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 regarding future developments in our business, expectations for our future financial performance, and any statement not including 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 solicitation of any offer to buy any securities. Good morning, Steven, over to you.

Steven van Rijswijk, CEO

Good morning, and welcome to our first quarter of 2023 results call. I hope you're all well. And as usual, I'm joined by our CFO, Tanate Phutrakul, and our CRO, Ljiljana Cortan. I'm pleased to take you through today's presentation. After that, we will take your questions. We started 2023 with a very strong quarter in both our retail and wholesale business by keeping focus on our customers and delivering value and demonstrating stability in these turbulent times for the banking sector. We continue to record organic growth and add another 106,000 primary customers, who chose ING for our superior customer experience, supported by our digital-only mobile-first strategy, as evidenced in the largest share of mobile-only customers. Another achievement was our growing volume mobilized to help our wholesale banking clients transition to a more sustainable business model. At €22 billion, the volume mobilized was up by more than 25% compared to the first quarter of 2022. In our P&L, we continue to see the benefits of the current rate environment, both on our retail customer deposits and our wholesale payments and cash management business. This comes on top of the structurally higher fee base, with a strong performance on total income, showing year-on-year growth of 23%. For the quarter, we realized a strong 13% ROE, increasing our four-quarter rolling average ROE to 9.7%. All of this has enabled us to announce an additional distribution in the form of a €1.5 billion share buyback that will kick off tomorrow. We accomplished all this in another exceptional quarter. Although, honestly, there has not been a dull moment since I became CEO almost three years ago. I'm proud that our performance has been strong throughout these years, and I'm confident we will continue to deliver value. This confidence underpins my belief that we have the right strategic focus and a solid balance sheet, with a strong funding and liquidity profile, which provides a robust foundation to build on. Before we go on to the financial results, I want to spend some time on these topics. Slide three shows our strategic priority and focus on 2023. Our top priority is to deliver a superior customer experience, which is a key differentiator for customer growth. Sustainability is also a key priority where an important aim is to support our clients in their transition to more sustainable business models. A superior customer experience means easy, relevant, personal, and instant service, and a key enabler for this is seamless digital delivery with minimal human intervention. This requires straight-through processing of customer journeys. Getting a mortgage is an important customer journey where being quick and predictable can be more important than price. Increasing the level of straight-through processing helps us achieve this. For example, in Germany, we have reduced the time to approval for brokers from four to two days. In Italy, we improved all aspects of the mortgage process with a faster time to approval and a higher first-time right. Streamlining how we interact with our customers is another important element of our customer experience as an increasing part of that interaction is through the chatbots we use. We also utilize AI to make interactions more effective and create a more personalized experience. While the KYC foundation is in place, now the focus is on how we can be more effective and efficient. Aside from combining efforts with other banking supervisors, the focus is on working smarter internally. For example, by improving the assessment and documentation of multiple individual transaction alerts for a single client, we can broaden the view of a client's behavior and increase the number of alerts that can be handled by one specialist. Regarding female representation, last year we set a target of at least 30% female representation by 2025 for our top 400 leaders, and we have extended that target to at least 35% by 2028. To reach that, we've also set a target to increase the share of women in the group of around 5,000 employees just below top management from 27% in 2022 to at least 30% by 2025. In sustainability, the financing of renewable energy is an important focus area. As the shift to renewable energy needs to grow faster, we set a target for new loan growth for renewable energy. In 2022, this book grew by 10%, and we aim to continue this growing trend. We combine this with further restricting the financing of new oil and gas fields by extending existing restrictions for upstream to the infrastructure activities that unlock new fields. Finally, we worked on the rollout of our Terra framework. Like we have done for steel, we are part of a working group to develop a framework for aluminum. On oil and gas, we are developing metrics and targets for mid and downstream, and we will cover an additional part of the value chain by including trade and commodity finance in our reduction targets in 2024. Moving on to our strong funding and liquidity profile on Slide four. On the funding side, 60% of our balance sheet consists of customer deposits. The vast majority comes from our retail customers, who keep €549 billion in deposits with ING. This is a highly granular deposit book that represents a large retail customer base spread over 10 countries. Seventy percent of these deposits are insured, forming a stable basis that has been steadily growing over the years. More details can be found in the appendix of this slide deck. As you can see from the recent NII development in a positive rate environment, our deposit base has material embedded value that will support our revenues in the coming years. On the liquidity side, our group LCR stood at 134% on a four-quarter rolling basis and at 137% at the end of the first quarter of 2023. These ratios exclude any local liquidity surpluses that are not transferable across borders and are based on a sizable high-quality liquid asset book (HQLA) of €187 million. In addition to HQLA, we have large amounts of readily available ECB eligible retained assets and other non-HQLA liquid assets, bringing the total level of available liquidity resources to €268 billion. In combination with our strong and stable deposit book, we feel very comfortable with this level of liquidity. Moving to Slide five, over the past years, we have built a solid track record of delivering an attractive return for our shareholders. ING continues to be a strong investment case as the best European bank with consistent strategy execution, income growth, discipline on expenses, and strong asset quality. Combined with our strong capital position, we are in a position to return capital to our shareholders, including the share buyback we announced today. Our shareholder returns for 2023 already stand at an attractive 8%. Slide six shows our financial targets for 2025 alongside our first-quarter 2023 performance. On fee growth in daily banking, we see further room to increase or introduce fees. In investment products, the continued growth of accounts provides a strong base for fee growth when market confidence improves, and this confidence will also support the growth of lending fees. Higher fees will also support income growth, although for 2023, the main driver will continue to be liability NII. While there are some uncertainties regarding central bank rates, deposit tracking, and customer behavior, the tailwind from liabilities will continue. We expect total income growth of more than 10% for 2023, with lower growth in 2024 and 2025 reflecting the flattening of the curve. This income growth will support an improvement in our cost-to-income ratio. On the cost side, we see pressure from high inflation, and we continue to invest in our business and execute our strategy, which will bring benefits in the longer term. Regarding our CET1 ratio, we intend to maintain our target CET1 ratio of around 12.5% through our 50% payout of resilient net profit, combined with additional distributions in roughly equal steps. With the targeted development of our cost-to-income ratio, a low-through-the-cycle risk cost, and a CET1 ratio target of around 12.5%, we are confident we will reach our targeted 12% ROE by 2025. Now, let's move on to the first-quarter results on Slide eight. The first quarter of this year showed a strong performance of our pre-provision profit. Excluding volatile items and regulatory costs, pre-provision profit was up 31% year-on-year and 11% higher quarter-on-quarter. I will address the underlying P&L lines in the following slides. Slide nine illustrates the continued strong development of NII, driven by liability NII reflecting rate increases, limited deposit tracking, and continued deposit inflow. The positive impact was also clearly visible in Wholesale Banking, with our Payments and Cash Management business benefiting from higher interest rates. In Lending NII, we experienced year-on-year pressure on mortgage margins due to rising interest rates as client rates generally track higher funding costs for delays, as well as declining income from prepayment penalties. Quarter-on-quarter, this effect has stabilized, leading to a slight increase in lending margins. Furthermore, in both comparable quarters, we saw the impact of a temporary shift of NII to other income in treasury and financial markets. In treasury, this reflected activities to benefit from prevailing favorable FX swap interest rates differentials, while in financial markets, this was due to the impact of rising rates on hedge positions. As noted on the previous slide, the boost in other income was further driven by financial markets benefiting from good client flow and market volatility. Excluding the net TLTRO impact in the Polish mortgage moratorium, our net interest margin for the quarter increased by 11 basis points to 159 basis points, primarily reflecting the higher NII on liabilities. Slide 10 shows net core lending growth. We are pleased to continue our support for economic growth and help our clients meet the demand across our businesses and regions. In retail, mortgages continue to grow, albeit at a lower pace, reflecting an overall slowdown in demand driven by uncertainty in higher interest rates. Higher net core lending and business lending was mainly visible in Belgium. Meanwhile, in Wholesale Banking, loan growth was observed in lending, more than offset by lower utilization in working capital solutions and a decrease in lending volume in trading commodity finance, which reflects lower commodity prices. Moving forward, we expect loan demand to remain subdued due to heightened macroeconomic uncertainty. Net deposit growth was €1.3 billion, primarily reflecting inflows in Poland, Spain, Belgium, and Germany, partly offset by an outflow in the Netherlands due to operational payments made by our business clients and an internal shift from savings to assets under management from our private banking customers. Asset under management saw further increases driven by external flows, while Wholesale Banking recorded a small outflow, noticeable in financial markets. Turning to fees on Page 11, they showed resilience, despite uncertainty continuing to affect the appetite for both investments and lending compared to a very high fee level in the first quarter of 2022. Fee income was down year-on-year, while daily banking fees continued to grow this quarter by 13%. This growth reflected an increase in primary customers, payment package fees, and new service fees. Lending fees were lower year-on-year, mainly due to decreased demand for mortgages. For investment product fees, we continue to feel the impact of lower stock markets and reduced trading activity, although the opening of new investment accounts continued, leading to an increase in assets under management. Sequentially, fees were up, reflecting growth in financial markets and higher fees in investment products and daily banking and retail. Lending fees in Wholesale Banking were lower after a strong fourth quarter. Moving to Slide 12, we see that excluding regulatory costs and incidental items, operating expenses increased, mainly due to staff costs resulting from the full-year effect of high inflation, manifested via salary indexation and CLA increases. This included a 10% to 10.5% automatic indexation in Belgium and an accrual for the CLA increase in the Netherlands. Additionally, there was a one-off energy payment in Germany and an early accrual of variable remuneration in Wholesale Banking. Legal provisions and energy costs were elevated in the first quarter. We also continue to invest in our business, which includes marketing campaigns and digitalizing customer journeys. We do this to ensure we keep increasing the number of primary customers, thereby expanding our base for future growth. As mentioned at the start of the presentation, investing to enhance our digital capabilities and optimize processes helps us become more efficient and reduce our cost to serve. Taking all this into account, and with the inflation rate declining, we expect cost growth for 2023 to be more subdued than the year-on-year development suggests. Regulatory costs declined year-on-year, mainly due to a reduced SRF contribution, while the quarter-on-quarter increase reflects the full payment of several annual contributions due in the first quarter of the year. Next, we move on to risk costs on the following slide, which were €152 million in this quarter, or 9 basis points of average customer lending. This included a €67 million increase in management overlays, bringing the total of management overlays built up at the end of Q1 to €521 million. Risk costs in Wholesale Banking included a further release of €118 million of Stage 2 provisions for our Russian book, reflecting a further reduction of our Russia-related exposure, which we will continue to diminish. We observed some collective provisioning in our retail banking, encompassing additions related to model adjustments in consumer lending alongside an additional provision related to Swiss franc indexed mortgages in Poland. The lower Stage 2 ratio mainly reflects the decreased Russia-related exposure, while the Stage 3 ratio remained low at 1.4%. Overall, it was a very benign quarter for risk costs, and we remain confident about the quality of our loan book. Our CET1 ratio, which increased to a very strong 14.8%, was due to a €600 million rise in CET1 capital, mainly from the inclusion of 50% of resilient net profit for the quarter. RWA was €4.1 billion lower, including a decrease of €1.4 billion from FX impacts. Credit risk-weighted assets declined when excluding FX impacts, reflecting an improvement in the overall profile of our loan book, particularly from reduced Russia-related exposure. Operational risk-weighted assets remained stable, while market risk-weighted assets saw a slight increase. Regarding our distribution plans, the final 2022 dividend was approved at our AGM and has been paid out on May 5. In line with our ambition to converge our CET1 ratio target, we will distribute an additional €1.5 billion in the form of a share buyback starting on May 12, which means tomorrow. This additional distribution will bring our CET1 ratio to 14.4% on a pro forma basis, and I'm pleased that we are taking this additional step in returning capital to our shareholders and optimizing our capital structure. We expect to provide further updates on distribution plans at the third quarter 2023 results presentation. To wrap up with the highlights, despite a turbulent quarter, we have delivered a strong start to 2023. Our team is committed every day to building a superior experience for our customers and supporting the transition to a more sustainable society, reflected positively in our primary customer numbers and volumes mobilized in transition finance. Our financial results also show that accelerating NII momentum is a clear tailwind, while fee income has proven resilient. Expenses reflect the inflationary pressure, especially on staff costs, but also on continuous investments to realize our strategy. Our capital position remains very strong, and we have announced an additional €1.5 billion distribution. Moving forward, I'm confident that we will continue to deliver robust financial results and successfully execute our strategy. With that, I would like to move on to the Q&A.

Operator, Operator

The first question comes from Rahul Sinha from JP Morgan.

Rahul Sinha, Analyst

Good morning, Steven. Good morning, everybody. Thanks very much for taking my questions. My first question is around capital distributions. Thank you for the new slide on the withholding tax mechanics and also for further clarity on the next decision date. My question is, how do you decide the right size of the buyback? It looks like you seem to have a good capital position, with your capital ratio not changing much despite a 50% dividend accrual and the share buyback. Are you expecting a rebound in RWA growth or capital consumption later in the year? And the second question is on costs. You had 55% costs in Q1 and you're not reiterating this 55%, 56% guidance from last quarter for the year. How should we interpret this? Does it indicate that it is easier for you to reach the 50% to 52% target, that is why you're hesitant to reiterate 55%, 56% because you're already in the lower end?

Steven van Rijswijk, CEO

Thank you, Rahul. I will answer the question on costs, and Tanate will address the decision on how we size share buybacks or capital distributions. On costs, I mentioned during the presentation that we saw a quarter-on-quarter cost rise of 10.7%. This was due to salary indexations and CLA that affected us this quarter, but we were not at that level in the first quarter of last year. Additionally, we processed several specific costs that we moved forward, such as CLA agreements and other costs in Wholesale Banking, along with a legal provision we booked. We continue to invest in marketing and in our digital experience. We want to extrapolate that over the year, and I want to reiterate that point. While we've given cost guidance of 55% to 56%, we do not currently see 55% as a floor, which may provide you some guidance.

Tanate Phutrakul, CFO

Rahul, when it comes to capital, we consider three key factors. The first is the level of capital generation that our franchise determines. The second factor is stress testing, which ensures that we capture all the macroeconomic situations in our numbers when determining the level of additional distribution. Lastly, we have split our capital management in terms of providing clarity in Q1 and based on specific outlook calibration, we will provide another announcement in Q3. That's our decision-making process on capital distributions.

Rahul Sinha, Analyst

Thanks so much. Are you expecting RWA growth for the rest of the year?

Tanate Phutrakul, CFO

At this point in time, no. We see negative risk migration even though the situation remains benign.

Jon Peace, Analyst

Thank you. Good morning, everybody. My first question is on NII. I'm not sure what you would consider a normal level of the sort of FX swap revenue transfer between NII and other operating income, but it seems underlying NII was probably at least €100 million above the reported number. Given lending margins are stabilizing, should we consider annualizing 16.4 or 16.5 as a reasonable NII level for this year? My second question is just on the cost of risk. Are you still seeing Stage 3 defaults running at a very low level in Q2? Could we assume you might be well below the through-the-cycle rate for this quarter?

Steven van Rijswijk, CEO

I'll address the question on NII, and then Ljiljana will take the cost of risk. As you know, we have provided guidance that we will increase our revenues compared to last year by more than 10%. We've seen the tailwind from interest rates. You point out the revenue we booked in other income, which effectively reduces interest income because that amount was moved through P&L lines. That means interest income, if you adjust for that anomaly, would have been higher. Currently, we continue to see that tailwind. The question remains when interest rates or savings rates will move, which closely links to higher loan demand, and that is not something we're seeing right now.

Ljiljana Cortan, CRO

Good morning. Regarding risk cost, as Steven noted, we see very modest and benign overall risk costs for the quarter. If we specifically look at the structure at the Stage 3 risk cost, we see €197 million as we presented. However, less than 40% of that amount refers to individual defaults. We do not see an increased number of individual defaults. In fact, this quarter was characterized by a very low number of individual defaults in wholesale banking, as well as no signs of structural deterioration in our major portfolios in retail banking. If we examine delinquency rates, days overdue, and unlikely-to-pay scenarios, the situation is stable.

Jon Peace, Analyst

Thank you.

Johan Ekblom, Analyst

Thank you. I'd like to revisit NII and these temporary effects. Regarding the total negative amount we see in Q1, the €271 million transfer between the lines, should we expect all of that to revert to NII at some point? Could you please explain the mechanics behind this transfer and the duration? Do we need to wait for ECB rates to stabilize or decrease? How quickly would that unwind? Additionally, concerning regulatory costs this quarter, you pointed out lower SRF contributions, and some temporary effects in Belgium. For risk costs going forward, should we expect the run rate to align with the levels from Q2 to Q4 of last year?

Steven van Rijswijk, CEO

This is a question for Tanate.

Tanate Phutrakul, CFO

To clarify, certain market opportunities are linked to interest rate differentials between different currencies. You can expect this transfer between other income and interest income to be interlinked. If we unwind these positions, those would return to normal. Therefore, you should see the normal run rate of replication and lending of that €234 million added to our Q1 numbers. This is linked to market opportunities which will persist into Q2. It depends on market conditions and interest rate differentials, so we will provide clarity in Q2 on these effects.

Johan Ekblom, Analyst

So to clarify on the NII side, when we look at the historical run rate, is there a normal level for these trades, or is it about a zero net impact over time? Could you help gauge the extraordinary component?

Steven van Rijswijk, CEO

The extraordinary component we mentioned is indeed €234 million in NII.

Amit Goel, Analyst

Hi, thank you. I want to return to the broader revenue picture. Your expectation of greater than 10% revenue growth suggests that the actual revenue trajectory for the remainder of the year doesn't need to be robust to achieve this. Where do you foresee revenues reaching this year? Also, regarding NII development, how do your current expectations compare with the information provided at Q3 of last year regarding sensitivities based on rates?

Steven van Rijswijk, CEO

Thank you, Amit. I will answer your question about revenues, while Tanate will address NII trajectory and the sensitivities. We mentioned that we expect revenue growth to exceed 10% for 2023, which we still stand by. As we said, this is enabled by the tailwinds in interest rates, which we continue to see recently. However, we need to observe how the loan demand evolves in the markets because currently we do not see strong demand.

Tanate Phutrakul, CFO

If you refer back to our presentation in Q3, the interest rate curve is now more beneficial to us than it was at that time. The curve is showing significantly sharper short-term rate increases compared to then. The simulation we had back then projected a tracking speed of around 30% for 2023, and we have noticed that the current tracking speed is significantly below that. How it will look for the rest of the year will depend on competitive pressure and the demand for deposits to fund loan growth, which has remained relatively benign so far.

Benoit Petrarque, Analyst

Good morning. The first question revolves around the current deposit margin at 114 bps, which is significantly above the cross-cycle average. Are you confident in sustaining this level in the medium term, or should we expect some normalization towards the end of the year? Do you sense any customer behavior trends regarding shifts out of current accounts into savings or term deposits? For my second question, on the cost side, I understand we should not extrapolate Q1, but now you have a CLA for Dutch staff and Belgium inflation is showing signs of moderation. Could you provide more specific details regarding cost growth for the full year?

Steven van Rijswijk, CEO

I'll pass both questions to Tanate.

Tanate Phutrakul, CFO

Regarding the deposit margin, we previously offered guidance that over the long term, we see a deposit margin around 100 basis points. Currently, we're at 114 basis points, which means we're operating slightly above our normal range. In terms of shifts, while some customers are moving from current accounts to savings accounts, the trend is small for now but is beginning to increase compared to Q4. We are not facing intense competition for deposits due to muted loan demand. As for costs, the 10.7% increase we experienced in Q1 was influenced by significant legal provisions and high marketing expenditure, accounting for roughly 2.5%. Thus, the normalized run rate is more accurate at around 8%. Moving forward, with salary indexations and energy costs on a downward trend, we remain optimistic about cost growth.

Benjamin Goy, Analyst

Hi, good morning. I have two questions. First, regarding new customer growth, it appears that you are more proactive, could you provide some insight on the markets and whether attractive savings rates are the principal driver? Secondly, you mentioned subdued loan growth historically, emphasizing positive pockets like Asia or the U.S. Are you observing any differentiation, or is the demand relatively muted across your lending portfolio?

Steven van Rijswijk, CEO

Thank you, Ben. On customer growth, we added a little over 100,000 this quarter. A significant portion originated from Germany, as we aim to grow our customer base there to 10 million in the next three years, by investing in the digital experience and marketing. This strategy is proving effective. In other markets, we see continued primary customer growth as well. Our focus is on converting new customers to primary status because primary customers are more profitable. Regarding loan growth, we don't see any significant regional differences. The mortgage levels across markets have dropped between 30% to 50%, but our book remains stable. Eventually, we expect the mortgage market to recover.

Flora Bocahut, Analyst

Good morning. I would like to revisit the revenue growth guidance for this year, anticipating over 10%. Given that Q1 suggests around 20% growth, why is the guidance unchanged? Is there anything from the Q1 results that you don't think will be sustainable or could turn negative before the year’s end? Secondly, could you confirm if the revenues booked in other income this quarter are in addition to the replicating portfolio contribution guidance that you had previously provided?

Steven van Rijswijk, CEO

Yes, for your second question, the answer is yes. As for the first question, we cannot predict the future, but we can report on current observations. For us to continue benefiting in a similar way from rising interest rates means that the level of tracking should remain relatively consistent with historical trends. Increases in lending demand would also contribute, which we currently do not observe. Therefore, for now, we see sustained benefits at a manageable level, though it will be interesting to see how this develops.

Kiri Vijayarajah, Analyst

Good morning, everyone. I have a couple of questions. Firstly, referring back to the core lending growth slide, which is currently annualized at less than 1%. Given your addition of over 0.5 million new primary customers last year, I am curious why this growth isn't translating into better lending volumes, especially looking at retail lending challenges. Secondly, with the deposit margin recovering, is this translating into rising customer acquisition costs as you add these extra primary customers, particularly in markets where competitors may be more focused on deposit-driven growth strategies?

Steven van Rijswijk, CEO

I'll hand these questions to Tanate.

Tanate Phutrakul, CFO

Regarding your second question, promoting customer acquisition in a negative interest rate environment was unprofitable from a P&L perspective. The current interest rate environment has transformed customer acquisition using deposits into a positive proposition, which explains the promotions we offer in several markets such as Poland, Germany, and Spain. We're acquiring more lending customers, but demand is subdued. We have ramped up marketing expenditures in Q1 to enhance our primary customer base.

Andreas Scheriau, Analyst

Thank you for taking my questions. I'm curious about the behavior of your most rate-sensitive customers. Are they transitioning towards variable savings accounts, time deposits, money market funds, or other investment solutions? It would also be helpful to mention any differences across regions. For my second question, regarding the Eurozone retail replicating portfolio, has its size changed significantly since the last update? Are you anticipating adjustments to the size of that hedge going forward?

Steven van Rijswijk, CEO

I'll pass the second question to Tanate while I address the first.

Tanate Phutrakul, CFO

Concerning the size of our Eurozone deposit replication, it has remained roughly the same, with levels of deposits somewhat higher than in Q4 or Q3. Interest rates lead to adjustments in our hedges, and we dynamically modify our hedges to reflect prevailing rates and customer behavior.

Anke Reingen, Analyst

Hello. Can you hear me?

Steven van Rijswijk, CEO

Yes, we can.

Anke Reingen, Analyst

Thank you. Just two questions, please. On fee growth, you're slightly below your target range. While Q1 last year was high, do you think to move higher in the range requires more supportive capital market conditions and a potential increase in wholesale lending? Or could there be a headwind from higher rate environments impacting payment packages? For my second question, regarding treasury impact in Q1, it's sizable. Could you provide reassurance regarding the size of the treasury positions?

Steven van Rijswijk, CEO

For the first question, I will answer it, and Tanate can assist with the second. Regarding fees, we aim to grow our primary customers as they will contribute more significantly to commission products. In several markets, we are incumbents feeling pressure to raise prices on commission products. Conversely, in some markets, we are challengers, starting to implement fees for services provided. In areas where we are extending our services, such as investment accounts, we've seen increasing growth. Once market confidence returns, we can anticipate an uplift in investment income.

Tanate Phutrakul, CFO

Regarding the trading strategies employed, I want to emphasize that we operate well within our market risk tolerance. The recognition of asymmetric accounting in Q1 is why we flagged this; it relates to a unique trading strategy where positions may be accounted for under different income lines. This doesn’t affect our overall NII replication of our savings book.

Giulia Miotto, Analyst

Hi, good morning, everyone. This is Giulia from Morgan Stanley. Thank you for taking my question. I want to follow up on liability margins. ING suggested that this is the main tailwind and key income driver for this year. The Netherlands has shown one of the fastest deposit pricing shifts across Europe. What are you seeing regarding repricing pressures from competition in the Netherlands and other markets like Belgium and Germany? Additionally, how close are we to peak NII? My second question involves overlays, leading to a top-up this quarter; how should we consider overlays moving forward? Can we expect further top-ups in the upcoming quarters, or are we comfortable at the current overlay buffer levels?

Steven van Rijswijk, CEO

I’ll answer the liability margin question, and Ljiljana will address the risk cost. The tracking rate is affected by the growth in loan demand, which is currently subdued. We observe that the mortgage production is down 30% to 50% across all major markets we've been active in, yet the book remains stable. Loan demand will significantly correlate with economic growth, so without a strong pick-up in loans, deposits required would remain steady. Consequently, we see a blend of being a challenger in some markets, like Germany, and incumbency in others, like Belgium, where we react to price increases.

Ljiljana Cortan, CRO

Good morning. Regarding the overlays, the total amount of overlays in the first quarter is slightly above €500 million—specifically €521 million. Yes, we have made a top-up primarily from model updates intended for implementation in the second quarter. The current situation concerning actual risk overlays appears stable, with no notable decreases in the macroeconomic forecast indicating we can maintain overlay levels.

Farquhar Murray, Analyst

Good morning. I have two questions. Returning to the sizing of the €1.5 billion capital return announced today, it aligns with the €1.5 billion from Q3 2022, consistent with equal steps. Given a pro forma CET1 ratio of 14.4, we don't observe a significant downward trend towards the 12.5% target. Is this due to the informational lag with ECB discussions or a strong quarter? Can we expect a return to the downward trajectory come the Q3 update? My second question is regarding the recalibration. Is this related to the scenarios you considered, and what are the key changes?

Steven van Rijswijk, CEO

We have indicated that we are aiming for around 12.5% by the end of 2025, executed in roughly equal steps. We confirmed that our capital distributions require a prior months' application, which means we cannot adjust distributions fully to fluctuating circumstances. They should occur gradually. If our profitability is higher leading to higher capital, this will prompt adjustments to the capital plan, which will, in turn, affect distribution trajectories. As for recalibration, we will adapt according to profitability and capital variations stemming from macroeconomic conditions, which indeed changes our outlook. Thank you for your time and for listening to our insights. I appreciate your thoughtful questions. We will remain available through our Investor Relations team, and I look forward to speaking with you again in three months' time. Thank you.

Operator, Operator

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.