Earnings Call
Ing Groep NV (ING)
Earnings Call Transcript - ING Q1 2020
Operator, Operator
Good morning. This is Anita Ogulin welcoming you to ING's first quarter 2020 conference call. Before handing this conference call over to Ralph Hamers, 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 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 an offer to buy any securities. Good morning, Ralph. Over to you.
Ralph Hamers, Chief Executive Officer
Thank you, operator. Good morning, everyone. Welcome to the first quarter 2020 results call. And for many of you, I thank you specifically because I know that for many of you it's actually a public holiday today. So thanks for joining us. I truly hope you're all in good shape, healthy in light of the COVID-19 pandemic. As always, I'll take you through today's presentation, which is a bit longer than usual because we are trying to give you as much information as possible. And for the Q&A session, as usual, our CFO, Tanate Phutrakul, and our CRO, Steven van Rijswijk, are here with me as well. So let's go through the presentation here. On the key points, the first quarter is not what I would call a standard quarter. For me personally, it's not, as it is the last quarter I'll be presenting as the CEO of ING, but even more so given the extraordinary times that we're living in, marked by the COVID-19 pandemic, which is having a profound impact on the entire world. It's our priority to support our customers, and it's our priority to support our employees and societies as a whole, during this time and to help them cope with the impact of the pandemic, while at the same time keeping our operations going. And I'm proud to see that our digital and agile business model is actually supporting this, while at the same time maintaining strong operational results, as you can see. So our support for customers was visible in core lending growth for the quarter, where growth in wholesale banking was mainly driven by providing liquidity in light of the COVID-19 pandemic. At the same time, we also saw continued growth in our retail book. Now combined with very strong fee growth, this largely countered the margin pressure that we faced on customer deposits and negative impacts from mark-to-market valuation adjustments driven by the market dislocation we observed at the end of March. And then on the risk costs, they are a clear focal point for this quarter. While Stage 3 provisioning was more or less stable, Stage 2 provisionings are elevated, reflecting collective Stage 2 provisioning, mainly driven by worsened macroeconomic indicators and, to a lesser extent, a drop in the oil price. All of this resulted in risk costs coming in above our through-the-cycle average, and we have time to take you through some of that. The CET1 ratio was also impacted by market volatility, overall coming in at 14%, around 60 basis points lower than last quarter. Approximately 40 basis points of this is caused by foreign exchange impact and valuation adjustments on capital, some of which has reversed already as we speak. Also, market risk-weighted assets were inflated due to volatility in March. At the same time, we absorbed EUR 9.9 billion or 43 basis points of risk-weighted assets as an impact related to the new Definition of Default. Going forward, we can clearly expect further impact from the COVID-19 pandemic. However, there are many unknowns that play a role in determining how significant this impact will be, and we're not going to speculate on this. There are many things we simply don't know. What we can say, though, is that we're very well positioned to face these headwinds. The change in customer behavior towards digital channels is indeed a wind at our back in order to maintain good operational results. Additionally, we have a good capital position, a strong funding base, and a low Stage 3 ratio going into this. Those are the key points. Now, over to Slide 2. As I said, our priority is to provide support to our employees, customers and society. We made a very smooth transition to around 80% of our employees now working from home, helping them to adapt to the new situation and at the same time, stay available for our customers. We kept the branch network open. Clearly, we had to tweak things here and there to ensure safety for our employees and our clients as well. Talking about clients, we help both our private and smaller business customers with payment holidays. To support safe payment behavior, we've also increased limits for contactless payments, also playing into our strategy. We're in close contact with our business customers to see how they are impacted and how we can support them through this. For smaller business customers, we provide credit facilities under local government guarantee schemes. For larger corporates, we look for tailored solutions, as you can expect, providing them with liquidity when needed. We have longstanding relationships with many of them. We've worked with them through previous cycles, and therefore, we will continue to support them as well in this cycle. All of this has, today, resulted in about 100,000 payment holidays, EUR 120 million in loans extended to SMEs and mid-corporate customers under government guarantee systems schemes, and EUR 5.6 billion liquidity provided to larger customers, as we have seen, with part of these drawdowns already reversing. Furthermore, we can't be detached from the societies in which we're active, and these societies have been under major pressure, given the COVID crisis. So we've been running collections to make donations to charities matching employee donations. We're working with UNICEF, with the Red Cross; we have donated laptops to enable homeschooling, many of those things that we can help to support the societies as well. Now on the next slide, what you will see is that our digital and agile abilities are great assets under these circumstances. We see a revolutionary change in the behavior of our clients rather than an evolutionary one. So we're very well positioned, given our business model in order to support these clients, who are all moving towards digital banking. It's a safe choice, and we have experienced a smooth adoption to working from home in order to support this. The systems and channels have been available all the time. So our IT investments over the last couple of years are really paying off in order to support a business that is increasingly digital. The share of mobile interactions further increased to 86%, with the number of interactions also increasing on an annual basis. This quarter alone, we had EUR 1.3 billion of interactions. As the last graph shows, on an annualized basis, we are more successful in our mobile channel offering new products and actually concluding sales, and that has increased to 84 sales per 1,000 customers and continues to increase. Our operations also continued uninterrupted, whereas the volumes that went through were very high. For example, in March and April alone, we opened 170,000 investment accounts globally, of which 100,000 in Germany. Up until now, we also processed and approved over 100,000 payment holidays and credit facilities under government guarantee schemes. So happy to be digital and able to support all these customer demands, but also the new account openings that we see. The next slide is one that we wanted to show you: that although we are in uncertain times, we are in a very good starting position, having built a very resilient bank by focusing on primary customers, increasing about 5 million over the last couple of years since we launched the Think Forward strategy. Today, we have over 13 million of them, representing one-third of our total customer base. That has resulted not only in higher income but also in more diversified income. In retail, we saw the highest growth in fees, reflecting our focus on increasing fee income. The share of fee income in total retail income has increased from 11% in 2014 to more than 16% in 2019. So digital primary banking does work. Our total income has also diversified geographically. With the main growth coming from other challengers and growth markets, which aligns with our strategy, their contribution to income increased from 30% in 2014 to 40% today, with income coming from non-Eurozone countries increasing from 13% to 17%. Specifically, in non-Eurozone countries, as you know, they still have healthy yield curves, which also helps us weather some of the pressure there. The increased share of both fee income and income from non-Eurozone countries is also helping us to better cope with the pressure of the lower interest environment, as previously mentioned. The next slide shows that with all this growth coming through and with the number of clients rapidly increasing, we have actually been able to control our cost over this period. Regulatory costs have clearly had an impact. But if you look at the real underlying operational cost, they have only increased by 1.7%. Therefore, most of the salary increases, most of the investments in ATF, and most of the KYC costs have been absorbed by being far more efficient and getting more volume through the system, generating more income. If you now look at the cost/income ratio over time, we were already more efficient at the beginning of Think Forward than our peers in 2014. Although we have been coping with a low rate environment and increasing KYC-related expenses, which certainly has had an impact on our cost/income ratio, we continue to absorb those over time. We actually see that our advance over Eurozone peers in terms of cost/income ratio over time has actually increased from 5.3% to 7.9%. Then to the way we do credit risk management. You see that also through the cycle, and that's why we go back a little bit longer to 2008, that we have a strong track record in credit risk management. Both our risk costs over average customer lending and our Stage 3 ratios are low compared to our Eurozone peers and also compared to equally or higher rated peers. This reflects the strong risk management framework that we have in place. We operate with a strict risk appetite, including exposure caps, to manage concentration risk, with extensive sector knowledge on the wholesale banking side, knowing how to work with our clients through the cycle. Our loan book with 42% in mortgages at 60% LTV is for more than 99% senior secured, to a large extent, with a focus on structures and collateral. All our efforts result in a good quality loan book with a low Stage 3 ratio, which puts us in a very good position to deal with the challenges of the current cycle. Turning to capital, that's been quite a journey over the last couple of years. Since 2015, we have been looking at that, given the fact that at that moment, we deconsolidated the insurance activities. Over that period, the CET1 ratio has increased to well above the ambition despite paying over 50% of our net profit to our shareholders and absorbing substantial risk-weighted assets impact from our model, methodology, and policy changes. We've also maintained our strong funding structure, as you can see, with the majority coming from a sticky deposit base. While in the low rate environment, I've had to explain often why this is the strength, in the present time with volatile and even dislocated financial markets, the stable source of funding again proves its value. It's always been our strength, and it will continue to be our strength going forward as well. This also sets the time frame going into the cycle. A strong capital position, a solid and diversified senior secured asset book, and a solid funding structure with a proven digital operating model. Now turning to the first quarter results. If you look at the first quarter results, we saw a strong increase in fee income combined with higher treasury income and disciplined lending margins on one side. On the other side, we saw, clearly, at the end of March, market volatility resulting in higher negative value adjustments. That basically explains the income as we see it. But if you compare it year-on-year, in 2019, the first quarter '19 actually had a one-off gain of EUR 119 million, which you probably still remember, related to the sale of our stake in Kotak Mahindra. If you take the literal year-on-year comparison, it resulted in a EUR 65 million lower income year-on-year. But if you correct it for the EUR 119 million, we actually see a bit of an increase in income there. Sequentially, income has also improved by EUR 72 million, reflecting higher treasury-related income and higher fees. While NII was lower, with the fourth quarter '19 NII including some one-offs, reflecting higher prepayments of some fixed loan rates. As you may remember, in the wholesale bank, there were a couple of large loans repaid at that moment. Pre-provision results, excluding volatile items and regulatory costs, show an increase in operating results by more than 5% year-on-year and quarter-on-quarter. This reflects the higher income, excluding the volatile items, and is obviously also a reflection of a quarter with lower costs. Turning to Slide 11. If you look at the NII development, excluding financial markets, it was 0.2% higher year-on-year, slightly up despite continuing margin pressure on deposits. Versus the previous quarter, it was 2.3% lower. While NII and mortgages improved, margin pressure on customer deposits actually continued. The fourth quarter also included some one-offs in wholesale banking, as I just referred to with the prepayments, as you remember. Overall, we continue to see the effects of pricing discipline coming through. Volume growth is continuing, and as mentioned in previous quarters, we benefit from our activities in non-Eurozone countries, as well as the negative rates that we have started to charge on deposits. Mainly versus the first quarter last year, we benefited from the deposit tiering, which came into effect in the fourth quarter, largely cancelling out the negative rates on our deposits held at the ECB. Our net interest margin decreased by 6 basis points, as you can see. It's actually been remarkably stable on a four-quarter rolling average at 154. But quarter-on-quarter, it decreased 6 basis points, explained by an increase of the average balance sheet, around 2 basis points; some market volatility, which lowered results in financial markets by 1 basis point; and then a 3 basis point impact from the combination of lower margins on savings and on non-mortgage lending. The increased balance sheet for the quarter was driven by Wholesale Banking in order to provide liquidity facilities on one side, but also institutional clients trusting ING with a considerable increase in deposits. Although we discuss the NIM all the time with you, and it is certainly a factor that we look at how to manage, we do think it is better to look at NII developments as part of the P&L. And how did lending develop? That's in Slide 12. In the first quarter, we saw EUR 12.3 billion of net core lending increase. Main growth was visible in wholesale banking, which increased by EUR 9.4 billion, with two components: EUR 11.2 billion in extra financing largely because of liquidity facilities. To date, we've already seen part of these drawings reversing; we also saw a decrease in trade finance, particularly in Trade & Commodity Finance, caused by the lower oil price, thereby affecting the value of contracts and of the underlying activity, while the volume remained the same. Retail core lending grew by EUR 2.9 billion, with Belgium's increase fully due to the growth in business lending by one large client, while retail challengers and growth markets continue to grow as well, largely driven by mortgages in those areas. Net deposits also increased by EUR 9.2 billion for the quarter, mainly driven by a EUR 6 billion increase in wholesale banking, reflecting funds drawn under revolving credit facilities, but also partly explained by institutions trusting us with their money, which shows confidence during these times. Retail banking deposits were EUR 3.2 billion higher. Now over to fee growth. We had a particularly strong quarter in fees this quarter. Fee income increased by 16% year-on-year by EUR 108 million. Among those, EUR 72 million was in retail banking, up 17% year-on-year, mainly driven by Germany with higher fees on investment products as the number of trades more than doubled in a volatile market. We also saw increased daily banking package fees rise there. In the Wholesale Bank, we saw the fees increase by 13.4%, reflecting increased syndicated deals in the first two months of the year and higher fees in financial markets. Compared to the last quarter, fees were up 6.5%, fully due to retail banking. In wholesale banking, fees were slightly lower, because of lower activity in corporate finance in the first quarter versus the last quarter and the low oil price which affected the fee income in Trade & Commodity Finance, as I already mentioned on the lending side. Turning over to financial markets. The results of financial markets were impacted this quarter by market volatility at the end of the quarter. The first two months of the quarter were really good. From the client side, the business was holding up quite well. It was lower by EUR 8 million, but we also had some losses in credit trading due to the abrupt downward movement in the market at the end of the quarter because of the crisis. If you correct for that, client income was actually substantially higher, so that's a good sign of underlying business and recovery of this activity. Sequentially, client income rose by EUR 25 million, benefiting from volatile markets. The negative value adjustments impacted FM income by EUR 92 million. This was partly caused by the dislocation of the bonds versus CDS prices at the end of March. It's clearly visible in the lower table on the slide, where you see the drop. Mark-to-market valuation on our derivatives portfolio also had a negative impact while requiring positive movements in bid-offer spreads necessitating higher fair value adjustments. Some of these negative value adjustments were offset by positive movements from our own hedges that we have in place. As the market volatility we observed at the end of the first quarter has somewhat subsided, some of these negative impacts have, in the meantime, reversed, as you can expect with the normalization of the market. Over to costs, expenses excluding KYC. This is additional information for you this quarter because you asked for more transparency around KYC costs. If you exclude KYC costs and regulatory costs, the costs were actually down EUR 29 million year-on-year, a 1.3% decrease of costs. So you see that cost control is actually working on the operational side. There were also some positive one-offs, but these countered some of the CLA salary increases. Quarter-on-quarter development, expenses excluding the KYC and regulatory costs were lower as well by EUR 52 million, a 2.3% decrease. You can also see that this quarter had a lower KYC cost than the fourth quarter. But if you look through, we expect KYC costs to plateau around these levels. We guided that we would expect them to come out around EUR 600 million for the year. In these times, we are very focused on costs going forward and will be very precise about what we want to do and where we want to invest. We will continue our cost discipline going forward, and it resulted in the first quarter already in lower expenses in almost all segments. So from that perspective, it was a good quarter. Then the regulatory cost, as you can see, is seasonally higher, and in the first quarter was EUR 11 million higher than the same quarter last year, driven mainly by higher SRF contributions and higher bank taxes in Belgium and Poland. Over to risk cost. We're disclosing quite a lot of additional information today to analyze. I'm sure it's a lot to cope with for the day, but we'll have a lot to work with going forward. So turning to Slide 16, here, you see that the risk costs came out at EUR 661 million, which is 42 basis points of average customer lending. That's above the through-the-cycle average of around 25 basis points and up from EUR 428 million in the previous quarter. The increase is mainly driven by higher collective Stage 2 provisions reflecting worsened macroeconomic indicators as well as historically low oil prices. In the next slide, you will see more detail on how the Stage 2 provision has developed per segment. If you look at how the Stage 3 ratio has evolved, I’m still on Slide 16, not to confuse you, you will see that in Wholesale Banking, the Stage 2 ratio has also increased to 5.9%. In Retail Netherlands, higher risk costs were driven by Stage 2 provisions as well. Retail Belgium also saw Stage 3 risk costs increasing, mainly due to some larger additions to individual files in mid-corporates. Retail Germany, risk costs on consumer lending were slightly higher as well. The increase in other challengers and growth was driven by the allocated Stage 2 provisions, while Stage 3 risk costs were stable and mainly visible in countries like Poland, a bit in Romania, Italy, and Australia. Looking at this picture from a different perspective, the risk costs were up by EUR 119 million in Wholesale Banking, again fully reflecting allocated Stage 2 provisions. The Stage 3 risk cost in Wholesale Banking stayed at almost the same level, reflecting larger individual clients and the split between additions to existing files and some new files. The Stage 3 ratio increased from 1.4% to 1.6%. This increase was driven by the implementation of the new definition of default in retail banking. For the Wholesale Bank, the Stage 3 ratio remained flat. Then turning to Slide 17. Here, you see that the majority of the collective Stage 2 provisions are allocated to wholesale banking, with about EUR 114 million reflecting the worsened macroeconomic indicators due to the COVID-19 pandemic, while another EUR 41 million was allocated to wholesale banking, reflecting the potential impact of low oil prices on our reserve-based lending book. So EUR 114 million is more COVID-related and EUR 41 million is more related to oil and gas prices. EUR 92 million of the collective Stage 2 provisions was allocated to retail banking; EUR 25 million in the Netherlands, EUR 20 million in Belgium, EUR 1 million in Germany, and EUR 46 million divided over the different markets in other challengers and growth. Overall, for 2020, we can expect risk costs to come in above through-the-cycle average as a result of the economic impact of the COVID-19 pandemic. I don't think that will be a surprise to you. However, that impact and how it really pans out depends on several factors: how long the lockdown measures will last, the effectiveness of government support schemes, and how quickly the economy can start to recover. We do recognize that since closing the books, macroeconomic indicators have worsened. Turning over to the book and why we feel comfortable with the risk management framework. This slide provides a brief overview of that book, highlighting some of the segments. Let me focus on a couple of sectors here: residential mortgages stand at EUR 298 billion at a 60% average LTV, showing a low Stage 3 ratio. If you look at consumer lending, we have a limited book as well; business lending is also limited. We've given you some more color on the more sectors at risk, such as agriculture, retail, and hospitality. The percentage of the total book is manageable. Then turning over to the Wholesale Bank. Oil and gas have clearly received a lot of attention in the past weeks. I would like to stress again that only EUR 4.6 billion of this book is directly exposed to oil price risk, which constitutes 0.6% of our total loan book. That covers reserve-based lending and offshore businesses. Our main focus here is on the EUR 1.4 billion U.S. book in reserve-based lending. If you examine the hospitality sector, our exposure there is also limited to 0.6% of our book. We've always been very restrictive in this sector, very selective, and you will see that we maintain a low Stage 3 ratio in that sector. We also have a very small exposure to aviation, only 0.4% of our total loan book. As you know, we've been ahead of the curve in capping certain businesses, such as the leverage finance book. We're closely monitoring the development of this portfolio. It is well diversified, and we follow a strict risk policy, only taking senior debt with maximum leverage, capping at a maximum EUR 25 million hold and no single underwrites. And then turning to commercial real estate. We're a larger player, with capped exposure since the third or fourth quarter of 2018 in order to avoid concentration risk. We're very experienced in this from previous cycles as well. We have a very strict risk policy. Retail-related assets are limited to 18% of that book, and generally financing of hotels is not allowed. The current circumstances will certainly impact our customers. We will have to closely monitor that and also how our book develops. However, the risk framework we have in place has been strict and so we remain confident in the asset quality. The next slide shows you the CET1 development. Our CET1 ratio is a healthy 14% with clear impacts from market volatility. I'll take you through it. On the capital side, we had a EUR 1.4 billion negative impact from the revaluation reserve as well as foreign exchange movements and Bank of Beijing, which combined lowered the CET1 ratio by around 40 basis points. To date, we have already seen some of this negative impact reverse. Then, we added EUR 0.7 billion of profit, basically adding first quarter profit to the capital. In risk-weighted assets, we absorbed EUR 9.9 billion impact from the new definition of default. We also observed some positive impacts with the release of EUR 6.6 billion of the expected supervisory risk-weighted assets impact taken in the fourth quarter of 2019. This was mainly ready to TRIM. This release follows the announced delay in TRIM, as announced by the ECB. Though we have remained part of the impact in risk-weighted assets reflecting the model changes, as we would need to implement them regardless of the TRIM implementation anyway, market risk-weighted assets were also inflated clearly because of the volatility in the markets, increasing by EUR 4.5 billion. Overall, with the announced performance of Basel IV, TRIM, and the floor on Dutch mortgages, we will face further risk-weighted assets impacts from banking regulations and model reviews which will be delayed. With the new definition of default and part of the TRIM now included, we feel comfortable with our current capital position and remain confident about the remaining future expected risk-weighted assets impacts. Although delayed, they may still come and we feel that we've already taken quite a fair amount, so we are very comfortable there. You know that the COVID-19 pandemic also resulted in several supervisory measures that have lowered our SREP requirement. You can see that in this slide. It has decreased to 10.5%. Our buffer at MDA level now stands at 3.5%, versus where we are right now. As you can see on Slide 20 then, the CET1 ratio and leverage ratio remain ahead of our ambitions. For our return on equity, it's below our ambition, and that's certainly true. But despite higher capital requirements, a low interest rate environment, and increasing regulatory costs, we still continue to produce an attractive total return. The current crisis, the current pandemic, could clearly have an impact on this metric. However, we don't want to speculate on it, and our current ambition remains unchanged. Our cost/income ratio was impacted by factors such as the low rate environment and regulatory costs. I want to reiterate that the cost/income ratio is not how we run our business, but it remains a very important input for our return on equity. We aim to reach around 50% to 52% as we further digitize. As for our dividends, there is nothing new for you. Following the ECB recommendations, we have suspended any dividend payment until the first of October, after which we'll see what the situation is. The EUR 1.7 billion that we reserved last year for the final dividend payment over 2019 is kept outside of regulatory capital. In summary, the first quarter has not been a standard quarter, given the pandemic leaving a mark on our customers, employees, and society. It's our first priority to support our customers, employees, and society. We also saw the impact of the pandemic on the market and market volatility on our financials. Loan growth with very strong fee growth and cost control largely countered the margin pressure on customer deposits and negative impacts from mark-to-market value adjustments. Risk costs were impacted by collective Stage 2 provisions reflecting worsened economic indicators and, to a lesser extent, the drop in oil prices, resulting in risk costs coming in above our through-the-cycle average. The CET1 ratio was also impacted by market volatility, coming in at 14%. However, just to remind you, we had a 43 basis point risk-weighted impact already related to the new definition of default. Clearly, the pandemic, as it continues, will generate some uncertainty and stress for some of our clients. We recognize that since closing the books on the quarter, economic indicators have worsened, and there are many unknowns in this regard. As I said before, the only thing you can look at is how strongly you feel about your capital position, and we're very confident about it. We have a solid and diversified asset book, a strong funding position, and a proven digital operating model that will give us some tailwinds to help us also here. With that, I know it has been a little bit more elaborate than normal, but I believe there are reasons to give you more information. I'll give the floor to you to raise some questions for us to answer. Thank you.
Operator, Operator
The first question is from Mr. Raul Sinha, JPMorgan.
Raul Sinha, Analyst
Ralph, I have two questions for you. First, looking at the long term, how has the risk level of ING's loan book changed since the global financial crisis? I realize that's a broad timeframe, but it would be helpful to understand your views on where the risk concentrates, especially considering the current crisis. What areas are you closely monitoring, particularly in regard to how the oil sector will perform, given that losses were minimal in 2015? How should we interpret that historical performance and what guidance can you provide for future risk costs? My second question is about capital and its various components. Tanate, could you elaborate on the positive factors that might enhance your capital ratio later this year? I'm thinking of smaller elements like the SME supporting factor and the software deduction. Is there anything else you can implement to manage the loan book? Additionally, if you could address the impact of credit risk migration, which was favorable this quarter, will that trend continue or become unfavorable moving forward?
Ralph Hamers, Chief Executive Officer
Thank you, Raul. Yes, so I think for the people around the table, I can actually take you through how it all has changed. Remember, when we were in the financial crisis at that moment in time, ING was largely a savings bank, using those savings to invest in bonds, and we had quite some concentration risk in some of these investment portfolios. And these were a couple of hundred billion investment portfolio at that moment in time. What we have done over the last 7, 8 years, actually longer, is moved away from using these savings for investment portfolios, but rather generate client business. That is reflected by the change in the composition of our balance sheet and therefore, a higher interest income over time that comes out of lending. What we have learned in the global financial crisis is that you have to stay away from concentration risk because no matter how risky the sector or a specific asset is, whether it is low risk or not, if the market thinks you have too much of it, you have a problem. That was one of the big learnings from us in that crisis. We needed to manage concentration risk in specific sectors and asset categories, and that's what you see. We have been doing that. With the growth in Wholesale Banking, but within wholesale banking, we also have many different sectors with capped exposures to each sector, while growing gradually in what we would call business lending in the economies in which we're active, but to a limited extent, with some growth in mortgages across different geographies. So it is much better diversified both geographically and through asset categories and sectors.
Steven Van Rijswijk, Chief Risk Officer
Yes. Thank you, Raul. Let me start by stating that what we currently see happening to oil and oil prices is not new. We've seen this in previous crises. Therefore, I particularly want to focus your attention on the page where we split up the book into portfolios that are more or less exposed to oil price. We are focusing on the RBL book, the reserve-based lending book, particularly in the U.S., as that is more shale-related with a potentially somewhat higher cost price. Thus, we focus on that part of the book. However, the part of the book that we have in oil and gas exposure is very limited.
Tanate Phutrakul, CFO
We're carefully monitoring changes in the capital requirements regulation, including the small and medium-sized enterprise support factor. In the future, we expect to benefit from the regulatory technical standards on software capitalization. We're also looking into how we can apply flexibility regarding prudential value adjustments and credit valuation adjustments over time, which should positively affect ING's capital. Additionally, as we've previously indicated, the implementation of Basel IV has been delayed, and we're actively working on strategies to optimize our risk-weighted assets, including how we handle data and sovereign exposure. The positive risk migration observed in the first quarter is partly the result of these improvements in data.
Operator, Operator
The next question is from Mr. Pawel Dziedzic, Goldman Sachs.
Pawel Dziedzic, Analyst
Two questions from me as well. The first one is on the cost of risk, and thank you for all the comments made so far. I was hoping you can give us a better insight into the cost of risk trajectory in the coming quarters. I know there is a lot of uncertainty, but to what extent do you feel you have front-loaded any of the costs? And how can it develop going forward? You booked 42 basis points in Q1. If we go back to Slide 7, which helpfully shows it is close to peak levels of 2009 and 2013. Can you comment on whether this crisis is likely to be similar in magnitude or perhaps greater than those 2 peaks in the past? More specifically, if you can, you mentioned that the assumptions you relied on for Stage 2 provisioning have deteriorated somewhat already. Could you outline your baseline scenario that you took to calculate Stage 2 provisioning this quarter concerning factors you mentioned, like the length of the lockdown, effectiveness of government schemes, and the pace of macro recovery? So that would be the question on the cost of risk. Also, if I can squeeze in a second question, could you give us a sense on what initiatives you're looking at regarding the cost? Which part of the bank? What do you mean by that?
Ralph Hamers, Chief Executive Officer
Okay. I'll start with the second question, and then Steven will take the first one. Regarding cost initiatives, the first thing, Pawel, is clearly, we were all— I think the entire world was set for growth, and therefore, you have investment plans in place to support that growth. Some of that growth will still be there, given that we have tailwinds due to our digital model, but some won't be there. Therefore, you can cut back on a portion of those investments. That is the first step that you will take. The second step is that digitalization and the behavior of clients have changed much faster than it has through the crisis. This also gives more room to accelerate digitalization across many processes and the channels environment. You can expect further investments and, therefore, also further decreased costs across the board. Now how this pans out across the different segments that we manage will still follow the same recipe, as indicated earlier, which basically means that in market leaders, you can expect, as we are showing in the Netherlands, a further decrease in costs. In the Wholesale Bank, it's maximum cost flattish, if not decreasing. We're really looking into that as well, considering the current circumstances. And in Consumer & Growth, if this crisis is indeed continuing in terms of the use of digital channels and the aspects we see, for example, in Germany, with 100,000 new investment accounts opened in two months, we could still allow for some cost growth in those areas because the demand from our customers justifies it. These are the areas we are looking at. It is further digitalisation across all processes alongside channels that will contribute to a decrease in cost.
Steven Van Rijswijk, Chief Risk Officer
Thank you, Pawel. Let me start by staying that we stuck to our process, meaning that we closed the books as of the end of March. We will also close again at the end of May, I think, and then we will take a new look, but let's focus on the end of March. We used that consensus for GDP forecasts at that point in time, and that forms the basis for our Stage 2 provisioning. Note that Stage 2 provisionings involve more elements than just GDP alone. Moreover, they depend significantly on the makeup of your book in terms of country, sector, security, and type of products. Those factors all impact Stage 2 provisioning rather than just GDP or house prices. We will not comment on what will happen to the forecast. We'll do that again at the end of the second quarter. These forecasts are continually changing, and so we’ll be monitoring that with interest. If you compare this crisis with 10 years ago, this crisis is indeed different, being a health and subsequent economic crisis. However, every crisis is idiosyncratic, meaning it is unpredictable what will happen because the comparisons and statistical evidence from one crisis do not apply to another. Hence, the best way to guard against crises such as these or very deep crises is to start with diversification. That is why, compared to previous crises, we have been very strict in ensuring diversity across countries, products, sectors, obligation limits, and other relevant factors. We aim to be senior lenders because, ultimately, if something goes wrong, being in a senior position is better than being in the second or third category of lenders. We want to have security; therefore, close to 80% of our book has security, completely or partially. Please note that, across our total loan book, almost half has a loan-to-value of over 60%. We also actively limit our exposure to certain cyclical sectors. For example, two years ago, we established caps on leveraged finance and real estate finance, taking size levels into account. You want to limit exposure or even avoid certain cyclical sectors. Our activity in sectors like aviation, agriculture and hospitality remains relatively restricted. This does not insulate us entirely from what can happen during a crisis. As we are a large bank operating in many places, with numerous products and sectors; if something occurs, we are likely to be affected, but typically, the impact will be limited. This is how we manage our book, and we are confident in our business model.
Pawel Dziedzic, Analyst
That's very helpful. To maybe just follow-up. Do you feel you front-loaded any of the losses in Q1? Or do you believe that as the environment becomes tougher, the charge will remain high or perhaps slightly higher in the coming quarters? What will your process result in if the environment proves to be slightly more challenging than anticipated at the end of March?
Steven Van Rijswijk, Chief Risk Officer
Thanks, Pawel. I mean, the process will remain the same. We will look at the economic indicators we have at the end of the next quarter, the data we have, and then reassess our calculations. By definition, the Stage 2 provisions we have taken, including the Stage 2 overlay for oil and gas, is forward looking because these are not loans that are currently non-performing.
Benoit Petrarque, Analyst
Yes. First of all, Ralph, good luck at UBS. I think your digital focus has been very useful, and you saw it right since 2013, so well done. All my questions will focus on risk, well, almost. The first one is actually on your oil and gas exposure, which seems to be a bit relaxed, while there seems to be a big gap with market participants who have been quite frightened about the oil exposure. I want to try and reconcile that view. I mean, you had an opportunity to take some Stage 2 provisioning in Q1; you didn't take that. Is this simply a matter of taking the oil price at the end of March and relaxing that level? Or what do you see clearly on this book? And what can we expect? Because there seems to be a significant gap between your stance and that of the market, and what you booked this quarter.
Steven Van Rijswijk, Chief Risk Officer
Yes. We indeed took an additional provision. Firstly, we have our normal Stage 3 provisions for non-performing loans. Secondly, we also have normal Stage 2 provisions for deteriorating but still performing loans. Additionally, we took an extra EUR 41 million provision for the North American RBL book. If you drill down further, the total book directly exposed to oil and gas is EUR 4.6 billion—about EUR 1 billion in offshore services and drilling, leaving us with EUR 3.6 billion. Approximately EUR 1.4 billion of that book is in the U.S. In particular on that book, we've taken more additional Stage 2 provisioning compared to normal.
Tanate Phutrakul, CFO
And on the leverage finance exposure on Page 30, yes, the colors of Asia and EMEA should be swapped. This is a completely diversified portfolio. There is no direct correlation of risk with any of these exposures, and they're all small. As I mentioned earlier, I capped the single unit size at EUR 25 million, meaning that if we get hit on an exposure, it doesn't correlate with another exposure. If we do take a hit, it will be limited.
Ralph Hamers, Chief Executive Officer
Thank you, Benoit. On state-guaranteed loans, the different government schemes vary widely across Europe. For instance, Germany guarantees almost 100% of loans; Belgium has a particular scheme; France, and indeed, every country has its own schemes. The appeal of these schemes when structuring loans to support clients ranges significantly and is not only assessed from a risk perspective but also from a return perspective. I don't have the exact numbers available as of today. However, we are financing under these schemes and meeting demand. Our structured loans differ and must be assessed on a case-by-case basis, considering that we have a duty of care to avoid burdening customers with debt they cannot repay, regardless of the presence of guarantees. At the end of March, we had, in total, EUR 120 million in financing under these schemes, and EUR 5.6 billion for specific liquidity and financing facilities. Additionally, we granted about 100,000 requests to delay repayments on both mortgages and SME loans.
Steven Van Rijswijk, Chief Risk Officer
Yes. Regarding your other questions on oil and gas, you are right to question whether there is any stress testing in our internal evaluations. We did conduct a stress test back in 2015; the $30 scenario predicted potential losses of EUR 200 to EUR 300 million over the lifetime of loans. Now we are assessing this under a stress test of $20 per barrel, predicting that both risk costs are a bit higher. This has become an ongoing practice as market fluctuations continue to develop.
Operator, Operator
The next question is from Mr. Tarik El Mejjad, Bank of America.
Tarik El Mejjad, Analyst
Just a couple of questions, please. First, on capital; coming back to Raul's question about potential headwinds related to capital, could you give us a sense of the potential magnitude concerning the SME support factor and the software amortization in basis points? And on capital, I wanted to understand why you would return only half of the TRIM impact you booked in Q4. Why only half? What's the rationale behind this? And to understand further: on dividends, you ring-fenced the 2019 final dividend. This approach seems very Dutch, quite different from how the French have approached their dividends. Can you explain why you've chosen this method and how it signals your intention to continue paying dividends? I find it a bit contradictory considering you do not accrue for the 2020 dividend.
Ralph Hamers, Chief Executive Officer
Tarik, you're right. You have a point. Regarding cost, if we are looking at the need for major reorganizations, this is not a time to do so amidst uncertainty in the job market. However, we find it is also key for banks to remain healthy. Therefore, banks must be efficient, and we can still continue on many programs we have started. There is flexibility as well in how we undertake the necessary tasks; for example, in the Netherlands, we are reskilling branch staff to cover KYC needs through responsible training. This is a live project making strides. So there are still levers available to enhance efficiency while reskilling staff into more relevant capacities.
Tanate Phutrakul, CFO
Regarding the SME support factor, we are monitoring it closely but are expecting a potential impact of around EUR 5 billion in RWA benefits. As for software, we're currently estimating a range between 10 to 20 basis points for the expected effect, which will heavily depend on the RTS issued by EBA. If it simply includes purchased software, it could be closer to 10 basis points; however, if more liberal including developed software, it could reach about 20 basis points.
Steven Van Rijswijk, Chief Risk Officer
If you look at our models, we have an internal model risk management framework with many rules and definitions based on regulatory standards. Over time, we will recognize opportunities for adjustments while ensuring we retain our model quality. Hence we took an add-on and, separately, assessed the expected TRIM impact. We decided to only take a part of it back while leaving our own improvements intact, resulting in the remaining EUR 6.6 billion.
Benjamin Goy, Analyst
Two questions from my side. Firstly, on markets outside the market leaders: do you see the crisis as an opportunity to gain further market share? Or is it more about protecting the loan book and focusing on risk management? If it’s the former, can you specify which countries or products you’re focusing on? Secondly, regarding trade and commodity finance, it seems this has led to a loss for the third time in less than three years, and I may have missed some smaller losses. Does this change your appetite in TCF or is it still the same?
Ralph Hamers, Chief Executive Officer
Thanks, Benjamin. No, in C&G, as you know, we have a very attractive model. Even if we wanted to limit new clients, if they express interest to come to ING, we are keen to accommodate them. So regarding general banking, that extends to current accounts and savings, as well as investment products; we don't need to increase appetite in those areas. Regarding gaining market share on the asset side, it's crucial we don't relax our underwriting standards. We’re continuously evaluating those standards to ensure we do not impose unmanageable debt burdens on our borrowers.
Steven Van Rijswijk, Chief Risk Officer
Yes, we had instances in Q4 and Q1, resulting in provisions. We have addressed both of those in our risk books. I want to stress that our focus remains on large traders in hard commodities with very clear supply chains. Generally, this model continues to work well. While there are always risks, especially in crises, some clients may cause losses; this is not a reason for us to exit our trading commodity finance sector. We'll monitor this closely through the cycles to ensure the book remains in a solid position.
Kirishanthan Vijayarajah, Analyst
Just a couple of questions from my side. Firstly, regarding RWAs, lots of moving parts, but what should we think about as the organic growth rate in RWAs for the rest of the year, after filtering out some of the regulatory noise? Secondly, honing in on the credit facility drawdowns in wholesale, you mentioned that the drawdowns started to reverse after the quarter-end. Can you give us a sense of the magnitude? Do you think the majority of that EUR 11 billion drawn will fully reverse by the end of this year?
Steven Van Rijswijk, Chief Risk Officer
On RWA, if you look at our RWA density, it's around 60%. Therefore, if you make certain growth projections, as Ralph indicated, around the estimates on Wholesale Banking and Retail Banking, this gives some indication. Regarding the drawdowns, approximately half of what increased has returned to normal levels. The growth we saw in Wholesale Banking largely came from general lending, where we noted a reduction by half already.
Martina Matouskova, Analyst
I have just a couple of questions. Regarding the KYC program, is there any risk it might be delayed this year due to lockdowns? What is your current progress on that? And sorry to amend on the oil and gas book, but I think you did an internal stress test back in 2015. I wonder how the current conditions have changed and how the EUR 45 million provision fits into the context of that previous stress test. If you'd run a similar evaluation today, what figures do you foresee?
Ralph Hamers, Chief Executive Officer
On KYC, as you're aware, the enhancement program consists of several pillars. The look-backs pillar is complete. The client file enhancement aspect, which ensures we possess all necessary information, has potentially seen a slight dip in productivity due to remote working in some cases and may face delays in some IT connections as teams are unable to travel. Overall, we do not feel particularly uncomfortable about delays in other aspects of initiatives. We’ll ensure to maintain close communication with regulators regarding our timeline and progress. On your inquiry regarding oil and gas stress testing, yes, you remember correctly that we conducted stress tests back in 2015. I believe that then, we estimated maximum losses of EUR 200 to EUR 300 million under scenarios of $30 crude oil pricing. Now we are assessing risks under a revised scenario of $20 obtaining higher risk costs. Each projection ought to take into consideration the average length of our loan duration, which typically varies between 4 and 5 years.
Steven Van Rijswijk, Chief Risk Officer
You're correct that EUR 41 million pertains to the stress test regarding the oil and gas book. The $20 stress test, I can confirm that it is gross without accounting for provisions already taken, in this case. As mentioned, the 2.4% Stage 3 ratio covers the entire oil and gas book. We do not provide coverage ratios; I reiterate that the stress modeling of our oil and gas book remains a focus.
Anke Reingen, Analyst
Just a quick follow-up: on your $20 stress test, is that above what you've already provisioned, or is that gross of what you've already accounted for? Could you also provide clarification on net interest income? Is it still achievable, or is it too uncertain at this point?
Steven Van Rijswijk, Chief Risk Officer
The $20 test we spoke about is indeed gross, not considering any already provisioned amounts. For my second question about NII: we are observing a flatter yield curve, but we also manage margins effectively, which should continue. There are unknowns regarding the new productions, but we expect retail banking volume to continue growing while wholesale might be flatter. The impact of payment holidays means outstanding balances remain consistent while repayments reduce, therefore, maintaining levels for net interest income bolstered by robust retail banking performance. While we acknowledge that there are many moving parts, our projected NII for the next quarters appears stable in the higher 140s.
Giulia Miotto, Analyst
Two questions from me as well, please. Starting with TLTRO: The new conditions introduced by the ECB seem quite favorable for banks, which see 1% being paid. Do you view this as an opportunity? Will you consider it for use? Furthermore, on Slide 30, regarding the cap on leverage being established at 6.5x, is there data available on the average leverage of that portfolio? This would be of strong interest.
Tanate Phutrakul, CFO
Yes, Giulia. You've stated correctly TLTRO III is indeed improved from our past considerations, with 1% based on specific growth rates in our book. We find that attractiveness likely prompts us to utilize it more so than other forms of funding. In terms of leverage, the cap of 6.5x serves as an absolute maximum. I presented it as an indicator, but it's inherently modified based on underlying portfolio conditions. Therefore, averages may vary, and we prioritize maintaining those stringent limits.
Daphne Tsang, Analyst
I have one question regarding capital and one on net interest income. On capital, could you provide an RWA inflation outlook based on anticipated growth in your loan book? Any further migration of risk you foresee for the rest of the year? Additionally, regarding the Dutch mortgage floor, what are the latest timings and scale you expect to be impacted? Concerning Basel IV, now that you've factored in the DoD impact and half of the TRIM impact, I presume they overlap with Basel IV. Please update us on expected RWA vs previous guidance, and how much you could mitigate?
Tanate Phutrakul, CFO
As we discussed, we do not provide a forecast for risk-weighted assets. However, you can look at our loan growth to estimate the potential inflation of risk-weighted assets. We anticipate the Dutch mortgage add-on to affect approximately EUR 8.4 billion in risk-weighted asset inflation, and the imposition could stretch out over the next few years as indicated by DNB. As for Basel IV, the aforementioned impacts are leading indicators of the Basel IV implications, meaning a significant component of what we face is either already included in our figures or can be anticipated over a manageable timeframe. We are endeavoring to mitigate a substantial portion of the impact with management strategies.
Farquhar Murray, Analyst
Just a couple of questions, if I may. Firstly, regarding Stage 3 impairments, given your macro outlook, could you give insight into how you expect them to appear over the coming quarters? Different dynamics will likely exert influence over various book lines, and also, could you indicate where you are currently seeing stress emerge? Secondly, brief reference to the favorable risk migration you reported. Was that mostly about housing collateral? If so, was there a split between that and data enhancement?
Steven Van Rijswijk, Chief Risk Officer
On the favorable migration, it primarily relates to increasing collateral values, which constituted the majority of our risk migration seen during the first quarter. Regarding Stage 3 impairments—those would have been classified differently had they been marked as such or been Stage 2, which they are currently not. We monitor watch lists and early warning indicators. Those have certainly been increasing recently, but it is too early to define how this will ultimately map out.
Ralph Hamers, Chief Executive Officer
Thank you, operator. Thanks all for participating. To summarize, under the given circumstances, we had a good set of commercial and operational results. It is challenging to predict the future at this moment in time, and that's simply because we focus on what we do know. The strong business model and our digital approach brings us tailwinds; we have a solid asset base; and have shared more granularity with you today. For the sectors impacted, the exposure remains small, and we possess a robust funding base alongside strong capital positions, which put us in a favorable situation during these uncertain times. We believe that when you cannot predict the future, knowing what assets and resources you have available is essential. I would like to take a moment to thank my investor relations team here for supporting us throughout these diverse calls. Their work in preparation and the remarkable information has always contributed significantly. I also want to thank the analyst community for following us closely throughout this period. Your keen interest has made us better as we've equipped ourselves to tackle the challenges ahead. I hope to engage with some of you in a different capacity by the end of this year. Thank you very much. Goodbye.