Earnings Call Transcript - ING Q2 2021

Operator, Operator

Good morning. This is Patricia Klosov-Norton, welcoming you to ING's Second Quarter 2021 Conference Call. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements. Such statements regarding future developments in our business, expectations for our future financial performance, and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you.

Steven Van Rijswijk, CEO

Good morning, and welcome to the second quarter 2021 results call. I hope you're all in good health. I'm happy to take you through today's presentation, joined by our CFO, Tanate Phutrakul; and CRO, Ljiljana Cortan. Thereafter, we will take your questions. The key message is, another quarter of COVID-19 has passed, and we see positive signs of vaccinations and economies reopening, however, also the effects of the delta variant with infections spiking again. Overall, we are moving back to normality, but we're not there yet. We have taken steps on climate change. The situation is not where the world needed to be, and the pressure to transition to a low-carbon economy continues to grow. We continue to finance the transition. We have been doing that through our Terra approach and have upped our ambitions by joining the Net-Zero Banking Alliance. If you look at the results and under the current circumstances, I am pleased that we show such a stable financial performance. As I said last quarter, looking at the results, you wouldn't think we are in a crisis. I'm proud of all the hard work by the colleagues realizing another record quarter in fees, growing our mortgage book, managing the pressure on NII while keeping expenses under control. Risk costs were minus EUR 91 million. We have released part of the buffer build-up in 2020 reflecting an improvement of macroeconomic indicators. The quality of the loan book remains strong with very limited risk costs on individual files and a lower Stage 3 ratio of 1.5%. Overall for 2021, we expect risk costs to be below our through-the-cycle average of around 25 basis points. CET1 was higher at 15.7% with 50% of the second quarter resilient net profit reserved for future distribution. This brings the total amount reserved for this outside of capital to just over EUR 4 billion, of which we distributed EUR 3.6 billion after September. Now before we go into this quarter's sales, let me spend some time on a few topics I want to highlight being a contribution to the green transition, our strong performance on fee income, and our distribution plan. The first topic is the transition to a low-carbon economy on Slide 3. As I mentioned, when it comes to fighting climate change, the sense of urgency and the need to accelerate is clear. Extreme weather is becoming more and more frequent; stakeholders see the need for more action and speed, and the urgency is also clear with policymakers. We fully subscribe to the sense of urgency and have been supporting our clients' transitional efforts for several years by being a pioneer with steering our Terra book or Terra approach and offering innovative sustainable products to our clients. This support has translated into a growing number of sustainability deals, with an acceleration visible over the first 6 months as we are already close to the full year 2020. This includes a growing number of green bond underwritings for which we have received recognition, as ING was named the most impressive investment bank for financial institutions on social responsible investments by Global Capital Magazine. And I'm happy to say that we are accelerating our efforts and have joined the Net Zero Banking Alliance. For 2 of our Terra sectors, we are already on the right pathway; for the other 7 sectors, some gaps exist. We will determine which actions are needed to align the pathway for each sector with a net zero ambition. I believe banks play a pivotal role by financing the transition. However, I also call upon businesses to take actions and urge different policymakers to set regulations that are clear, both for all green and not. These regulations need to reflect that the transition takes time, and it is key that transitional efforts are recognized and that credit is also given to others who are not yet green but are moving in the right direction. I see this as a potential weakness in how the green asset ratio is currently proposed. On the other hand, the intentions of the European Commission's revised sustainable finance strategy to incorporate certain transitional activities in a taxonomy are encouraging. Slide 4 shows the development of our fee income with an 11% CAGR over the past 3 years, even with the effects of a lockdown. Investment product fees stand out with a CAGR of 27%, reflecting growth of accounts, assets under management, and trades, driven by a growing appetite to invest, an appealing investment proposition, and an elevated number of trades, partly due to the market volatility of COVID-19. Especially in Germany, we benefited from our digital proposition and growth in the number of accounts. In the second quarter, the number of trades was less elevated, resulting in lower related fees. However, with a rising number of accounts and assets under management, we have a strong foundation for a structurally higher level of investment fees. Another important contributor was daily banking fees with a CAGR of 10%. Main drivers included the introduction of new fees in Challengers & Growth Markets and the annual increase of package fees in the Benelux. Overall, I'm pleased with the strong performance of our fee business, keeping in mind that international payments are still at lower levels with upside potential as we return to more normal circumstances. The same applies to lending fees, reflecting still subdued demand from business clients. Hence, we see further progress for our fee income on new product propositions, for increased charging of the cost of operating accounts, and for fees on daily banking packages. Overall, our track record shows we are able to deliver on our 5% to 10% growth ambition, and that ambition stays in place. Now let me now move to Slide 5. I trust I have your full attention for this, and you're familiar with our distribution policy. As the ECB announced that they will lift the ban on distribution after September, I am pleased that we can now execute on the policy. Starting with a payout of EUR 0.48 on October 12 or EUR 1.87 billion, reflecting the EUR 0.21 interim over '21 and EUR 0.27 for the remaining amount originally reserved for 2020. After September 30, we will make an additional distribution of EUR 1.74 billion. The exact form is to be decided, but it could be in the form of cash and/or share buyback, subject to relevant approvals. Going forward, we will convert to our CET1 ambition over time, as long as the exit from the pandemic and government support remains unclear, we will maintain a prudent buffer. Now let me take you through the second quarter results as shown on Slide 7. In the second quarter, total income year-on-year was supported by strong fee growth. NII included EUR 83 million TLTRO. However, pressure was visible mainly reflecting lower liability margins. Other income was lower as the year-ago quarter included several positive valuation adjustments as markets rebounded from the negative impact of volatility last year in March. This was partly offset by the EUR 72 million receivable related to the insolvency of a financial institution in the Netherlands a number of years ago. Sequentially, fee income remained at the same high level while lower NII was primarily driven by lower TLTRO. Moving to NII on Slide 8. In previous quarters, we addressed continued pressure on NII stemming from low interest rates and pandemic effects, which affected the levers we generally use to counter it. We want to reiterate that swap rates have improved; however, they remain below the 5-year rolling average. We invest in majorities, which can range from over 9 to over 10 years. For example, we could say we invest 20% of our replicating portfolio every year. Improvement will only come over time, and we, of course, will benefit from a more steepening yield curve. NII, excluding the TLTRO benefit, was lower year-on-year, primarily due to the continued negative interest rate environment, while deposit inflows have been substantial. Lending margins were slightly higher, but at lower average lending volumes year-on-year, we also saw a negative impact from FX currency translation. Compared to the previous quarter, NII, excluding TLTRO was slightly lower and impacted by the pressure on liability margins, which was partially offset by, however, average lending volumes at higher margins. The higher volume seems counterintuitive as net core lending decreased this quarter. However, this reflects that the majority of the loan growth in the first quarter came in March and was therefore not fully reflected in average customer lending for that quarter. Our net interest margin already decreased by 10 basis points to 136. This was primarily driven by lower TLTRO benefits, representing 6 basis points, with the remaining 4 basis points due to an increase in the average balance sheet and the liability pressure I mentioned earlier. Slide 9 shows net core lending; there is strong growth in mortgages. Demand for mortgages continues to be strong, particularly in Germany, Poland, and Spain, which are the primary drivers of net core lending growth in retail. There is also some growth visible in consumer and business lending. In Wholesale Banking, we saw a high level of repayments on term loans and short-term lending in financial markets, resulting in an overall decrease. Our net customer deposits grew by EUR 4.9 billion, driven by EUR 7.3 billion of higher savings in retail and a EUR 2.5 billion decrease in wholesale banking. I have repeatedly said that negative loan growth is not structural, and we expect loan growth to return when uncertainty subsides. With the ongoing delta variant creating some uncertainty, there might be a delay in the return of loan demand. But when demand returns, we are well positioned to support our customers and capture growth, thanks to our geographical and product diversification. Now back to fees on Page 10. Year-on-year income grew by 18%, with growth evident in both retail and wholesale. Retail fees were up 20%, with an impressive 46% growth in daily banking. This reflects an increase in payment package fees and the recovery of domestic payment transactions, while international payment transactions remained subdued. In Wholesale Banking, fees were 14% higher year-on-year as we saw some growth in lending-related fees, including in Trade & Commodity Finance, while payment fees increased. Sequentially, retail fees were slightly lower, mainly reflecting a lower number of trades in investment products after a record high in the first quarter. Higher fees in Wholesale Banking primarily reflected daily banking and corporate finance activity. On Slide 11, you will see the expenses, which for this quarter included EUR 39 million of incidental items, reflecting IT impairments and some provisions related to measures we announced for retail in the Netherlands. Excluding these regulatory costs and incidentals, operating expenses were under control. Year-on-year, we further absorbed higher IT expenses and some litigation provisions, while quarter-on-quarter, we had a slightly higher VAT refund. Regulatory costs were lower quarter-on-quarter, reflecting a seasonally high first quarter. Year-on-year, the increase mainly reflected additional DGS contributions in Germany following the Greensill insolvency, which included a EUR 30 million catch-up. Going forward, we expect a quarterly impact of around EUR 10 million until the end of '24, which could be adjusted depending on the conclusion of this insolvency. Unfortunately, we also see some unexpected costs coming in, such as VAT charges on intercompany services following a recent court ruling for one of our peers. We expect to see the impact from this building up over the coming quarters to around EUR 125 million annually, which we will have to absorb over time. Going forward, we will continue to steer for operating expenses to go down. On the measures announced over the past quarters, it takes time to execute, but I'm very positive about the execution and pleased we found new homes for our retail customers in Austria and the Czech Republic in mutually beneficial transactions. Now then to asset quality on Slide 12. The risk costs were minus EUR 91 million, or minus 6 basis points of average customer lending. This includes a EUR 230 million management overlay primarily in Stages 1 and 2, which partly offset a EUR 492 million release driven by updated macroeconomic indicators. This resulted in a net impact of minus EUR 262 million with releases in all business lines. Aside from these releases, in Retail Benelux, risk costs mainly came from a EUR 109 million collective provision in Belgium, reflecting model updates, of which EUR 79 million was in Stage 3. We further saw some collective provisioning for consumer lending in the Netherlands. In Retail Challengers & Growth Markets, risk costs further reflected collective provisioning for consumer and business lending, mainly in Poland, Germany, and Spain. In Wholesale Banking, Stage 3 risk costs were low, reflecting very limited additions. Both Stage 2 and Stage 3 ratios were lower, reflecting lower outstanding amounts in both stages. Looking at the numbers, you would think that we are in a crisis, which certainly applies to risk costs. This is not ING specific, and I believe it is reflected in the support provided by governments, combined with a positive macroeconomic outlook, which could allow businesses to make a quick rebound. However, uncertainty remains. Therefore, we still keep in place part of the buffer build-up over the past quarters, amounting to around EUR 425 million at the end of the second quarter. We believe things are moving in the right direction. For 2021, our risk costs will end up below our through-the-cycle average, and there is a change in guidance. The next slide shows that our CET1 ratio increased to 15.7%. I'm on Slide 13. Capital was higher with EUR 400 million, which included EUR 700 million, or 50% of net profit for this quarter, while the other 50% was reserved for future distribution in line with our policy. This was partly offset by foreign exchange impacts and increased NPE backstop but also lower benefits from the IFRS 9 transitional arrangements. Our RWA has decreased, mainly driven by market and operational risk-weighted assets. The market risk-weighted assets reflected a lower historical VaR as a volatile quarter was no longer included in the calculations; lower operational risk-weighted assets was due to technical model updates. The current risk-weighted assets were up, driven by model impacts, primarily reflecting the final 3-year impacts. This is it for TRIM, partly offset by an overall improved collateral profile of the loan book. Remaining regulatory RWA inflation is manageable at around 30 basis points. As you can see on Slide 14, the CET1 ratio is well ahead of the ambition. On ROE, it is below our ambition, but we have already seen an improvement versus the previous quarter to 11.2% for this quarter. With more efficiency in cost and capital and with growth returning, we maintain our ambition and intend to continue to provide an attractive total return. To reiterate, cost income remains an important input for our return on equity. We continue to work on our ambition of 50% to 52%. And currently, we have an amount just over EUR 4 billion reserved outside of CET1 capital with an announced EUR 0.48 to be paid out in October '21. To wrap it up, the highlights of the quarter: first of all, we subscribed to the sense of urgency to transition to a low carbon economy, and we contribute to that by financing the transition. We have been doing that by steering our loan book with our Terra approach, and we have upped our ambitions by joining the Net Zero Banking Alliance. Looking at our results, these are good. This quarter, we managed to realize another record quarter in fees, to grow our mortgage book, and to manage the pressure on net interest income while keeping expenses under control. Risk costs came in at minus EUR 91 million. We have released part of the buffer build-up in 2020, reflecting an improvement of macroeconomic indicators while still maintaining a buffer of around EUR 425 million. The quality of the book is evident with a lower Stage 3 ratio of 1.5%. For 2021, we expect risk costs to come in below our through-the-cycle average. The CET1 ratio was higher at 15.7%, with 50% of the resilient second-quarter net profit reserved for future distribution, bringing the total amount reserved outside of CET1 capital to just over EUR 4 billion. As the ECB has lifted the restrictions on distribution after September, we will pay an amount of EUR 1.87 billion or EUR 0.48 per share on October 12. After September, we intend to make an additional distribution of EUR 1.74 billion in the form of cash and/or a share buyback, with the latter subject to relevant approvals. That concludes the presentation. Now, on to your questions.

Operator, Operator

Our first question is from Mr. Benjamin Goy of Deutsche Bank.

Benjamin Goy, Analyst

Two questions, please. First, on capital return. And then secondly, on costs. In capital return, I'm just wondering because of this conditionality subject to approval. So just wondering, is there execution risk in case you go for a share buyback as compared to a dividend? Or is this something you would expect to kick off in the fourth quarter? And then secondly, on costs. I think in Q3 last year, you announced that costs are going down from here. Just wondering now with a couple of quarters of actions in place. Now you mentioned some headwinds; what's the balance? Do you think it got easier and you have some comfort from the execution so far? Or is there more needed to offset these new headwinds?

Steven Van Rijswijk, CEO

Okay. I will take the cost question, and then thank you, Benjamin, and Tanate will take the capital question. I think on costs, if you take out the special, this is actually the first quarter it went down; the amount is still small. We have made a number of announcements of actions that we're taking, including branch reductions, restructuring of private banking in the Netherlands, and branch increases in various other countries, including Poland and Belgium. We announced last year a curtailing of our footprint in Wholesale Banking in South America and Asia. We have come to an agreement with Bank99 to transfer Austria's retail activities to Bank99. We have transferred already 50% of our clients and 60% of our activities to Raiffeisen in the Czech Republic. But what you will see is that these benefits will come in over time. As soon as you announce them, it still means that you go through a period of restructuring; you have a discussion with the works councils and unions. You have potential M&A discussions with buyers as we have now seen, and gradually, we will see the benefits come in. So yes, I mean, with that VAT decision on one of our peer banks, of course, sometimes you have some headwinds, but I remain focused and confident on the target of bringing the cost further down.

Tanate Phutrakul, CFO

And Benjamin, on your capital question, I think, first of all, you need to realize that this capital of EUR 1.7 billion is reserved outside of our capital calculations today. Secondly, we have a very constructive dialogue with the ECB regarding our capital management discussions, and we have applied to the ECB for a share buyback. So, these are all in constant dialogue with the ECB.

Stefan Nedialkov, Analyst

It's Stefan from Citi. Two questions from my side. The first one is on NII. I wanted to check in, given your wholesale lending growth is actually more of a decline. What is your confidence in being able to book the TLTRO 3.2 benefits? The one that runs through December 2021 in terms of loan growth? Related to that, what's the outlook for expanding the negative deposit charging base within existing countries where you do that, such as Belgium? Or for example, in Germany, there were some press articles about DiBa potentially that charge more negative rates. Some color around that would be very helpful. So that's the NII question or maybe two questions. Apologies for that. Lastly, on the core equity Tier 1 target of 12.5%. It seems like you have changed the tone slightly on capital return. Given COVID, you will be targeting a significantly higher buffer versus the 12.5%. Can you put some numbers around how much of a buffer you're thinking about above the 12.5% in terms of capital return?

Steven Van Rijswijk, CEO

Thank you very much, Stefan, for your questions. Yes. I mean the first question is question 1a and then 1b, I would say. And then there is a question on CET1. Tanate will take the NII and CET1, and I will take the net interest rate charging.Certainly on Belgium, we announced that as of July, we will charge deposits over EUR 250,000. In the Netherlands, we announced that as of the 1st of July, we started to charge on EUR 100,000. In Germany, we announced that we will start to charge clients with EUR 50,000 or more. The latter part is delayed, obviously, also linked to the conclusion of the High Court on changing conditions for clients. We will, of course, need to send a letter to our clients to agree on these conditions, so that will take a bit more time. But we will continue to monitor developments and look where we need to charge. We can never predict the future. We are expanding our income base and looking at business lines; we also need to consider appropriate charging based on market circumstances for negative interest rates.

Tanate Phutrakul, CFO

And Stefan, on TLTRO, if you look at our ability to achieve the first target, that gives us confidence in our franchise. We are coming off a relatively lower level in October, which is the start of the measuring point. So I think we are confident of hitting the second TLTRO. On your second point regarding core Tier 1 guidance, we have not changed our guidance; it remains around 12.5% core Tier 1 level. We always caveat that we will take our time during the period where COVID continues to influence our operations.

Kiri Vijayarajah, Analyst

A couple of questions from my side. So in terms of the various market exits you've been doing in France, the Czech Republic, and Austria. I'm just wondering, is that rationalization program now completed? Or are some of your weaker smaller geographies still under review? So just an update there. On the outlook for volume growth specifically in the wholesale bank, looking out into the second half, you sounded quite optimistic, but could you elaborate on where you see that growth coming from? How much of it will come from outside Europe? Which sectors is your financing pipeline looking strong? I wonder if there's scope for some margin expansion in wholesale? Or is that too early to see those trends?

Steven Van Rijswijk, CEO

Thank you very much, Kiri. On the rationalization of the markets, you have seen the announcement of selling Austria to Bank99. In the Czech Republic, we are well on our way to transferring operations to Raiffeisen. Regarding France, we announced a strategic review; however, we have not reached a conclusion yet. This strategic review is likely to take until the end of the year. I will continue to assess our business performance, including geographic performance and our overall business lines. On the loan growth outlook for Wholesale Banking, as stated in the first quarter, there is likely some pull forward due to TLTRO, which has occurred. That may partially explain the repayment levels we're seeing in financial markets. In Asia Pacific and the Americas, we already observe stronger pipelines and an uptick in green loan processes. In Europe, certain markets still show low working capital utilization; when confidence in the reinstatement of normal operations returns, I anticipate more working capital needs and increased capital investments, which will take time.

Giulia Aurora Miotto, Analyst

The first question will be on fees. ING has a target to grow 5% to 10%, but has nicely overshot the target so far and has delivered strong results, with EUR 855 million now looking low as a running rate. Would it be time to update the guidance, and is there potential to actually grow above 10% over the next year? Any color on a potential good run rate for fees would be great. Secondly, and sorry to go back on loan growth, have you seen any evidence of loan demand picking up quarter-to-date? Additionally, are deposits going down as people perhaps move them to investments or start pursuing this?

Steven Van Rijswijk, CEO

Thank you very much. I'm pleased that our 5% to 10% target was previously seen as overshooting, but if I interpret your question correctly, you now suggest I may be undershooting. I am highly satisfied with fee growth, and there are more levers to pull moving forward. We are developing new propositions, introducing daily banking fees in markets where they have not been implemented yet, or where they have remained free. We are also extending our investment products to markets where we can benefit from successful rollouts in Germany. Currently, we are transitioning from execution only to simple advice distribution in Germany, as other banks have done in the past. I would like to maintain our ambition of growing at 5% to 10% on average annually, not just for this year, but also for 2022 and 2023. I remain optimistic about the levers available to us. Regarding loan growth, we do not provide forward-looking guidance; however, we saw contraction in business bank and consumer lending over the past quarters. This was the first quarter that we recorded growth in both, even if modest, amounting to about EUR 1 billion—which is positive. Additionally, we noted strong mortgage growth of EUR 4.2 billion, which is a rate higher than in recent years. We have also seen the return of business banking and mid-corporate lending growth. Although I expect that wholesale banking loans will take longer to rebound, some companies have been borrowing from the bond market rather than taking out loans. Nevertheless, as configuration improves, we anticipate the return of overall loan growth.

Raul Sinha, Analyst

I'm sorry to bring you back to the risk of undershooting on fees. My first question is about investment product fees in terms of sustainability. Given it's up 20% year-over-year, if I look at the first half of 2019, pre-pandemic, it's up 60% over that period. There's an inflow in AUM, and there's also this market volatility environment. I wanted your thoughts on how sustainable you think the investment product fees are going forward. Secondly, about capital distribution: obviously, there's concern about the remaining EUR 1.7 billion. You mention post-September, but clearly, that could mean early next year as well. I assume the lack of precision on timing relates to the wait for the ECB’s approval process for buybacks rather than an intention to delay the payout.

Steven Van Rijswijk, CEO

Thank you, Raul. Concerning fees, yes, we saw strong growth during the pandemic. We were also gearing up to better offer investment products through our app. It should be noted that we were only just beginning to establish our investment product offerings before the pandemic struck. The Q2 performance in investment products is more structural than in Q1, which experienced high volatility. Our assets under management grew, and investment accounts increased by 160,000. Continued growth in assets under management and investment accounts is crucial for sustainable fee growth, alongside a good mix of trades. We also raised payment package fees in the Netherlands and Belgium by 15%. We're evaluating how best to develop our fee propositions for other markets, given that some are still free or nearly free. Lastly, on the matter of capital distribution, Tanate, please provide your insights.

Tanate Phutrakul, CFO

Yes, Raul. I repeat our message; we intend to return this EUR 1.7 billion. We have a constructive dialogue with the ECB. Just a reminder, the dividend ban was only lifted on July 23rd, so we have applied for that capital return and intend to do so as soon as we acquire the necessary approvals.

Anke Reingen, Analyst

First, just on net interest income ex TLTRO. Given the dynamics you were explaining, should it be sort of like a stable level going forward? Is the upside lever additional volume growth? On capital return, you reiterate the 50% payout ratio, but I wonder how you're thinking about the margin from your current 15% core Tier 1 ratio down towards your target of 12.5%, even slightly higher. Is it 50% plus special dividend, or would you consider increasing or revisiting the payout ratio to make this a more gradual process?

Tanate Phutrakul, CFO

Thank you, Anke. Concerning NII, the impact of negative interest rates on our liability replication remains a challenge and will continue for some time. Yet, if you look at our strong mortgage growth and resumption of growth in business banking and consumer lending, along with positive wholesale banking resurgence, we see potential. Loan origination margins are holding up. Regarding capital returns, we will achieve our normal dividend policy of distributing 50% of retained earnings. We aim to reach our target of around 12.5% core Tier 1 gradually through special dividends, whether in cash or share buybacks.

Andrew Lowe, Analyst

Can I ask a quick question on Turkey? Firstly, you haven't had your Turkish exposure slide for the last couple of quarters; an update on those numbers would be pretty helpful. Also, Steven, I remember you saying when you were CRO a number of years ago that your Turkish business was important as it supported lending for German and Italian wholesale clients. Is this still the case?

Steven Van Rijswijk, CEO

Thanks, Andy, for your question. Yes, you are correct; we have not disclosed information on Turkey because in the larger scheme, it is relatively modest. Nevertheless, I’m happy to provide you with the amounts. Our total exposure to Turkey is around EUR 8 billion, reflecting a decrease from previous quarters. Our intercompany loans, including subordinated debt, began around EUR 4 billion. With the subordinated debt now repaid, only senior loans of around EUR 600 million remain. Additionally, approximately half of that exposure relates to wholesale banking business, driving connections with large companies, including many from Germany, Italy, and others engaged in exporting machinery. This network underpins our operations. However, we remain cautious regarding the geopolitical circumstances in Turkey.

Omar Fall, Analyst

A couple of questions for me. Firstly, just on NII. The market expects it to remain flat this year. Yet it seems that volume growth isn't coming through as quickly as expected, assuming a EUR 60 million deposition margin pressure every quarter. Core geographies show falling asset-side margins. Some NII support came from FM, which can be volatile. Do you think the levers, including negative rate charging, will suffice to keep NII stable in the second half? Secondly, could you talk specifically about Retail Germany? Even excluding Greensill, it's shown weak performance in what has been one of the top-performing divisions in the European retail banking space. Can you provide more color there, given the costs associated with Austria, and that fees and NII are both down? Lastly, a cheeky question: can you provide NII revenue and/or profit associated with Retail Austria, France, and Czech Republic for our modeling?

Steven Van Rijswijk, CEO

Thank you very much, Omar. Let's address Retail Germany. If we look at performance from top to bottom, there’s been good loan growth in mortgages, approximately EUR 2 billion in mortgage growth, which is promising. If we look at fees, two factors have contributed: growth in accounts led to approximately 100,000 new investment accounts and increased assets under management, but we also experienced a decline in trades, which reduced fees by roughly EUR 30 million. The remaining portion of the fee decrease stems from the fact that our mortgage growth is largely run through brokers, resulting in higher costs for us due to commissions. Therefore, paradoxically, lower fees may correlate with stronger mortgage growth due to broker payments. Retail deposits remain strong amidst ongoing COVID impacts. Austria is also still contributing to the overall retail deposit performance until we finalize that deal, which we hope to conclude this year. Regarding the situation in France, we won't discuss specifics as we don't disclose those entities now. However, we did disclose separate information on various countries in previous quarters, giving an overview for those businesses.

Timo Dums, Analyst

I'm also stuck on two questions. The first one, my apologies again, is related to return on excess capital. Would you consider M&A activities either to increase scale or add capabilities, not only looking at banks but also considering fintechs? That would be the first one. Secondly, I would like to understand if you have any additional regulatory burdens ahead of you given that you received a final TRIM letter.

Steven Van Rijswijk, CEO

Thank you very much, Timo. Regarding the second question, I will defer to Ljiljana. As for M&A, as you can see, with the growth of our primary customers this quarter, with 281,000, our fee growth trajectory is positive, and there is much still to do. I am particularly interested in skills—whether that be technology skills or product skills that could diversify our income or enhance customer experience. Small fintech companies could potentially provide support in areas like payment engines or consumer loan engines. While we might look at small-scale M&A opportunistically, cross-border consolidation does not seem likely under the current regulations that compartmentalize capital and liquidity.

Ljiljana Cortan, CRO

Good morning from my side. You will remember we have announced a regulatory RWA inflation of 50 basis points in previous quarters. This quarter reflects an additional impact of EUR 5.2 billion as we already split it further before. This indicates an impact of 30 basis points going forward, primarily from the Basel IV day 1 implementation. We expect to mitigate risks through previous TRIM and other inspection considerations.

Benoit Petrarque, Analyst

Just one for me. To follow up on the EUR 1.7 billion, which is the catch-up from 2019 and the related timing. Is it fair to assume the only reason you don't provide a date or specific quarter is that you want to do it in the form of a share buyback? In other words, in a worst-case scenario where the share buyback is not approved, which I don't expect, would you also pay this EUR 0.45 per share, EUR 1.7 billion, on the 12th of October?

Tanate Phutrakul, CFO

Again, Benoit, we keep that flexibility. We want to get approval for the share buyback, and that's our intention. I recognize that there are concerns expressed on this call about the timing of when this will take place. However, the dialogue with the regulator has been constructive, and we expect it to happen as soon as possible.

Stefan Nedialkov, Analyst

Yes, guys, it's me again for a quick question related to Basel IV. As you look out over the next couple of years, you seem to be relatively better positioned in terms of Basel IV impact. Do you think Basel IV will create positive events for margin pricing overall regarding mortgages and corporate lending? Or do you think it will amount to a nonevent or perhaps even have a negative impact on pricing?

Steven Van Rijswijk, CEO

That's a good question, Stefan. In the end, if you consider all the regulatory scrutiny on models, including Basel IV, it was intended to provide consistency and strength in capital and modeling for banks operating in the European Union. Those changes mean that banks must hold sufficient capital to withstand market stresses. For ING, we have already been significantly impacted by the TRIM missions due to our advanced and standardized models. Hence, Basel IV's rollout is less of a cause for concern. If more fellow banks are compelled to increase their capital loads due to Basel IV, the general conclusion may be that this puts upward pressure on pricing, given that we only pass through required capital levels. In terms of supply and demand on mortgage lending, there certainly is a lot of liquidity in the market that would need to be absorbed. ECB tapering will be a key metric to monitor, and I expect margins to influence pricing within a few years. As for pricing, we will meet the required capital levels and would return surplus capital to shareholders. So, yes, it could be perceived as a competitive advantage, but we cannot look into our peers' pricing methodologies.

Anke Reingen, Analyst

I wanted to come back to your sustainability slide, Slide 3. It’s obviously a significant area of importance. I wanted to understand how you think this will impact your loan growth going forward. Should we be expecting a rundown portfolio that you will offset with growth in greener assets?

Steven Van Rijswijk, CEO

That's an excellent question, Anke. I discussed energy transition earlier in the analyst presentation. We are committed to transitioning and are pleased to have signed with the Net-Zero Banking Alliance, as it encourages stricter adherence to pathways. Companies must quicker transition to sustainable practices, which necessitates investing in greener technologies, machines, etc. Much of our lending portfolio is already green, while some assets still require transitioning. This could raise investment levels, and I'm particularly pleased by the intentions of the European Commission's revised sustainable finance strategy, which focuses on transitioning rather than static metrics. The aim is to assist businesses in their transitions—those with financial support can ramp investments to meet the new guidelines. Thank you very much. This concludes the second quarter results. I wish you a good Friday and hope to speak to you soon.

Operator, Operator

This concludes the ING Second Quarter Conference Call. Thank you for your attention. You can disconnect your line now.