Earnings Call Transcript - ING Q1 2024

Operator, Operator

Good morning. This is Laura welcoming you to ING's Q1 2024 conference call. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance, and any statements 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 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

Thank you very much. Good morning, and welcome to our results call for the first quarter of 2024. I hope you're all well. And as usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. In today's presentation, I will inform you about the fundamental drivers of ING's excellent start of the year, both in terms of our commercial performance and our financials. Tanate will walk you through the financials of the quarter and the resilience of our net interest income also in a lower rate environment. At the end of the call, we will be happy to take your questions. Now let's move to Slide 2. As you can see on this slide, we achieved a very strong commercial performance in the first quarter with growth across the board in customers, lending, and deposits. We added 99,000 primary customers comprising both new and existing customers who have chosen us as their primary bank, and our primary customer base now amounts to over 15.4 million primary customers. We are well on track to reach our target of 17 million by the end of 2025. We've also been able to grow our lending book following a strong fourth quarter. Our mortgage book grew by EUR 2.4 billion this quarter. Most of this growth was visible in the Netherlands, where we further increased our market share and in Germany. In Wholesale Banking, we were also able to capture loan demand while we continued focusing on capital efficiency. On the deposit side, we had successful campaigns to raise new funds in Germany and Poland. Also, in Italy, we were able to further grow our business as evidenced by the deposit inflow this quarter. Now this strong commercial growth contributed to an excellent start of the year, which we highlight on Slide 3 and can summarize in four main points. Number one, NII was strong. We have been able to keep our lending and liability margins relatively stable and benefit from the growth in volumes. When excluding the increased impact from accounting asymmetry, our NII rose compared to last quarter. Two, our focus on fees is clearly paying off. Income from fees has grown by double digits versus both comparable quarters. As mentioned during our fourth quarter '23 earnings call, we are benefiting from more customers choosing ING for their banking products and from increased package fees. Also, the new commission structure for independent brokers in Belgium is resulting in lower fees paid. The market dynamics have also become more favorable, leading to a positive impact on fees from investment products and lending. As such, we remain confident in our ability to grow fees by 5% to 10% this year. Number three, operating costs, they were on track. Operating costs increased by 5%, which was mostly attributable to the impact of inflation on staff expenses and the implementation of the Danske Bank ruling on VAT. However, when taking the lower regulatory costs into account, total operating expenses were 1.4% lower than last year. And then we have number four, we maintain a high-quality loan book. In line with 2023, the high quality of our loan book continues to be reflected in lower risk costs, which came in at only 16 basis points this quarter. And this has all resulted in another quarter with very attractive returns. Our fourth quarter rolling return on equity was 14.8%, and we have achieved this while operating on a high CET1 ratio of also 14.8%. Then we turn to Slide 4. As you can see on the top graph, we are in a very predictable rhythm of announcing distributions to our shareholders. I'm pleased that we have announced another EUR 2.5 billion share buyback today, which is the next step in converging our CET1 ratio towards our target of around 12.5%. Including this buyback, we have returned almost EUR 26 billion to shareholders since 2018 and over EUR 5 billion in 2024 alone, also including the final cash dividend over 2023, which will be paid tomorrow. With a pro forma CET1 ratio of around 14.1% and continued capital generation, we have ample capacity to continue providing an attractive return. We will update the market at the time of announcing our third-quarter 2024 results. Before Tanate takes you through the financial results in more detail, I will spend some time on the progress we're making on the execution of our strategy and related targets. On Slide 5, our purpose and strategic priorities are shown. The first priority is to deliver a superior customer experience that is personal, easy, relevant, and instant. This is highly valued by our customers as evidenced by our Net Promoter Scores, where we are ranked #1 in four of our ten retail banking markets. One example of how we offer this excellent experience is the launch of a feature in our banking app that allows customers to immediately check whether a caller who contacts them is actually an ING employee. This will protect both the customer and ING from fraud. In Romania, we expanded our instant lending proposition by introducing an instant overdraft product in addition to term loans. In Wholesale Banking, the ING inside business portal now includes a portfolio insights tool that saves clients' time by giving them real-time insights into their lending portfolio. Our second strategic pillar is putting sustainability at the heart of what we do. We continue to support our clients in their transition to a low-carbon economy. In the first quarter, we achieved a volume of sustainable finance mobilized of EUR 24.7 billion, an increase of 13% from the same period last year, and we closed 156 sustainability transactions, 59% more than in the first quarter last year. In Retail Banking, we provide sustainable mortgages in several countries and we're also working to help connect customers with services to undertake our sustainable home renovations. For example, in Germany, we started a pilot in the first quarter where customers can receive advice and connect to partners specialized in sustainable solutions such as heat pumps, solar panels, installation services, and subsidy advice. Looking at sustainability and ESG more broadly across the bank, we released publications on human rights and nature that transparently outline our progress. On the next slide, I'll give you some insight into the key themes of our Capital Markets Day. As you know, we'll host a Capital Markets Day on the 17th of June. Obviously, I will not reveal too much now, but I can give you a broad outline of what we intend to discuss. First, we will update you on the next phase of our strategy. In addition, we will highlight how capital will be allocated going forward and how that results in further growth and diversification of our business. We will discuss how we leverage our operational excellence. Lastly, we will update you on the targets for the next few years. Now I will hand over to Tanate, who will take you through the results in the first quarter in more detail, starting on Slide 8.

Tanate Phutrakul, CFO

Thank you. As Steven mentioned in his introduction, net interest income was strong again this quarter. Lending NII increased for the fourth consecutive quarter, driven by increased volumes at a higher interest margin. Liability NII continued to be resilient with a margin above our historical average. We did not increase our core rate this quarter. We reinvested part of our replicating portfolio at higher rates and benefited from the positive impact of these actions. The overall net interest margin, which took into account the development in the total balance sheet, decreased by 3 basis points. This is fully driven by lower net interest income for financial markets following an increase in accounting asymmetry. I'll give you more details on the next page. On this slide, there are two messages I want to get across. First, note that when excluding the increased impact of accounting asymmetry, our net interest income increased compared to the previous quarter. However, our net interest income continued to be impacted by accounting asymmetry, which lowers net interest income in group treasury and financial markets with, of course, an offset in other income. This quarter, this accounting asymmetry increased, particularly in financial markets. The second point that I want to make is that we have clearly benefited from improvement in the curve since our Q4 results presentation, and this will also positively impact the development of our NII in 2024. The normalization of our liability margin is likely to happen more gradually compared to the scenario we presented in February, while there's no reason to change the assumptions from lending growth and other NII. As a result, we now expect to end up at the high end of the range given in February. On the next slide, we see the resilience of our net interest income also in a decreasing rate environment. Slide 10 illustrates our ability to maintain a strong liability NII also in a lower rate environment. The graph on the left shows the improved forward curve as of the end of March compared to the end of December, with long-term rates moderating around 220 basis points. These continued positive rates benefit our gross replicating income, as you can see in the graph in the middle of the slide. Then when you assume a scenario in which the pass-through gradually increases over time to 50%, the liability NII for our retail Eurozone deposits, net of deposit costs, remains at a strong level. The pass-through on total retail Eurozone deposits was around 30% in Q1 2024. Under this scenario, the liability margin is expected to stabilize at a level of around 100 to 110 basis points. Now moving to Slide 11. This shows the development of our core lending and deposits. In Retail Banking, mortgages continued to increase, with growth mainly visible in the Netherlands and in Germany. In Wholesale Banking, we were also able to capture growth opportunities while we continued to focus on capital efficiency. On the liabilities, we saw core deposits increase by EUR 13.5 billion in the first quarter. This was mainly due to another successful promotional campaign in Germany, but we also saw growth in Poland as well as in Italy. Wholesale Banking also recorded a small inflow, mostly driven by financial markets and Bank Mendes Gans, where we offer cash pooling for our clients. Now turning the page to Page 12. You can see that our focus on fees is clearly paying off, as income has grown by double digits compared to both comparable quarters. Roughly half of this growth was driven by the increase in the number of customers and our own pricing actions. The new commission structure in Belgium is also resulting in lower fees paid to independent agents. On top of this, we saw the market dynamics also improve, leading to a positive impact on fees from investment products as our customers start to trade more and assets under management increase. At the same time, in the Wholesale Bank, our global capital markets team has had a very successful start to the year. With that in mind, we remain confident in our ability to grow fees by 5% to 10% this year. On Page 13, we continue to be disciplined on cost. Excluding regulatory costs and incidental items, operating expenses were up 5% year-on-year, which is in line with what we said during our fourth quarter earnings call. The increase was mainly the impact of inflation on staff expenses, reflecting indexation and CLA increases across most of our markets. We also had to pay higher value-added tax following the implementation of the Danske Bank ruling in the Netherlands. Regulatory costs are also seasonally high in the first quarter but were significantly lower than last year because no contribution is required to the Eurozone single resolution fund this year. The additional bank taxes in the Netherlands will be paid in the fourth quarter as per normal. As Steven said at the beginning of the presentation, the total expenses, including regulatory costs and incidental items, decreased versus both comparable quarters. Now on to risk costs on the next slide, Slide 14. Total risk costs were EUR 258 million this quarter or 16 basis points of average customer lending, well below our through-the-cycle average and demonstrating the quality of our loan book. In Wholesale Banking, risk costs included additions for our number of individual files in unrelated industries that were newly provisioned in Stage 3. This was, however, offset by releases in Stage 1 and 2. In Retail Banking, risk costs were predominantly driven by business banking and consumer loans, while mortgages, our largest book, continued to perform well. Looking at the different stages, additions to Stage 3 provisions were EUR 368 million, but the Stage 3 ratio remained stable at 1.5%. Risk costs for Stage 1 and 2 were a negative EUR 110 million, reflecting an update of a better macroeconomic forecast and releases of management overlay. We still have a stock of overlays amounting to EUR 533 million. All in all, another benign quarter in risk cost, and we remain confident in the quality of our loan book. Now Slide 15 shows the development of our capital ratios, which increased further to a very strong 14.8%. Core Tier 1 capital increased by more than EUR 1 billion, driven by the inclusion of the net profit for the quarter after reserving for dividends. Risk-weighted assets increased by EUR 3.9 billion, including EUR 1 billion of FX impact. Credit risk-weighted assets increased by EUR 3 billion, mostly driven by an increase in exposure and some model changes. These factors were partly offset by a change in the overall profile of the loan book. Both operational and market risk weight were stable. The share buyback announced today will have an impact of approximately 77 basis points on the core Tier 1 ratio, which will be visible in the Q2 numbers. We will again update the market on our capital plans with the disclosure of our Q3 results in early November. Then on Slide 16. As Steven and I have explained today, ING had an excellent start to the year with good commercial and financial performance as we executed on our strategy. Total income grew with strong NII and double-digit fee growth. The development of operating costs was in line with our outlook, while regulatory costs decreased significantly compared to last year. Our four-quarter rolling ROE remains very attractive at almost 15%, while our core Tier 1 ratio further strengthened to 14.8%. This has allowed us to announce another sizable share buyback program, which has started today. We will update the market again at the time of announcing our third-quarter results. The strong first-quarter performance gives us further confidence that we will reach an above 12% return on equity target. In general, looking ahead, we are confident that we will continue to deliver robust financial results while successfully executing our strategy. We will take a long-term view at our Capital Markets Day taking place in June. We look forward to discussing this with you then. Now on to the Q&A, operator.

Operator, Operator

We'll now take our first question from Tarik El Mejjad with Bank of America.

Tarik El Mejjad, Analyst

Well done on a solid set of results. My first question is about capital and capital return. You have reiterated the 12.5% CET1 target for 2025. How do you interpret the increased scrutiny regarding capital and banking resilience in Europe, especially with the chair of your own Ministry of Finance providing a report with a cautiously optimistic outlook on capital build and the Swiss Federal Council's reports on capital stock? Are you still comfortable with maintaining the 12.5% CET1, which does not include any management buffer? Additionally, regarding the timeline, when you announced the 12.5% target in 2022, the rapid rise in rates was unexpected, yet you have managed your RWA effectively over the past two years. Will it take you 2 to 3 more years to reach the 12.5% target? Furthermore, M&A activity in Europe has increased, as evidenced by recent deals. How does this influence your business model? Do you believe your business model is suited to participate, especially given your ample capital? I ask this at every call, but is it almost essential for you to address your unbalanced fees and NII mix, which may face pressure in a normalized rate environment? Lastly, regarding NII, I expect there will be several questions after mine, but I want to clarify the trajectory. Your Slide 10 is quite useful for understanding the liability margin. Should we interpret that if we exclude volume growth for 2024, you will experience NII pressure from the liability margin until about the first half of next year, after which volume growth will support a stable level and lead to a recovery towards 2027?

Steven van Rijswijk, CEO

Thank you very much, Tarik. The answer to the third question is yes, but Tanate will elaborate. Tanate will also talk about capital. I'll talk about M&A and fees. Look, clearly, we see that we have continued good growth in our customers, but also in our fee income. So autonomously, we are doing very well and we can also continue to grow very well. As I've also said, in local markets in retail, scale is key because you can make more impacts. You can do that with better operational jaws and better operational leverage. You can offer better propositions just given the sheer size you have in that market. Therefore, it's important that in every market in retail where we're active, we are sizable. Now in that sense, in case there would be opportunities to increase that size while fitting our culture and our digital operations, we would look at it. And that would be to increase size. Two, we would look at certain skill sets, either digitally or fee-related, whereby I would say we can diversify quicker than we could do that on an autonomous basis. So the first strategy is to continue to be autonomously, if there is in-market consolidation or skill consolidation, then we will look at it.

Tanate Phutrakul, CFO

All right, Tarik, in answering your question, clearly, we are comfortable operating at around a 12.5% core Tier 1 level. What drives that confidence is the fact that we have a diversified business model. We have a gradual transition to a much more capital-light revenue model and the fact that we have, through the cycle, been able to manage our risk management in terms of risk cost, credit risk, and market risk well. I think that gives us comfort that we can operate at the buffer levels envisaged that you see now. The second point to make on the comfort that we take is that clearly, every share buyback that we do would mean a consultation and approval from the ECB to actually do the share buyback. That has been granted, and that's why we're starting the share buyback today. Now to your second question around NII on liabilities, yes, we do expect in our simulation that rates will remain stable where they are now until the end of June and then gradually transition to a lower level somewhere during the course of 2025. So if these simulations come through, indeed, you will see a dip during the second half of '24, stabilization in '25, and indeed, with volume growth, see accretion in terms of NII on liability going forward with the assumptions we've given around tracking speed of deposit costs.

Operator, Operator

We'll now take our next question from Giulia Miotto of Morgan Stanley.

Giulia Miotto, Analyst

I want to ask another question about this slide. Is the 50% assumption regarding the pass-through on the savings rate realistic, or is it a bit conservative? This implies that you're not cutting savings rates as rates decrease. I would appreciate your insights on this. Additionally, while I understand that Russia is currently a small market for ING, there seems to be increased interest from Europe in reducing and exiting that market. Do you have any comments on this?

Steven van Rijswijk, CEO

Yes, I'll do the question on Russia, and Tanate will talk about the pass-through assumptions. Well, on Russia, like we said at the beginning of the war, we did not see a future for ourselves in Russia, so we have been building down our loan book. It was about EUR 6.7 billion at the time, it is now about EUR 1.3 billion. So we decreased this with over 75% and we will continue to do so. In that setting, also EUR 600 million is covered by ECA, European credit agencies, or insurance. So we, in the meantime, took ample provisions and capital. So we're well covered for that book. Yes, of course, we see the attention, but there is not particular attention to us. We are just continuing on our decrease and path that we have chosen already 2 years ago.

Tanate Phutrakul, CFO

Giulia, to answer your question, clearly, deposit tracking is one of the, I would say, two or three major assumptions that we make in this scenario, with the forward curve being one, deposit growth being the second, and the tracking being the third. Now the tracking, I think what I can say is the following: the tracking up until Q1 was around 30%, right? Take that as an anchor point. We have done indeed a simulation for 50%. I think there's an element of prudence in there. At the same time, we are also giving you a sensitivity that every 10 basis points is around EUR 400 million. So I think we've given all the major driving parts, and then you can take a judgment on that as well.

Operator, Operator

And we'll now take our next question from Sam Moran-Smyth of Barclays.

Samuel Moran-Smyth, Analyst

I have one question on NII and one question on fees, please. I appreciate there's going to be a lot of questions about liabilities. But on the asset side, the lending margin grew again Q-on-Q. Could you please talk about which geographies and products are driving that? And is it something that you expect to gradually tick up going forward? I appreciate you've given a lot of color on liability margins and your expectations there. So anything you can give on lending would be great. And then on fees, I'm just trying to understand if we should be expecting fees to kind of grow Q-on-Q from here because when I look at the mix, daily banking fees are up Q-on-Q, and next quarter, we'll have a full quarter of the package increases in the Netherlands. And then on lending and investment products, you might expect those to grow as we approach lower rates. So is that the right way to think about it? Or am I missing something? I can see that on insurance and financial market fees that they look at the inflated parts this quarter? So I'm just wondering how we should extrapolate that?

Steven van Rijswijk, CEO

Okay. Thank you. On the lending margin, yes, the largest impact of that increase was in mortgages also because most of our mortgages are funded a bit earlier. So with a decrease in the funding rate, there you see that an increase in the margin coming in. When we come to fees, yes, look, in the end, what we want to do is to increase all five, if you will. First of all, a growth in customers. Indeed, payment packages, indeed, increases this quarter will also filter through then for the full quarter in the second quarter. What we told you on the brokers in Belgium will continue. Of course, it is that continued also growth in the number of investment accounts that we have because once people have investment accounts with us, when the market is changing, which it has now done again, then we are going back to a trade situation that we saw in the past. The past couple of years, it was a bit benign, which also caused the fees to be flatlining, if you will. With that, the fact that we can grow our customers, the fact that there is a feed-through of the increase in the payment packages for the next quarter, the fact that the contract with the independent brokers in Belgium are there. On top of it, therefore with that increase in primary customers, the increase in the activities in investment products in insurance and maybe more cyclical in Wholesale Banking makes us very confident to reach that 5% to 10% in 2024.

Operator, Operator

And we will now take our next question from Benoit Petrarque with Kepler Cheuvreux.

Benoit Petrarque, Analyst

It's Benoit Petrarque. I apologize for returning to the topic of lending margins because you've indicated a decrease in your liability margin to the 100 to 110 basis points range. Based on your current interest rate outlook, you anticipate a rate of 2.3% by 2027. How much improvement in lending margin do you foresee in that context? Additional details on this would be very helpful. Additionally, I wanted to inquire about the replicating portfolio and the typical duration, which was last reported at plus 2.4 years. Has that duration shifted at all? Lastly, we recently saw an interview with the CEO of Germany discussing the growth of the SME business in that market. How much growth potential do you perceive there, and could it be significant?

Steven van Rijswijk, CEO

I'll take the question on our CEO in Germany. Tanate takes the other questions. Yes, look, I mean, there is a lot of growth opportunity in Germany. We have just started, I would say, our digital SME offering. As in the past, when we came to Germany to say we only will do digital banking for private individuals, people said, well, that will not work in Germany. That's just not how the German culture and German contract works; you have to have branches, et cetera. Well, now we are 20 years further and then 9 million clients further. Moreover, also, corona in that sense also really gave an additional impetus for people to do digital and even mobile banking, so only use their mobile. Now since the last 2 years, we have said, okay, we can also do this for, let's say, smaller SMEs, with self-employed smaller SMEs, small businesses. We also built a fully digital offering for them as well. Most people don't necessarily want to spend a lot of time on banking. They want it to be easy, instant, and safe; that's how we are offering that as well. It doesn't exist in Germany. We have launched it. It's currently small. In the end, we also want to test it with the risk costs that come in. So you provide a savings account, a current account, a loan, and then you calibrate your model and gradually we grow our business. We have very positive views on how we can diversify our business. Moreover, with the learnings that we have in Germany, we intend to roll it out in other markets as well.

Tanate Phutrakul, CFO

Ben, in some reflections on lending margins, I think we have seen the beginning of a quantitative tightening cycle. We have seen the fact that the TLTRO funding EUR 3.5 trillion is being taken out by the ECB. So that points to a thesis from us that lending margin should improve. Importantly, in terms of our lending NII is the fact that as rates move from 4 to 20, they should stimulate more lending growth, and that's what we see signs of already. So that's with respect to NII lending. I see potential upside from where we are today. Then to answer your second question, we did indeed give guidance on the weighted average duration of liabilities of 2.4 years, and that remains roughly the same in Q1.

Operator, Operator

And we'll now take our next question from Benjamin Goy of Deutsche Bank.

Benjamin Goy, Analyst

Two questions, please. The first on costs. You mentioned that in Q1, your expense growth is a bit below your target for the full year. Just wondering why this should increase throughout the year? Or is it just a full year guidance, a conservative element considering inflation that came down in most of your markets already? And the second is with the accounting asymmetry, it's a bit more difficult to judge the developments across the country. Maybe you can comment on the moves in some of your key geographies, whether it was Netherlands, also Germany, the challenger markets Q-on-Q net interest income, what was underlying, what was accounting asymmetry driven to quarter-on-quarter move?

Steven van Rijswijk, CEO

So on the cost, I'll take it. Essentially, what we have factored into the outlook of our costs that we provided last quarter is also the spillover of the CLA increase that came from the past year into this year, but also the new CLA amendments that we will need to make in the second and third quarter. That's what gives you that guidance.

Tanate Phutrakul, CFO

And then on accounting asymmetry, most of the accounting asymmetry happens in financial markets, which is a global business. So that is not linked to any particular country. With respect to GT, it's the same; it's the global results, which are predominantly based in Amsterdam. So it's in our Dutch location. But we'll give you a bit more clarity in terms of what these asymmetries are on Page 22 of our results presentation as well. You can see where the movements are.

Operator, Operator

And we'll now take our next question from Farquhar Murray of Autonomous.

Farquhar Murray, Analyst

I have two questions, if that's alright. First, the new liability margin guidance of 100 to 110 is somewhat higher. Could you broadly explain how that relates to the curve movement and tracking speed assumptions? It seems like there might be elements of both involved. Additionally, are there specific geographies influencing this, particularly regarding the tracking speed assumption? It appears you might feel more confident about tracking in certain areas. Secondly, the EUR 2.5 billion is a positive step forward for the share buyback. However, considering the CET1 ratio of 12.5%, by full-year '25, you might find yourself at the lower end compared to peers. Is this a situation that ING would be comfortable with, meaning you view the 12.5% as independent of peer comparison?

Steven van Rijswijk, CEO

Okay. I'll take the second question, and Tanate will take the first question on even further splitting up Page 10, I guess. The answer to the second question is yes. So yes, we are comfortable with our CET1 target of around 12.5%, which we have said all along. We are a bank that operates in a relatively low-risk environment with low risk costs with low NPL ratios with largely collateralized loans in the form of mortgages or senior or super-senior loans also in Wholesale Banking. So yes, in that sense, we are comfortable with our 12.5% and we're comfortable with our buffer.

Tanate Phutrakul, CFO

And to try to give you a bit more detail, I think it's a combination of tracking and of the curve. I think from us, there are three things to answer your question. We believe that we are reaching a point of stabilization in terms of our current account levels, right, which drives a lot of the margin improvement. We see that as being structurally more stable given the higher number of primary customers. That would be one. The second one is that we also see that in the picture we gave on Page 10 that the total liability margin includes liability margin in non-Eurozone countries and it also includes Wholesale Banking margin. We see that the liability margin in our non-Eurozone is actually holding up quite well. It's the same for liability margin in the wholesale bank. That gives us the comfort to give you this outlook of between 100 and 110.

Operator, Operator

And we'll take our next question from Kiri from HSBC.

Kirishanthan Vijayarajah, Analyst

I have a couple of questions. You provided updated guidance on the Day 1 impact of Basel IV. Can you share any new information regarding the effects of the phasing from the output floor? I understand there are many factors to consider, but any insight would be appreciated. Additionally, I have a broader question about fees and investment products. It seems that ETFs are gaining popularity in Continental Europe, especially among younger customers, which is your target demographic. How should we approach this? Should we expect some structural margin pressure in the medium term, or does this trend benefit ING since you lack legacy product lines associated with traditional asset management? How do you see this developing for your organization?

Steven van Rijswijk, CEO

Thank you, Kiri. I'll address the second question, while Ljiljana will handle the first. Regarding investment product fees, we don't operate production engines; instead, we distribute ETFs and funds in the market. We come from a background where, in several countries, we function somewhat like a neobank in retail, having a large client base but relatively low activity. A couple of years ago, we began diversifying, with investment products being one of the main strategies. Currently, our total assets under management are around EUR 220 billion, with the majority being from brokerage. We provide simple, easy, and instant digital products that we distribute rather than produce. Although we operate in multiple markets, the number of clients engaging with these products is still significantly lower compared to our primary customer base. Our initial focus is to encourage our existing customers to utilize these apps for these products since we are relatively new in this space. Additionally, because most of our activities revolve around brokerage or self-execution, we have substantial potential for growth as we progress towards offering simple or personal advice, which is something we currently do not provide in several markets. We have yet to see any advantages from the margin pressure on the ETF side.

Ljiljana Cortan, CRO

On the Basel IV day 1 impact, as you've seen, there are no actual updates. What we are doing every quarter, as you noticed as well in our RWA moves, we are periodically updating our models and having some results for collaborations that can cater for the RWAs going up or down, as you have seen throughout the quarters. That's why our view on Basel IV day 1 impact remains around 20 bps and it's driven by various factors, primarily operational RWA. When it comes to the output floor as well, I would say no update at this point in time. There are still some topics in the industry. As you know, that we are discussing and depend also on the national regulators and how they are going to tackle certain areas. We're going to update you in due time. But so far, as I said, around 20 bps remains our guidance.

Operator, Operator

We'll now take our next question from Guillaume of BNP Paribas Exane.

Guillaume Tiberghien, Analyst

Two please. Number one is on the lending margin again. I think historically, you guided that the lending margin was around 150 basis points. Do you think you can revert back to it, but I guess not within 2 or 3 years, maybe longer term? But do you think 150 is still a reasonable long-term lending margin? The second one relates to the revenue to RWA ratio in the wholesale division. You've done a good improvement in the last couple of years, both from the revenue side and from the denominator side. Do you think there's more to do on the denominator side? I know your RWA density looks low, but that's due to mandates gone to some extent. But do you think you can improve your density further?

Steven van Rijswijk, CEO

Thank you. Regarding the lending margin, in the past, we guided a total margin of 450 basis points, which does not solely refer to lending margins. This was the overall figure, so not all of it pertains to lending. As for the revenue over risk-weighted assets, we've indicated in previous quarters that we have emerged from a certain environment as ING. We have always positioned ourselves as a strong credit bank, focusing on underwriting and holding. Our involvement in secondary loan trading, packaging, and selling has been very limited. Over the past 1 to 1.5 years, we have progressively enhanced our capabilities, particularly in utilizing capital more efficiently, as Wholesale Banking accounts for about half of the bank's capital. We aim to boost the return on equity in Wholesale Banking. We are actively developing this area, and gradually, we are improving. This remains a key focus for us in Wholesale Banking, and we will continue to prioritize this growth.

Operator, Operator

And we'll now take our next question from Johan Ekblom of UBS.

Johan Ekblom, Analyst

Just maybe to come back where we started on M&A in the sector. If you could maybe outline how you put further share buybacks versus M&A. I mean, how important this near-term EPS accretion, et cetera, in terms of the criteria that you put up for potential M&A? Just to come back on the fee income, I think you've flagged many times how successful the investment product build-out has been in Germany. You said that there are potential in other markets. Can you give us a bit more color as to where we are in terms of the investment product piece? How much comes from Germany today? What countries are the most underpenetrated in that sense in terms of giving us some confidence on the sustainability of the fee income growth?

Steven van Rijswijk, CEO

Okay. Thank you. When talking about M&A, yes, in the end, we will look at what does that do for value. And EPS is a measure to value. But in the end, it needs to be beneficial for the value of the company in terms of ROE and profitability. Therefore, we also find it important that when looking at an acquisition, it has tangible benefits in terms of costs and potentially revenues, especially diversification of fees, that we are clear in how we would integrate this acquisition that would not take us too long. That’s why we have said we would unlikely focus on a company that is very much brick-and-mortar, because then we're very much focused on very long integrations, and then we go very inward-focused. We have ample time and ability to grow and focus externally also autonomously. So that's why we're careful. But when we look at it, it means cultural fit, quick integration, also a clear digital angle in markets or, let's say, fee skills because we want to focus on the growth that we currently have rather than being very inward-focused. In terms of fees, yes, that is successful in Germany, but the growth that comes from fees also in these accounts comes from various countries; it's not only Germany. Other countries like Belgium continue to grow. If you look at the Netherlands, we're actually quite underpenetrated. In Spain, we're growing our customer base very nicely. In Australia, we want to broaden our service offering there. We still have a narrow offer. So in most of these markets, like in Germany, we are not a true broad-based universal retail bank. We're quite a narrow digital bank, and we're now gradually building this out in all the markets, not only in Germany.

Operator, Operator

And we will now take our next question from Anke Reingen of RBC.

Anke Reingen, Analyst

The first is on the pass-through rates. I'm just trying to understand how conservative this is in your assumptions of going to higher levels? Are you assuming you are sort of like a price leader driving your strategy forward? Or is this largely driven by market trends? Then secondly, on capital distribution, you're thinking about buybacks versus dividends. Would that have changed given your shares are now closer to book value and also probably considering that, over a longer period, the 12.5% could be reached? So is there any thinking about considering changing the mix?

Steven van Rijswijk, CEO

Thank you, Anke. I will do the question on pass-through, and Tanate will talk about the form of capital distribution. Our pass-through rates are dependent on our balance sheet and client strategy. In some markets where we're more an incumbent and we don't grow that much in the market, we will more likely be a follower. In a market with certain actions, like in Germany, where we did another marketing action earlier this year, we will typically use promotions to increase the number of customers. These campaigns are successful, such as in Germany, where two-thirds of the money then stuck and was sticky with ING. So it’s a market-by-market strategy.

Tanate Phutrakul, CFO

Anke, just on our thinking about how we distribute capital to our shareholders, probably driven by three things. The first one and the most important is our internal management view about the intrinsic value of ING, right? This relates to book value and getting close to and potentially above book value. The second one that we look at is the potential introduction of a share buyback tax in the Netherlands. That's still uncertain but we take that into consideration. The third area is making sure that we balance the interests of our stakeholders, particularly looking at the total return to shareholders as a guide for us. So these are the three drivers in our consideration.

Operator, Operator

We'll now move on to our next question from Hugh Moorhead of Berenberg.

Hugh Moorhead, Analyst

Two from me, please, one on deposit mix and one on capital. On deposit mix, thank you for the color about the proportion of current accounts stabilizing, but do you expect much more of a shift in term deposits perhaps between savings and term? Do the conservative assumptions in your tracking speeds include conservative assumptions around future mix shifts? And then on capital outside of the Basel IV impact guidance, are there any sort of chunky model approvals pending with regulators? Or should we just expect that might lead to sizable RWA movements in future quarters? Or should we just expect small movements Q-on-Q a bit like we've seen in Q1?

Tanate Phutrakul, CFO

Yes. We have seen this phenomenon of reducing the amount of current accounts going to savings and term deposits. Given what we see in Q1, the level of competition in terms of rates on term deposits has subsided, and the rates are reflecting the yield curve that's coming up in terms of potential reductions. So we don't see at this time a further change in the deposit mix that we have at the moment.

Ljiljana Cortan, CRO

And then on capital and RWA, correct for around 20 bps when it comes to Basel IV day 1. As you have seen throughout the past quarters, we can anticipate as well for the next quarters, we do have some volatility around amounts that are going up and down when it comes to the rating models. It is clearly subject to the approvals of the models by the ECB, but as well about performance of the models and calibration based on what we see historically and around us. So I would say no specific changes in this guidance. We will continue updating our models quarterly, but we do not expect higher volatility than what we've seen historically.

Operator, Operator

And we will now take our next question from Mike Harrison of Redburn Atlantic.

Michael Harrison, Analyst

Thanks for clarifying the duration of the replicating portfolio. I just wanted to ask a more general question about how we should think about the duration and the mix situations within the replicating portfolio evolving as and when the yield curve inverts, which the forward Markets Day happens next year?

Tanate Phutrakul, CFO

I think what we look at in terms of looking at duration is about managing our balance sheet and managing our interest rate risk, right? If you look at the tracking speed in the past, the level of tracking has been below expectation. At the end of the day, we will see continued shifts between below 1 year and above 1 year as two distinct buckets, right? We continue to see accretion of income from the level of replication for the bucket that is more than 1 year. The bucket below 1 year will subside over time, like two pendulums on the opposite side. As we’ve given the simulation, we think over a transition to 222 basis points overall, the replication income will be accretive.

Operator, Operator

There are no further questions in queue. I will now hand it back to Steven van Rijswijk for closing remarks. Thank you.

Steven van Rijswijk, CEO

Yes. Thank you very much for your time and your questions. I'm sure that you will know how to find our Investor Relations team. I hope to see all of you during Capital Markets Day on the 17th of June in wonderful London. Have a great day.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.