Earnings Call Transcript - ING Q2 2020

Operator, Operator

Good morning. This is Patricia Klosov Norton, welcoming you to ING Second Quarter 2020 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 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, Steven, over to you.

Steven van Rijswijk, CEO

Thank you very much. Good morning, everyone, and welcome to our second quarter 2020 results call. I hope you are healthy and well. I'm pleased to guide you through today's presentation in my new role as CEO. I am joined by our CFO and our interim COO, Tanate Phutrakul, along with Karst Jan Wolters, who is currently responsible for our day-to-day risk activities. At the end of the presentation, we will, as always, have time for your questions. The second quarter was anything but standard due to COVID-19, which has impacted many. We continue to support our customers, employees, and society during this challenging time. Nevertheless, addressing financial and economic crime remains our top priority, and we are steadfast in enhancing the effectiveness of our KYC activities. The current operating environment reinforces our conviction that we are on the right strategic path, with our digital model being a distinct advantage that allows us to maintain operations and provide uninterrupted service. Pre-provision results have shown resilience as we remain focused on maintaining pricing discipline. We also observed a reversal of some negative valuation adjustments from last quarter as financial markets began to normalize. Combined with our cost control measures, this largely offset the margin pressure from customer deposits and goodwill impairments. Regarding our risk costs, under IFRS 9, we made substantial collective provisions in Stage 1 and Stage 2 to account for deteriorating macroeconomic indicators. Given that these indicators have stayed unchanged, we believe that we have already taken the majority of the provisioning needed for this year. For the second half of 2020, we expect our risk costs to be below the levels recorded in the first half of the year. Our CET ratio improved from 14% to 15%, supported by lower RWA due to various management actions and CRR amendments, and regulatory capital also saw an increase, which I will address later in the presentation. We are confident in our strong capital position, funding base, and low Stage 3 ratio to help navigate through any potential challenges. This quarter, we provided support to our employees, customers, and society. Currently, around 75% of our workforce continues to work from home, and we have initiated a phased return to the office, ensuring safety for our staff in alignment with local requirements. We have offered payment holidays to both private and business customers, amounting to €18 billion of credit outstandings, representing 2.5% of our loan book. This is primarily within mortgages and business lending. Of these amounts, payment holidays have expired on €1.3 billion, and we are not seeing a significant increase in risk costs on these loans. After an initial surge in requests back in March and April, new requests have diminished, and with many payment holidays expiring, we do not anticipate a large rise in this area going forward. We have also extended around €250 million in loans to SMEs and mid-corporate customers, and our government guarantee schemes have provided €5.4 billion of liquidity to larger corporate clients, with some of the liquidity drawn reversing after peaking at the end of March. We utilize various methods to monitor the credit risk profile of our clients, including personal credit assessments and an early warning system designed to catch potential signs of increased credit risk. We are staying informed about our clients' activities, and if necessary, we are intervening early. In the prior quarter, we experienced unusually high loan growth driven mainly by protective drawings in Wholesale Banking. This quarter, some of those drawings have returned, but investment plans are on hold, leading to decreased demand. In Retail, mortgage demand remains steady, while Consumer Lending demand is subdued, and Business Lending is experiencing reduced demand primarily because of the liquidity provided through government support packages. This has caused negative loan growth in that area. Our fee income showed a strong trend that continued from the last quarter in investment products. However, daily banking fees were affected by lockdowns, resulting in lower payment fees due to reduced commercial activity and limited travel. We managed to offset some of these effects through increased payment package fees in the Benelux and Germany. Our conservative approach to syndicated transactions in Wholesale Banking led to a decline in lending fees, and low oil prices continued to affect trade finance. Despite the impacts of COVID-19, our fee income for the first half of the year was almost 9% higher than in the first half of 2019, indicating we are on track with our fee growth ambitions. Loan provisioning was influenced by worsening macroeconomic indicators, leading to an uptick in Stage 1 and Stage 2 provisions. Looking at our primary customer base, we continue to see growth despite the ongoing challenges presented by the current market environment. Germany has greatly benefitted from the digital experiences we provide. Additionally, we've seen growth in our top-line income on both a year-on-year and quarter-on-quarter basis. There are some positive effects from more volatile items, but our net interest income has remained stable, as we guided, despite the challenges of the negative interest rate environment in the eurozone. Year-on-year, we have seen some support from tiering; however, pressure on liability income continues to be significant, which further increased this quarter due to core rate reductions in non-eurozone countries. Our discipline in managing lending margins and implementing negative rates are examples of our approach to this pressure. Importantly, we expect benefits from TLTRO III to become apparent starting in the third quarter, as our main participation in this scheme only began at the end of the second quarter. Our digital and agile capabilities are key assets in the current environment. Digital banking provides a secure option for customers and ensures business continuity in a rapidly changing world. Our digital, mobile-first strategy remains relevant, and under my leadership, we will persist in that direction. As demonstrated by the top graph on this page, we continue to assist our customers in transitioning from using assisted channels like branches and call centers to mobile banking at an accelerated pace. With lockdown measures in place, our customers have quickly adopted remote channels for advisory products, such as video consultations for mortgages and investment advice. This is evident in the continued reduction of assisted channel usage and the growing mobile customer base, which now stands at 41%. Furthermore, mobile interactions increased to 87%, showing strong annualized growth. Our conversion rate to sales has improved since the end of 2019, with an increasing number of mobile sales per thousand customers. We continue to enhance the digital experience for our customers, including advancing our "Unite" initiative to improve the digital experience for our Belgian customers. This quarter, we made important strides toward digital harmonization in Belgium. We launched OneWeb, our new digital banking channel, and we began welcoming private individual customers to OneApp, which is based on the app already available in Germany and the Netherlands. Many milestones in the Unite program have already been achieved, including implementing an agile service model, reducing the number of branches, migrating all Record Bank customers, and decommissioning systems. While we have decided against the centralization of core banking systems, the technological advancements initiated since we kicked off Unite in 2016 will allow us to harmonize our digital customer offerings more swiftly using APIs. Much of the planned cost savings have already been realized, and although the technical execution of Unite differs from our initial plans in 2016, we believe we can further improve efficiency. In terms of our second quarter results, we saw an increase in income when compared year-on-year and quarter-on-quarter. We achieved higher treasury income through disciplined management of our lending margins, along with positive valuation adjustments, which mitigated the ongoing pressure on customer deposit margins and reduced income from foreign currency ratio hedging given the lower interest differentials in core deposit rates. It's worth recalling that the second quarter of 2019 included a €79 million extraordinary gain. Overall income was €6 million higher than a year ago, and without that one-time gain, the growth would have been even more substantial. Sequentially, income rose by €160 million, primarily due to the reversal of negative valuation adjustments from the previous quarter, despite some special liability income and lower fees after exceptionally high fee income in the first quarter. Excluding volatile items and regulatory costs, our pre-provisional results remained resilient. Our net interest income, excluding financial markets, decreased slightly year-on-year due to the negative rate environment on customer deposits and lower foreign currency hedging income. This quarter, we experienced core rate reductions in non-eurozone countries alongside a significant influx of deposits, particularly in the eurozone, due to reduced spending during these uncertain times. Compared to the previous quarter, NII was down 1.8%. Although NII on mortgages saw an improvement, continued margin pressure on customer deposits persisted. Overall, we maintained pricing discipline and benefitted from negative rates applied to deposits. We previously saw benefits from deposit tiering that rolled out at the end of 2019. Furthermore, the benefits we anticipate from TLTRO III will become evident in the third quarter, given that most participation in the TLTRO scheme occurred toward the end of June. As for our core lending developments, we are witnessing steady growth in Retail, particularly in mortgages, with notable growth in Germany. However, consumer lending demand remains subdued. In Wholesale Banking, core lending declined by €5.6 billion, largely due to repayments following increased utilization of revolving credit facilities in the previous quarter. Daily Banking and Trade Finance also experienced declines due to reduced demand for receivables finance and working capital solutions, in addition to the impacts of low oil prices in Trade & Commodity Finance, resulting in a net core lending decrease of €7 billion this quarter. On the customer deposit side, we observed an increase of nearly €21 billion, largely driven by Retail Banking in light of reduced spending amid the COVID-19 pandemic and the holiday allowances received. We managed to grow our fee income by €12 million year-on-year within Retail Banking, reflecting a 1.7% increase. Fees rose by 5%, primarily due to investment product fees, which increased by nearly 28% year-on-year, benefiting from a high number of trades amid market volatility. Reduced fees in Wholesale Banking were mainly a consequence of our conservative stance toward the syndicated lending markets in this quarter, contrasting with the first quarter, where we experienced high fees from successful campaigns in Belgium. Additionally, lending fees in Wholesale Banking declined quarter-on-quarter after a robust entry into the syndicated loan market, which led us to moderate our appetites, also seen in Daily Banking, where activities decreased due to the effects of COVID-19. In financial markets, our results for the quarter were strong, with client income rising by €64 million, primarily driven by Rates and Global Capital Markets. Sequentially, client income increased by €73 million, reflecting robust performance in rates and credit ratings following losses due to market volatility in the first quarter. Net valuation adjustments positively contributed €87 million to our results this quarter, as markets stabilized after the volatility experienced toward the end of the previous quarter. Turning to our expenses, excluding KYC and regulatory costs, as well as the €310 million goodwill impairment, our costs have decreased by €44 million year-on-year. By focusing on cost control and lowering performance-related expenses, we successfully absorbed salary increases associated with collective labor agreements. Even when excluding a provision recorded in Q2 2019 for a restructuring in Germany, costs remained lower than last year. KYC-related expenses were similar to the previous quarter as we continue to enhance effectiveness and make progress with fund improvements, and these costs are expected to stabilize in 2020, with an anticipated run rate of around €600 million this year. Regulatory costs were seasonally lower by €40 million in the second quarter compared to last year, thanks to catch-up contributions owed to the Single Resolution Fund. Given our resilient income and the current demand pressures, you can expect Tanate and me to examine our cost base closely. While some investments will continue, we need to differentiate between essential projects and those that are simply nice-to-have, and we will evaluate these accordingly. We have increased provisions across all stages. The provisions in Stage 1 may seem counterintuitive, as IFRS 9 requires us to set aside €255 million due to deteriorating macroeconomic indicators. In Stage 1, we assess macroeconomic indicators over a 12-month period. This quarter reveals a challenging outlook, indicating a significant downturn with limited recovery prospects. Since nearly 90% of our exposures are in Stage 1, this is applicable to the majority of our book. Stage 2 provisions were also elevated, reflecting worsening conditions during the second quarter. Nonetheless, we anticipate some recovery in Years 2 and 3, positively influencing our risk assessments. We have also noted several individual files in high-risk sectors moving to the Watch list and have applied some rating downgrades accordingly. Stage 3 has been affected as already fragile companies have faced additional hurdles due to the COVID-19 pandemic, leading to extra provisions compared to previous quarters. We have transferred several larger files, including a significant suspected fraud case that has garnered media attention, to Stage 3. The overall risk costs totaled €1.33 billion or 85 basis points over average customer lending in the second quarter. As previously noted, the significant provisions in Stage 1 and Stage 2 contributed substantially to this figure, including €421 million of collective provisioning allocated to various segments. That figure includes a management provision for payment holidays. Apart from Stages 1 and 2, Retail Benelux experienced higher risk costs due to larger individual file additions in mid-corporates, while Retail Challengers & Growth Markets faced higher risk costs mainly related to collective Stage 3 provisions in countries like Poland, Spain, and Turkey. Wholesale Banking Stage 3 risk costs remained elevated as large clients, both existing and new, presented additional challenges, especially in Germany, the Americas, Asia, and the Netherlands, representing that serious provision related to the suspected fraud case. As we moved more exposures to the Watch list, Stage 2 totals increased, resulting in a higher Stage 2 ratio of 7.0%. To clarify, Stage 2 is not necessarily a waiting area for defaults; it simply indicates that the risk is under closer monitoring. When credit risk is deemed to have stabilized, we revert it to Stage 1. The strength of our book is reflected in the Group's Stage 3 ratio of 1.6%. Excluding TLTRO III from credit outstandings, the Stage 3 ratio is slightly higher but remains low at 1.8%, highlighting the resilience of our portfolio. I have confidence in our risk management framework and the quality of our portfolio. We have absorbed valuable lessons from previous financial crises, resulting in a well-diversified loan book with limits on single exposures, sectors, and countries, a conservative risk appetite, and a focus on senior secured structures. Our strong performance throughout the economic cycle, with historical risk costs as a percentage of pre-provisional profits, is significantly lower than that of our eurozone peers. The slides illustrate our loan book and highlight specific sectors in Business Lending and Wholesale Banking that are directly affected by the pandemic. The size of these individual books is limited, and Stage 3 ratios generally remain low. Focusing on sectors that commonly attract inquiries, an example is Oil and Gas, where we have €4.5 billion directly exposed to oil price risk, which includes reserve-based lending and offshore operations. We have observed recent deterioration, particularly in offshore drilling; however, this portion is relatively small at only €0.5 billion. For Hospitality and Leisure, we have maintained a restrictive portfolio and been very selective. In Aviation, our exposure is minimal, and we are exercising caution under current market conditions. To summarize, we have seen a decline in fees for Wholesale Banking due to decreased activity in underwriting markets amid ongoing uncertainty. We are closely monitoring the evolving situation as it impacts our customers. Thankfully, our solid risk framework is supported by our experienced risk management team. Regarding our capital strategy, our Common Equity Tier 1 ratio has increased to a robust 15%. Our capital position improved due to a €1.4 billion positive impact of incorporating our full net profit, with regulatory capital rising by €600 million. As it relates to dividends, we have opted to delay payments until after January 1, 2021, in line with ECB recommendations. The reserved dividend for 2019 is currently excluded from regulatory capital but will be included eventually. Notably, if we were to rethink this approach, our pro forma Common Equity Tier 1 ratio would be 50.5%. We observed a €13 billion reduction in RWAs this quarter, mainly due to €12 billion in lower credit risk-related assets, as a result of management actions—including adopting the standardized approach for sovereign exposures. Reduced lending volumes further contributed to the RWA decline, marked by the €7 billion drop in core lending this quarter. We recorded a €6.6 billion rise in RWA from TRIM impacts following recent updates from the ECB. With TRIM impacts understood and accounted for, we remain optimistic about our capital standing in light of any future RWA influences. Our Common Equity Tier 1 ratio and leverage ratio exceed our ambitions. We have adjusted our ROE targets while aiming to deliver attractive total returns to shareholders. Our cost-income ratio has faced pressures stemming from factors such as the negative interest rate environment and regulatory expenses, with this quarter's goodwill impairment influencing that metric. We aim for a cost-to-income ratio of 50% to 52% as we continue with digitization initiatives. Most segments have successfully reduced operating expenses, and Tanate and I will maintain scrutiny on costs. In conclusion, we remain committed to supporting our customers and society against the backdrop of COVID-19’s side effects. At the same time, our focus on combating financial and economic crime remains crucial. Current circumstances reinforce our confidence in the strategic direction we are pursuing, with our digital model experiencing increased customer engagement and retention. While loan volumes have been affected by COVID-19, mortgage growth continues to be strong. Our pre-provisional results demonstrate resilience, supported by our pricing disciplines, robust fee income, and effective cost control measures. Based on the current macroeconomic indicators, we believe we have accounted for most of this year's provisioning needs, and we expect risk costs in the second half of the year to be lower than those recorded in the first half. Our CET ratio remains strong at 15%, and we will present an updated capital plan in our third quarter results. I am confident we can navigate through potential headwinds, supported by stable income, growing fee income, a solid capital position, a resilient funding base, and a low Stage 3 ratio. Thank you for your attention; I’ll now open the call for questions.

Operator, Operator

Thank you, sir. Our first question is from Mr. Stefan Nedialkov of Citi. Go ahead, please, sir.

Stefan Nedialkov, Analyst

Hi, good morning, guys. It's Stefan from Citi. Steven, welcome to your new role at ING. I have a couple of questions. The first one is on the outlook for pre-provision profit and post-provision profits. You seem to be getting to stable NIIs for the rest of the year. There was a small miss in the quarter. How should we think about the evolution for the rest of the year in terms of help from TLTRO and others? Then fees obviously very strong and costs relatively under control. Does this mean we should be looking at an improving pre-provision profit into the second half of the year? On the post-provision profit basis, cost of risk, you guys seem to be guiding to the second half being less than the first half. Back of the envelope calculations basically point to around €3.4 billion which is in line with consensus. Would you agree or disagree with that? Thank you.

Steven van Rijswijk, CEO

Thank you very much, Stefan. I will take the cost on the risk guidance, and then I will give the outlook for the pre-provision profits to Tanate, also in light of your question on TLTRO. If you look at the risk cost, there is a significant part of our risk cost that came from macroeconomic indicators. And as we said in the first quarter of the year, we then took a very much a process approach and said okay, well there's no consensus that we have in the first quarter of what we use for the economics of the then outlook, we then have for the economies for the first year and also for the next three years. This consensus still was quite benign since some reports were negative whilst others remained flat. Hands on average, the impact GDP impact or impact on house prices or unemployment was relatively limited. We took then a €200 million plus an additional €40 million for one of the portfolios. Now, what we now do is again, going back to the process and we look then at what are the macroeconomic indicators for the end of June and there you see a big deterioration. You see a forecast for the eurozone minus 8% for some countries, even minus 10% or minus 12% with then recovery, a gradual recovery in 2021, 2022. We need to bridge that delta in our risk costs. So both in Stage 1 and in Stage 2, you see a significant uptick in our risk costs with over €400 million. We included an additional management overlay for potential risk costs arising from our payment holidays. Additionally, migration of clients who because these macroeconomic indicators get higher probabilities of default allocated, leads to higher ratings and therefore we see higher risk costs as well. So, the lion share, the large lion share of what you see in Stage 1 and in Stage 2, are these macroeconomic impacts. And therefore, if these macroeconomic indicators stay as they are, then in the next quarters, we will not see that anymore. Thus we are quite confident that our risk costs will go down for the second half of the year. Now, Tanate, can you go into the pre-provision profits?

Tanate Phutrakul, CFO

Sure. Stefan, as you know, we don't give forward guidance, but let me talk you through some of the components about our NII. If you look at our quarterly results this quarter, you see that we maintain pricing discipline in terms of our repricing of our loan book. We try to continue to diversify the geography of our loans to more non-eurozone markets, and I think to maintain stable NII, we are counting on an improving macroeconomic situation which should lead to increased loan growth in Q3 and Q4. Having said that, we are also taking steps regarding our liability costs; for example, there in several of our non-eurozone markets, we are looking to take steps or have already taken steps on reducing the deposit rates offered to our customers. As you know, we have also gone negative for large private banking customers in either the Netherlands or in Belgium. Furthermore, we have taken approximately €60 billion in TLTRO funding, which we benefit from if we can keep our loan growth stable or rising, benefiting from funding of approximately minus 1%.

Operator, Operator

The next question is from Mr. Benoit Petrarque of Kepler Cheuvreux. Go ahead please.

Benoit Petrarque, Analyst

Good morning and welcome, Steven. It's great to have you here. As a first question, since you've only been with us for a couple of weeks, do you anticipate providing any updates on the company’s strategy? While I don’t expect a big turnaround, I’m curious about any direction you might want to share. Additionally, a key concern is the focus on cost. We've seen some banks significantly reduce costs in the second quarter, and the trend is quite clear. Can you provide us with an update on the cost-cutting pipeline and the outlook for the full year 2020? I believe it was a 0.4% decrease on a clean basis in Q2, which is positive, but given the pressure on revenue, perhaps more action is needed. The second question is regarding asset quality and risk. As you know, there is a relatively small portion of loans under moratoria, about 2.5% of your book, which equates to €18 billion. Could you provide more detail on that figure, specifically the breakdown between Retail and Wholesale? When do you expect those loans to return to normal? Also, do you have any preliminary insights on how much of that €18 billion could potentially become problematic? Is that a minor figure, or do you have an opinion on it? Thank you.

Steven van Rijswijk, CEO

Thanks very much Benoit; I’ll try to unpack your two questions. Starting on strategy and the cost of risk, then Tanate will address the cost side of things. But let me start by saying that cost will be an important focus of mine, particularly during these times. Although I've only been in this position for a few weeks, I've been part of the Board for three years as Chief Risk Officer and have been involved in strategy, and I will continue that strategy. Of course, we could consider some adjustments, but I support the strategy. We witnessed during the crisis that digital banking and mobile-first approaches are the way forward. We've seen dramatic growth in digital use, with 87% of interactions occurring through mobile channels and 41% of clients solely using mobile services. We are gradually transforming clients from assisted channels like chat or call center access to digital banking. We've reduced our branch footprint and are evaluating branch performance since some locations see only a couple of customers per hour, making retention impractical. As for the focus on digital offerings and online banking, we see another growth opportunity, illustrated by increasing brokerage fees online. This will positively impact our earnings while we manage client loans and risk costs prudently, keeping a close watch on the evolving scene and ensuring we're well-positioned with our AML strategies.

Tanate Phutrakul, CFO

Addressing your question on cost, if you examine our quarterly results for Q2, we’ve achieved an absolute cost reduction, absorbing inflation and additional compliance spending on KYC. If we maintain a downward trajectory, we've guided toward negative cost evolution in market leadership. In Q2, that trend was realized. Excluding the goodwill impairment from Belgium in the wholesale bank, you see cost in Wholesale Banking beginning to decline. In the CNG region, we’ve suggested targeted cost growth; however, in light of the macroeconomic situation and lowered revenue forecasts, measures will be adopted here as well. Therefore, we’ll seek a balance between immediate efficiencies and investing in our digital future, with some initiatives currently undergoing review for cost efficiency.

Steven van Rijswijk, CEO

Regarding the cost of risk related to the payment holidays, approximately 40% of the €18 billion loans are allocated to households in Retail, while 60% are for business clients. The majority of the payment holidays are sent to the Northwestern European countries. Over €1 billion has already expired without meaningful risk cost increases noted in those loans. Provisions for potentially problematic sections of currently outstanding payment holidays remain cautious, and to date, we do not see signals of deterioration.

Stefan Nedialkov, Analyst

Great. Thank you very much.

Giulia Aurora Miotto, Analyst

Yes. Hi, good morning. Can you hear me?

Steven van Rijswijk, CEO

Yes, very well.

Giulia Aurora Miotto, Analyst

Okay, fantastic. A couple of questions from my side as well. So fees, a strong result there. Can you please run through the main initiatives that make you confident that ING can deliver on the 5% to 10% fee growth? And then secondly, less related to results per se, but DCB had an M&A consultation last week, or yeah, recently, and any thoughts on that? Could ING be perhaps involved in cross-border M&A, do you think, if there are some opportunities available? Thank you.

Steven van Rijswijk, CEO

Thank you very much, Giulia. I think in terms of fees, we have a clear track record, as evidenced by the 8% increase seen across the first half compared to the previous. We have robust plans in place and have expanded on brokerage activities particularly in Germany, noting a significant 28% year-on-year increase. We have also increased payment packages, and while their effects might take time to manifest, we are optimistic given the activity rate is starting to return. Additionally, we continue to innovate within the insurance portfolio, evidenced by our collaborative projects with AXA. Historically, we consistently deliver on our fee targets of 5% to 10%, which underpins our confidence moving forward. Should we transition to the M&A consultation, our approach has always been focused on organic growth, considering acquisitions for particular skill sets or service enhancements. Market consolidation is primarily seen as cost synergies, but the current environment makes cross-border synergies challenging, and thus, we have limited expectations for cross-border M&A on the horizon.

Benjamin Goy, Analyst

Yes, hi, good morning and two questions please from my side. I want to follow up on the fees and your work that has been repriced. In Germany, for example, your payment packages, just wondered how the experience was and whether we can expect them to say more pricing power in your Challenger markets as well where you have historically been price leaders? And then secondly, I think there was a headline that you reviewed your dividend policy, which probably is no big surprise. But I was just wondering whether this is part of a broader review and might also include share buybacks, considering your trading below book value? Thank you.

Steven van Rijswijk, CEO

Yes, regarding the dividends, based on the announcements by the ECB earlier this year, we delayed our dividend policy, which we will address in the coming third quarter results. To clarify, we will make decisions based on what we are allowed to pay, but one thing is clear: we aim to return dividends to our shareholders. We've set aside the 2019 dividend reserve, which remains outside regulatory capital, indicating our commitment. Now, Tanate can take your question on fees.

Tanate Phutrakul, CFO

Just to reiterate on fee income, as Steven mentioned, we review daily banking packages annually and aim to ensure the sustainability of our investment product fees, with a focus on collaboration with AXA for third-party fees. In Germany, we implemented payment package fees of €5 per month; this incentivized nearly a third of non-primary customers to switch to primary status, while 30% opted to remain non-primary, choosing to pay the €5 fee, and the remaining clients have left ING altogether. Overall, we are satisfied with this evolution.

Johan Ekblom, Analyst

Thank you. Just coming back to some comments you made regarding growth ambitions. Should we expect any change in terms of where you’d like to focus on growth? You talked about the challenges in growth markets, but if we look back over the last two years, you clearly put the brakes on a bit in Wholesale. Is it a continuation of that strategy or an acceleration? How should we think about it?

Steven van Rijswijk, CEO

Thanks, Johan. We will maintain our existing strategy. A couple of years ago, we identified risks creeping into the wholesale banking books; structures deteriorated over time, with increasing amounts and pricing not accurately reflecting the risk. That's why we initiated caps on certain exposure types, particularly in real estate and leverage finance and started to cautiously run off the oil and gas and drilling books. We will continue this approach for now. As for growing our loan book, we will diversify further, especially in our CNG sectors and consumer lending, continuing our strategy over the years.

Tarik El Mejjad, Analyst

Hi, good morning. A couple of quick questions, please. First on the NII; could you give us some indication of how Retail and Corporate customers have behaved regarding deposits and how the €21 billion significant increase in deposits in Q2 could reverse in the coming months? And my second question is about capital; an update on CRR 2.5, what input on the structure and the implications on Basel IV? After factoring in the €10 billion RWA booked in Q1 and the €13 billion TRIM, I assume you’re left with only 20 or 30 basis points of additional RWA tied to Basel IV?

Steven van Rijswijk, CEO

Regarding the capital benefits from the CRR 2.5 regulation, around 25 basis points is what we've gained, with the key benefits stemming from management actions. If we look at RWA, you've hit the nail on the head; most TRIM missions already took significant impact, while the smaller TRIM letters will cause little disruption going forward. Hence, we feel comfortable with our current capital level, ready to absorb potential future RWA impacts. For the remaining Basel IV concerns, we continue to monitor unfolding regulatory developments and will keep investors updated as appropriate.

Tanate Phutrakul, CFO

To address your question on capital implications; the 25 basis points credit for CRR 2.5 does account for the SME support factor, but does not yet include the regulatory treatment of software costs. Those are expected to be finalized in Q3 with applicability in Q4, and it’s estimated to yield another 10 to 15 basis points advantage.

Johan Ekblom, Analyst

Thank you, sorry, I was cut off. Just a second question regarding TLTRO. How should we expect that to be accounted for due to the growth dynamics we're witnessing? Will you book it on a recurring basis or adjust it at the end?

Steven van Rijswijk, CEO

In terms of TLTRO, I’ll pass it over to Tanate.

Tanate Phutrakul, CFO

There are three parts to TLTRO: the total magnitude, the confidence we can maintain at least zero growth in our portfolio, and as long as we can leverage those funds to generate revenues at attractive margins. Our strategy depends on loan growth, which will inform our accounting decisions going forward.

Kiri Vijayarajah, Analyst

Yes, good morning everyone. So you’ve alluded to pricing discipline in recent comments. I’m curious to assess the extent you’ve been repricing on the loan side, particularly in Wholesale Banking. Additionally, could you clarify your capital management actions this quarter concerning the RWA profile? Will 20% flow through affecting the Basel IV ratio or predominantly Basel III?

Steven van Rijswijk, CEO

We're committed to maintaining pricing discipline across our loan book. While we noticed mortgage lending margins increased, margins in business lending slightly declined. The average in wholesale remained roughly flat partly due to shifts from project loans to recurring credit facilities, affecting overall pricing. For capital management in this quarter, most actions were indeed geared towards improving our Basel III parameters with TRIM missions substantially accounted for. Provisions based on expected risks contribute largely to our RWA profile.

Anke Reingen, Analyst

Yeah, thank you for taking my question. The first is on loan growth. Several banks have mentioned a resurgence in demand in June, some in July. What has ING witnessed in terms of returning loan demand? Furthermore, regarding your update on capital with the Q3 results, given the ECB is unlikely to have commented, should we expect potential reallocations of capital within the group and any insights on your targets as you navigate this transition?

Steven van Rijswijk, CEO

We are starting to see loan demands returning, which parallels improvements in payment volumes. Increased shopping activity often points toward rising loan requests. While demand in mortgages remains consistent, future demand will depend on ongoing economic activity. As far as capital strategy, the ECB has advised against dividend payouts in 2020, but our intent to resume dividends must remain central to our discussions in the coming third quarter results.

Daphne Tsang, Analyst

Hi, welcome to the call. I have a couple of questions. First, regarding net interest income, do you still maintain your previous guidance of flat NII? I understand this suggests a need for higher NII in the second half of the year. Additionally, how should we analyze margin dynamics, especially considering the current pricing discipline? Do you believe that the net interest margin can recover from the low levels seen this quarter? Also, concerning TLTRO III, what additional capacity do you have to increase current levels? My second question is about costs; as we look at costs in the second half of the year and beyond, are you planning any reductions this year or next, given that opportunities seem limited?

Steven van Rijswijk, CEO

Thank you, Daphne. Those are good questions regarding our NII and margin stability. Therefore the onus would be on Tanate to provide you your detailed outlook.

Tanate Phutrakul, CFO

Daphne, regarding net interest margin in Q2, it fell from 151 to 144 basis points, driven by the extension of revolving credit facilities that come with lower margins than our blended loan portfolio. Though the concern might seem serious, on a pro forma basis that margin is around 148 basis points. Forward outlook hinges significantly on our pricing discipline. Continual reduction in deposit rates and utilizing TLTRO advantages will support our strategies for stable NII coverage. For the moment, our liquidity levels are sound, and we do not anticipate increasing TLTRO levels shortly. On the cost front, proactive cost management measures observed positive trends in Q2 with absolute reductions visible across major divisions, we'll continue to maintain that focus.

Omar Fall, Analyst

Hi, good morning. Two brief questions regarding costs: the €44 million decline in underlying costs (excluding restructuring) — can you break those down into quantifiable components? I'm curious why reductions from COVID-related savings aren't visible as they are in other banks, whereas their retail divisions show notable reductions. Also, regarding Unite, where do we stand with that plan? The reduction quoted suggests Belgium and the Netherlands have low underlying costs, keeping it all in context.

Steven van Rijswijk, CEO

Touching on Unite's implementation; we've successfully centralized a number of practices and seen reductions in branch counts, and most importantly empowering digital solutions. We anticipate rolling out further client integration elements through continuous practical steps. Specifically concerning costs, I’ll pass this to Tanate for a detailed breakdown on the €44 million costs.

Tanate Phutrakul, CFO

Omar to address your cost situation; the CLA’s average increase is around 2.5% to 3%. Our approach remains committed to finding efficiencies while fostering robust compliance practices, resulting in marked investment towards KYC efforts, currently clocking approximately €134 million this quarter. Our expenses in KYC are slated for €600 million this year and will preserve a reliable framework moving forward.

Raul Sinha, Analyst

Good morning, gentlemen. If I may follow up on two particular points: firstly, the oil and gas book saw a notable rise in the Stage 3 ratio, up to 7.8%, even after accounting for the trade finance sector from Q1. Can we discuss your outlook here, considering the recovering oil prices and how you proactively manage risks in this portfolio? My second question related to the fraud cases we've discussed, it is clear some lessons need to be revisited. How's the group addressing these fraud incidents? Lastly, could you elaborate on your dividend policy moving forward, possibly outlining new considerations that may put you in line with US banks, which are planning for lower payout ratios yet retaining flexibility for share buybacks?

Steven van Rijswijk, CEO

To clarify on oil and gas and the Stage 3 rated risks, the observed 7.8% mostly reflected that €4.5 billion allocation, specifically for the oil and gas sector, largely tied to upstream resources. While we recognize potential in the ongoing recovery trends, we are still cautious with projected provisioning levels accounting for broader industry dynamics, including individual company outlooks. On dealing with fraud risks, we have taken steps to enhance checks and balances by reinforcing auditing measures and harnessing fintech solutions within our trade finance operations for increased transparency across transactions. Our stated drive remains firm with tackling financial crime significantly. Regarding dividends, our determination navigated by the enhanced measures imposed by the ECB, we’ll re-evaluate our approach come the third quarter, exploring various trajectories and flexibility.

Raul Sinha, Analyst

Great. Thank you very much.

Operator, Operator

Ladies and gentlemen, this concludes the Second Quarter 2020 ING Analyst Call. Thank you for attending. You may now disconnect your line.