Earnings Call Transcript - ING Q4 2020

Operator, Operator

Good morning. This is Patricia Klosov-Norton, welcoming you to ING's Fourth Quarter and Full Year 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 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

Thank you very much, and good morning, everyone, and welcome to our full year 2020 results call. I hope you're all in good health, and I'm happy to take you through today's presentation. I'm joined by our CFO, Tanate Phutrakul, and our new CRO, Ljiljana Cortan, who joined us as of the 1st of January, and we're happy to have her on board. Welcome, Ljiljana. At the end of the presentation, we will always have time to take your questions. When we presented our 2019 results a year ago, I don't think anyone expected that the year 2020 would evolve the way it did. 2020 goes into history books due to the COVID-19 pandemic, which presented unprecedented challenges to our employees, customers, and society. And also at ING, we have felt this effect. We continue to support our customers, employees, and society during this time, and I'm sure I speak for many of us when I say that with the vaccination programs in the way, we very much look forward to circumstances normalizing again. During 2020, we have taken several actions to further build a sustainable company, and I'm pleased to see an increasing interest and recognition for our strong profile on ESG topics. Our digital model continues to be a clear advantage as we have added another 578,000 primary customers in 2020, and the number of mobile interactions continues to grow. I'm proud to say this supports us to deliver strong performance with pricing discipline, good fee growth, and cost control. The most notable effect of COVID-19 was on lending and deposits, with low lending demand turning historic strong loan growth into a small negative for 2020, while deposit inflow doubled and rates in the Euro swap market and non-Eurozone country declines. These factors have put pressure on NII, which we believe will be alleviated in normal circumstances. Full-year risk costs were at EUR 2.7 billion or 43 basis points over average customer lending. Around 30% was in Stage 1 and 2, driven by IFRS 9-related provisions and management overlays. For 2021, we expect to move close to our through-the-cycle average of around 25 basis points. On asset quality, we have a strong and well-diversified loan book built through a proven risk management framework, which we did not change during COVID-19. Our strong track record underscores that we are a low NPL bank compared to our Eurozone peers. The CET1 ratio improved from 15.3% to 15.5%, and this almost fully excludes the fourth quarter net profit as this has been added to the EUR 2.5 billion already reserved for future distributions, in line with our policy. This brings the total amount of reserves for future distributions to EUR 3.3 billion. We want to provide our shareholders with a healthy return and will start distribution of this amount with the delayed interim cash dividend over full year 2020 of EUR 0.12 per share, in line with the current ECB recommendation. We intend to distribute the remaining amount reserved after September 30, subject to prevailing ECB recommendations and relevant approvals. Looking forward, when economies recover, we are well positioned to capture growth again as we benefit from our geographical and product diversification. Now let me take you through our full year results, starting on Slide 4. So when you look at Slide 4, here are some highlights of our efforts in 2020 to further build on being a sustainable company. We are pleased to see an increasing interest in the market and that we are recognized for our strong ESG profile. It's an area where we are considered an industry leader, especially on environmental topics, where we make a difference with our Terra approach and also the transparency that we provide through our reporting. In 2020, we published our second Terra update report, which contains targets and progress on our alignment with the Paris climate goals in the nine most carbon-intensive sectors. Demand for sustainable finance solutions remained strong in 2020. Aside from the numbers shown on the slide, we supported the issuance of nine social bonds, which included the first COVID-19-linked bond in Europe. We further took action to provide support during the pandemic and published our annual human rights update, which includes the impact of COVID-19. We revised our remuneration policy, formulated with stakeholder feedback and strongly linked variable pay to sustainable performance. And we continued our focus on ensuring the right behavior at ING through initiatives such as the assessments of our behavioral risk management team. We are a pioneer in the sector with our dedicated behavioral risk management team, and in 2020, the team developed Dialogue Starter, a method to further support teams in mitigating behavioral risks. Our strong ESG profile is also reflected in our ESG ratings. In December 2020, CDP confirmed our place on its climate A List, while MSCI upgraded our rating to AA. Recently, we also received an ESG evaluation from S&P, rated us as strong, with a score of 83 out of 100. Slide 5 shows that our focus on our digital- and mobile-first customer proposition has benefited us as we saw customers increasingly turning to these channels under COVID-19. The share of mobile-only customers increased in 2020, as did the number of mobile interactions, growing to an 87% share, while also the number of total interactions continued to grow. We also showed an upward trend in our product and services sales, with our digital investment account in Germany as an example of how we successfully offer a digital and differentiating customer experience. 326,000 new investment accounts were opened in 2020, contributing to 20% growth in a number of investment accounts and 25% growth in assets under management. Customers appreciated the mobile capabilities offered, with the number of trades via the app almost tripling to 45%. Also worth mentioning is that 20% of those new accounts were opened by customers who were new to ING, demonstrating that our digital offering also attracts new customers in a time of crisis when people could be more inclined to stick to their main bank. This is further evidenced by the fact that our primary customer base grew by 578,000 customers, reaching 13.9 million at the end of 2020. Now on to Slide 6, which shows the clear effect of the pandemic on lending and deposits. In normal circumstances, lending is a growth driver for us, with average loan growth exceeding 5% in previous years, outpacing deposit growth. In 2020, COVID-19 changed that picture. Mortgage demands remained, but the demand from businesses dropped, driven by delayed investment plans and less need for working capital. Also, in our main markets, governments provide direct liquidity support rather than through the banks. Combined with ECB actions such as TLTRO III and bond purchase programs, a high availability of liquidity made the repricing normally seen in times of crisis more modest. On deposits, we saw record inflow, as lockdown restrictions and growing uncertainty resulted in shifts from spending to saving. While we managed to steer part of this to investment products, the overall effect is clearly visible. At the same time, the euro swap rates moved further into negative territory, and in response to COVID-19, central banks and non-Eurozone countries cut rates. The pressure from negative rates is not new. But in the past years, we successfully countered this pressure and NII grew. This became more difficult in the second half of 2020, driven by the factors that I just mentioned. We saw added pressure from FX translation, which was partially offset by margin discipline and increased charging of negative rates. In the current circumstances, we expect pressure on NII to continue. However, with global progress on vaccinations, a return to normality comes closer, and with that, also more normalized spending patterns and lending demands. I don't want to speculate on timing, but I'm confident that loan growth will again be an effective lever for us, where we will also benefit from our geographical and product diversification. Finally, the conditional TLTRO III benefit is not included. As mentioned before, we first need to be virtually certain again that we will meet the eligible loan target growth. And looking at our pipeline, we're close, but it will be tight as we're also dependent on repayments and cash flow movements. While an additional EUR 300 million in NII is certainly welcome, we maintain our risk appetite and margin discipline to avoid trading short-term NII benefit for future risk costs or longer-term superior loans. On Slide 7, you can see that despite the pandemic, we realized strong fee growth in 2020. This growth was partially driven by investment products with an impressive 31% increase compared to '19. We saw new account openings increasing, reflecting the success of our digital investment solution in Germany, which I mentioned before, and also marketing campaigns in other countries. A higher number of trades in a volatile market also helped. A significant part of the fee growth can be considered structural as assets under management grew strongly. Daily banking fees grew 12% year-on-year. The main drivers here were increased package fees at the beginning of the year and also the introduction of account fees in Germany. With these measures, we countered the impact of a drop in domestic and international payment transactions, especially in the first half when lockdown measures and travel restrictions were put into place. Though not yet back at normal levels, we have already seen some recovery in domestic transactions in the second half of 2020 as spending increasingly shifted to online and lockdown restrictions were temporarily loosened. International transactions remain subdued as travel restrictions stayed in place. The development of lending fees reflects the lower loan demand from businesses. Overall, in a challenging year, fees grew by 5%, and we remain committed to our 5% to 10% growth ambition, supported by a 5.5% CAGR over the past five years and the belief that in normalized circumstances, daily banking fees will benefit from a normalized level of payment transactions, investment products will remain at a higher level, while lending fees should increase again in line with loan demand from our business clients. On to Slide 8. 2020 expenses included EUR 673 million in volatile items, including goodwill impairments taken in the second quarter as well as provisions and impairments related to the review of activities and measures that we announced so far on wholesale banking, on Maggie and on the branch networks in our retail countries. Excluding these volatile items, operating expenses were only slightly higher compared to '19 as our focus on costs almost fully offset contractual salary increases. We continue to review our activities, resulting in the additional measure of reducing our branch network in Belgium, and we're also looking at network optimization in challengers and growth countries. As I said last quarter, the nose of the cost plane needs to come down, and we're not stopping here. However, carefully reviewing the business takes time. We are taking a diligent approach, and we will announce further measures in due course. Slide 9 shows the risk cost development, with full-year 2020 risk costs coming in at EUR 2.7 billion. Approximately 30% of this is Stage 1 and Stage 2 provisioning, reflecting the working of IFRS 9, especially in the second quarter when macroeconomic model updates resulted in significant provisioning. In the second half, the improved macroeconomic outlook resulted in releases which we have largely compensated with management overlays to reflect remaining uncertainty, and we prepare for a possible delay in expected credit losses, which could materialize when the direct government support in our markets roll off. At 43 basis points, we are above our through-the-cycle average of around 25 basis points, which is a trend we have also seen at our Eurozone peers. In line with our track record, we remain well below the average of these peers. The total amount of loans on which payment holidays were granted remained limited to EUR 19.4 billion or 2.6% of our loan book. We received only a small number of extension requests, and 93% of these payment holidays have already expired. While so far, we don't see a significant deterioration of the risk for loans, with expired payment holidays during 2020, we have conservatively taken additional provisions primarily related to business clients and sectors that we consider high risk under COVID-19. As mentioned, for 2021, we expect to move close to our through-the-cycle average of around 25 basis points. If you look at Slide 10, that reinforces our strong track record of managing asset quality. Both on average risk costs and Stage 3, we are historically well below our Eurozone peers, which is a result of the solid risk management framework we have had in place for a long time. This has been built using our extensive experience and applying lessons we learned during times of crisis, such as limiting concentration risk by applying exposure caps. Within these caps, our policy framework sets the standard for our risk appetite. In the current crisis, we benefit from applying this framework with limited and well-structured exposures to sectors at high risk under COVID-19. While the current crisis is unprecedented, we are confident in asset quality with a diversified, senior, and well-collateralized loan book and with our current prudent provisioning process. I want to emphasize this as we often get questions on asset quality, and I'm not saying that nothing ever goes wrong, as taking risk is part of banking, but we take calculated risks in line with our risk appetite. I believe that in the industry, ING is considered to be a bank with good lending standards, and our track record does underscore that. Now on ROE on Slide 11. In 2020, the ROE was impacted by several factors, such as some sizable incidents and incidental costs and COVID-19-related effects on income and provisioning, with a CET1 ratio well above our ambition level. We look at ROE through the cycle, I've said it many times before, and the lower level in 2020 doesn't mean we let go our 10% to 12% ambition. Not at all. We believe that going forward, our results will be supported by the return of loan growth, further charging for actual account costs and continued discipline on controllable expenses, while provisioning levels will normalize. At the same time, we intend to, over time, reduce the equity level as we take management actions to control RWA, risk-weighted assets, and intend to bring the CET1 ratio more aligned with our ambition level. As for timing, we can control it for parts of these factors, but it also depends on when we will be able to move on from the pandemic and return to normal circumstances. And for CET1 reduction, we need to take into account prevailing ECB recommendations. However, our intentions should be clear, which I think they are. As you can see on Slide 12, both CET1 ratio and leverage ratio are ahead of our ambitions. Regarding ROE, as I addressed on Slide 11, in the current environment, it is below our ambition. But with the supporting factors I mentioned, we maintain our ambition and very much intend to continue to provide an attractive total return through the cycle. Our cost-to-income ratio was impacted by factors such as the negative rate environment and regulatory costs. In 2020, some sizable incidentals also affected this metric on both income and costs. To reiterate, cost to income remains an important input for our ROE. We have the ambition to reach 50% to 52%, and we have supporting factors on both income and on costs. As for the dividend, we announced our updated distribution plan last quarter and after the fourth quarter results, we will pay a delayed interim dividend over 2020 of EUR 0.12 per share, which is in line with the current ECB recommendations. Later in the presentation, I will discuss our other intentions going forward. Now let me take you through our fourth quarter results, starting on Slide 13, and we'll go through this a bit faster. First of all, to keep your attention, but also to allow some time for Q&A. In the fourth quarter, we had another strong quarter on fees. Total income was lower due to: one, pressure on liability margins; two, lower results in foreign currency ratio hedging; and three, a negative effect from currency translation. Sequentially, both NII and fees were up. Total income was lower, including the impact from an indemnity receivable in Australia, which was offset in the tax line, valuations adjustments in financial markets, and hedge ineffectiveness. Then to NII on Slide 15. As mentioned earlier, we have seen some pressure on NII from the current market conditions, which affected the levers we generally use to counter the impact from the low rate environment. NII, excluding financial markets, was lower year-on-year, reflecting the continued pressure on liability margins, while deposit inflows this year were substantial. We improved lending margins. However, lending volumes declined, reflecting lower demand. Year-on-year, the impact from foreign currency was also visible this quarter, with lower interest results on foreign currency ratio hedging, while also the devaluation of some foreign currencies had a substantial negative impact. Compared to the previous quarter, NII, excluding FM was stable, overall lending margins improved, and the interest results on foreign currency ratio hedging slightly recovered, countering the continued pressure on liability margins. Our net interest margin increased by three basis points this quarter to 141 basis points, and this mainly reflects higher NII, including financial markets, and a lower average balance sheet due to the lower average customer lending. As stated previously, NIM is an important metric for the market. But we know that NIM can be impacted by volatile items, so we believe it is better to look at overall NII development and guidance. Then turning to core lending on Page 16. Overall, we saw a slight decrease this quarter, reflecting low demand from business clients. But in retail, mortgage demand remained strong, especially in Germany. However, with some lower lending to businesses, overall net core lending was down by EUR 200 million in retail. In Wholesale Banking, net core lending in Trade & Commodity Finance was up, reflecting higher average oil prices. In lending, net core lending decreased due to repayments of term loans, including year-end's balance sheet optimization that we see every year, as well as further repayments of increased utilization of the revolving credit facilities that we saw in March of last year. Overall, this resulted in a total EUR 900 million decline in net core lending, so EUR 200 million in retail, EUR 700 million in wholesale. Net customer deposits increased by EUR 7.8 billion, a level well above the last quarter of '19, driven by EUR 8.8 billion in higher savings in retail, while the EUR 1 billion decrease in Wholesale Banking was more in line with previous years. As mentioned before, the negative loan growth is a shift in demand which we don't consider structural, and we expect loan growth to return when uncertainty subsides. Positive signs of that are already visible in Asia and in the US. Now on to fees. Both year-on-year and quarter-on-quarter, fee income was up by 5%, driven by another strong quarter in Retail Banking. Year-over-year, retail fees were up by 19%. In investment products, those fees increased by almost 33%, reflecting the increase in investment accounts and number of trades, while daily banking fees grew by 25%. That results from the level of payment transactions which continue to recover and the increase of daily banking package fees that we put in place in the first quarter of 2020. The full benefit of this action should become visible, however, when transaction levels return to normal, which we hope will be the case in the course of 2021. Lower fees in Wholesale Banking were mainly driven by lower demand, lower Trade & Commodity Finance volumes, and less activity for our clients in financial markets. Sequentially, retail grew by almost 8%, driven by the same factors as year-on-year growth, while Wholesale Banking was slightly higher as higher payment charges offset a decline in lending fees. On Slide 18, we look at our costs. Expenses this quarter included EUR 223 million of incidental costs included in volatile items, mainly reflecting provisions and impairments related to measures we announced for Wholesale Banking, for Maggie, and our retail branch network. Excluding these incidental and regulatory costs, operating expenses were under control as they were lower year-on-year and stable quarter-on-quarter as we fully absorbed CLA increases and higher IT expenses. Regulatory costs are seasonally high in the fourth quarter as they include the full payment of Dutch banking taxes. The year-on-year increase reflects a catch-up on contributions to the Dutch deposit guarantee scheme due to the strong growth of corporate deposits in the first half of 2020. As mentioned, also going forward, we will continue to monitor developments, critically review our activities and expenses, and act when and where needed, with a continued focus on bringing the nose of the cost plane down. Slide 19 shows the risk costs split per business line. Risk costs were EUR 208 million for the quarter, or 14 basis points of average customer lending, and it is well below the elevated levels of the previous quarters and also below the through-the-cycle average of 25 basis points. This amount includes a EUR 413 million management overlay, primarily in Stage 1 and Stage 2, which was applied to compensate for a EUR 622 million release driven by updated macroeconomic indicators, resulting in a net impact of minus EUR 209 million, mainly in Wholesale Banking. Aside from this allocation of the management overlay, in Retail Benelux, risk costs mainly reflected some additions to individual files. In Retail Challengers & Growth Markets, risk costs included a EUR 59 million provision for Swiss franc index mortgages in Poland. In Wholesale Banking, Stage 3 risk costs included some additions to existing Stage 3 files. The lower Stage 2 ratio reflects the improved macroeconomic outlook, and the Stage 3 ratio for the group was stable and remained low at 1.7%. The next slide shows our CET1 development. That was up 0.2%, reaching a very healthy 15.5%. The CET1 capital was EUR 0.5 billion lower, and that includes the implementation of the nonperforming exposure backstop. Except for EUR 2 million, net profit for the quarter was not added to CET1 capital as it was reserved for future distribution. The CET1 ratio was further supported by lower risk-weighted assets, mainly driven by lower volumes, a shorter duration in the Wholesale Banking book, and a better loss given default profile. This leverage effect was driven by both a reduction of outstandings with a lower coverage ratio in Wholesale Banking and improved house prices in retail. The market risk-weighted assets were up mainly due to TRIM impact exposures as markets normalized, while operational risk-weighted asset decreased due to technical updates on our AMA model. Now, I'm sure you have been waiting for that, we turn to our distribution plans on this slide, 21. As announced last quarter, we have moved to a 50% payout ratio of resilient net profits, and we have adjusted our CET1 ambition to around 12.5%. In line with the distribution plan, we have reserved EUR 1.5 billion over 2020, adding to the already EUR 1.8 billion originally reserved for the final 2019 dividend, bringing the total amount reserved outside of capital to EUR 3.3 billion. To align with our current ECB recommendations, we will pay EUR 0.12 per share after publication of this quarter results. We intend to distribute the remaining amount reserved after September 30, subject to prevailing ECB recommendations and relevant approvals. And for 2021, we will reserve in line with our distribution policy. Given current ECB recommendations, payment of that interim dividend will also be delayed until after September 30, 2021. With a CET1 ratio of 15.5%, there is also room for further distribution. Over the coming years, we intend to bring down our CET1 ratio towards our ambition level of 12.5%. To wrap it up, 2020 was a year that brought unprecedented challenges to our employees, to our customers, and to societies for which we continue to provide support. Fee growth was good, with an impressive contribution from investment products and despite COVID-19's impact on payments and lending. Full-year 2020 risk costs were above our through-the-cycle average, but well below our peers, and include provisioning for a delay in expected losses. For 2021, we expect to move closer to our through-the-cycle average. We're confident in the quality of our well-diversified loan book and the strong risk management framework we have in place. Our track record, as you've seen in one of the slides, indicates we are a low NPL bank. The CET1 ratio improved to 15.5%, in line with the current ECB recommendation, and we will start distribution of this amount with the delayed interim cash dividend over full year 2020 of EUR 0.12 per share. We intend to distribute the remaining amount reserved after September 30, subject to prevailing ECB recommendations and relevant approvals. Looking forward, and I really want to look forward, when economies recover, we are well-positioned to capture growth again as we benefit from our geographical and product and service diversification. And with that, I would like to move to questions.

Operator, Operator

First question is from Mr. Robin van den Broek, Mediobanca.

Robin van den Broek, Analyst

First of all, thank you for your strong message regarding the cost of risk and capital return. I think it's very welcome. And while I may sound a bit greedy, I notice you're pointing out excess capital above your 12.5% target. You've also mentioned that your expectation is for a successful vaccine rollout and a restoration of loan growth in the second half of the year. I'm curious about the timeframe for releasing that buffer above 12.5%. What type of announcement could we anticipate with the full year 2021 results? That will be my first question. My second question is about the reasoning behind net interest income. I assume the pressure from the portfolio is still present. In the fourth quarter, there was a one-off impact from the foreign exchange ratio that offset this, and financial markets were a bit stronger quarter-on-quarter. Should we expect that pressure to continue in the first half? And then, as loan growth recovers in the second half, can we expect net interest income to stabilize or grow slightly? Your insights on this would be very valuable.

Steven Van Rijswijk, CEO

I will take the first question, and then Tanate will take the second question. Yes. I mean we do have very strong capital. And like we said, we intend to move towards the ambition level of 12.5%. I mean clearly, the COVID pandemic is not over yet, and of course, we see the inoculation programs taking off. We believe that GDP growth, and then also loan growth, will be there as of the second half of this year. At the same point in time, we need to be mindful of the current uncertainty and potential cliff effects that we haven't seen coming yet. But having said that, we will move over the next number of years to our 12.5%. But we're not giving a roadmap for that at this point in time. Tanate?

Tanate Phutrakul, CFO

Robin, let me give you a bit of guidance around net interest income. First of all, clearly, we flagged before in Q3 about this FX ratio hedging, and that has basically plateaued during the course of Q4, and we expect that plateauing to go into the future. If you talk about other things that could affect our NII in the future, loan growth is clearly one which we flag. Continued pricing discipline on origination margin has always been there, and we expect that to continue. We have started in a number of our markets charging negative rates for deposits coming in. You see that in the Netherlands, for example, we have decreased our threshold for charging negative rates from EUR 1 million to EUR 250,000. We introduced negative charging in Belgium. We introduced negative charging for new customers in Germany. So do see that the impact of negative charging on our results will become a bit more material going forward as well.

Operator, Operator

Our next question is from Mr. Omar Fall, Barclays.

Omar Fall, Analyst

So I just want to go back to NII, please. Assuming you hit the TLTRO bonus threshold and the incremental negative charging effect, that looks like a benefit of around EUR 400 million or so. The replication portfolio drag should be pretty close to that amount on an annual basis, I'm guessing if you're investing around EUR 500 billion at the five-year swap rate. Is that the right way to look at it, that these two elements kind of offset each other? I know you don't want to say how confident you are about hitting the TLTRO bonus threshold. But do these effects kind of offset each other, which basically means that should you return to volume growth and asset margins continue at the current positive trend, doesn't that mean that NII has a pretty good chance of rising this year? Set to aspire for rates, of course. And then the second question is just if you could give us a bit more sense of the glide path on fees. Obviously, we had the big jump in investment-driven products. How much product-related fees? How much more momentum do you think there is? Has the year started well? Are you seeing further evidence of, say, deposit transformation into fee-driven products, for instance? That would be great.

Steven Van Rijswijk, CEO

I'll take the fee question and then Tanate will take the NII question. I think on fees, we see very good momentum. We are converting a number of our clients in using more investment products. And therefore, like we said on Germany, over 326,000 new investment product lines. We do see that trend continuing also in the first month of this year. We have increased our daily banking packages in a number of markets, which the benefits you gradually see coming in, in the fourth quarter, but that's still only part of it, and continued benefit we would see in 2021. The number of payments is still at a subdued level, especially constrained by limited international travel. Though we, therefore, have been able to increase our fees by 5% quarter-on-quarter and also 5% year-on-year, this is on the back of lower payment levels than what we would see pre-COVID, especially international payment levels. When we return to what we would call normality, those payment levels should increase, and therefore, also the fees on those payments should increase as well. Lastly, when we look at lending, we see, of course, a subdued number of structured loans, which has decreased the lending fees for Wholesale Banking quite steeply over the past four quarters. That should return to a level that we've seen pre-crisis as soon as lending demand picks up. In short, most of the elements are structural on the retail side, with, of course, an element of investment fees that could be lower if the volatility may reduce. Other than that, it's very structural and potentially a higher fee level for Wholesale Banking if lending activity picks up again.

Tanate Phutrakul, CFO

And Omar, just to address your question on NII, we obviously don't give disclosure on the replication impact on our results. They can be volatile from year to year, depending on which part of the investments run off and get reinvested. But I can tell you about the management actions we are taking. As Steven mentioned at the top of the presentation, if we are able to make the TLTRO III targets, we would book anywhere around EUR 300 million in the first half of 2021 on that benefit. But again, it's too tight to call for now. Just for actions already taken with respect to negative charging, that would have a positive impact of around EUR 100 million and EUR 140 million full-year impact as well, okay? The last point, of course, is that we are actively managing and discussing with our customers that deposit inflow continues to come into the bank, and we are discussing options for them to invest their money, including investment funds.

Operator, Operator

Next question is from Mr. Stefan Nedialkov, Citi.

Stefan Nedialkov, Analyst

A couple of questions on NII and fees, unsurprisingly given that you guys are not giving overall group guidance for 2021. On NII, can you confirm that even if you don't meet your benchmark for the first TLTRO, you can still accrue benefit on your entire outstanding TLTRO amount as part of the second extension of TLTRO III? Meaning that if your loan growth picks up in the second half of '21, you can still accrue benefit on the TLTRO you took out in the first tranche. My second question is on the transformation of deposits into fees potentially of this around EUR 40 billion of deposit inflow that you saw in 2020, which is quite a bit higher compared to your regular run rate. How much of that deposit base do you believe is sort of on the conservative/saving side of things versus something that can be shepherded into investment products? I know that you kind of mentioned a little bit on that point, but if you can put some numbers around that, it will be really helpful. You guys obviously have a good digital platform. Beyond your own product, you also offer third-party product. For example, scalable capital in Germany, how much can that deposit, massive deposit inflow be diverted into your platform product, therefore, earning fees for you? If I may also related to that, there's a slide in your deck where you basically show annual mobile non-deposit sales increasing quite a lot from 2018 to 2020 from 46 per thousand to 74 per thousand. What is driving that growth? If you can give us a bit of color on investment product versus the AXA insurance products, etc., that will be very, very helpful.

Steven Van Rijswijk, CEO

I will take the questions on fees and mobile sales growth and then Tanate will go back to NII. Maybe that's the topic of today. So in terms of mobile sales growth, let's start with that, Stefan. We have a mobile- and digital-first mindset, and that means that we very much focus on the strength of our digital channels and our app environment. We have a strong app environment and strong interaction with our clients. We focus on end-to-end digitalization to make the interaction with our clients better, easier, and smarter. It also means that we are getting to better personalization of our clients, because in the end, if we create better personal interaction with our clients, those clients contact us for particular questions, driving better quality interaction but also driving better growth. That is the reason you see an increased sales of products via the mobile app because of the strength of our digital channels. We will continue to drive personalization because that drives better interaction, growth, and primary customers. Looking at fees, yes, we, of course, had significant inflow in 2020. That also was due to the fact of the lower spending pattern of our clients. Over the past four or five years, you saw that there was a balance between deposits growth and lending growth, where, especially in the later years, there was more lending growth and fee growth. We continue to look for ways to diversify our income and also mature clients. Like Tanate said, we have started to charge negative interest rates in various markets at different levels, and we continue to do so. We built an app environment so it is easy for people to invest and move their savings money to investment products. As an example, of the 300,000 clients that started to invest with ING in Germany, 20% were new to bank lines. Also, clients that normally would not be in ING changed their bank and started to invest through us. We will continue to do so. If lending demand picks up, you may see a reversal of deposits compared to lending. In the meantime, we continue to nurture our clients to use their money increasingly more, to use investment products. It is too hard to put a number on that at this point in time.

Tanate Phutrakul, CFO

Stefan, if we talk about NII and TLTRO mechanism, the first tranche is a measurement from March last year to March this year. The measurement point for the second tranche is between October 2020 to December 2021. It’s a new measurement point. Given our expectations for the resumption of loan growth in the latter part of this year, it’s something that is before us, but still uncertain to determine today. Regarding the EUR 40 billion of deposits inflow into the bank, it's clear that this is extraordinary levels of inflows, even when you have seen in the past. Hence we hesitate to say how much of that would get converted into investment funds. We measure, as management, how many additional accounts are opened, as Steven mentioned, in terms of investment funds new to bank and how much our investors and savers are increasing their investment activities. This is perhaps too early for us to guide on how much of that deposit will be transferred to investment funds.

Operator, Operator

Next question is from Mr. Benoit Petrarque, Kepler Cheuvreux.

Benoit Petrarque, Analyst

Just two questions on my side. So first of all, coming back to the loan growth for 2021. You are guiding for close to across-the-cycle average on cost of risk. So it looks like you are pretty optimistic on growth into 2021. I was wondering if we should expect loan growth in line with your quarter cycle in 2021? Or are you thinking about something a bit higher but also playing catch-up on this very low growth in 2020? Just wondering how much loan growth you are likely to make in 2021, or if you could provide the direction at least. The second question is on the cost; I think there's clearly more focus on cost control. It was down, on a clean basis, 1% in Q4. Could you talk about the short-term projects you are working on the cost side? Could you be a bit more specific on the cost trend into 2021, please?

Steven Van Rijswijk, CEO

Yes, on the risk costs, what we have said is that we will move, and I'm looking at Ljiljana, who looks very stern at me as the new CRO, that we will move towards the through the cycle average of risk costs. This is due to the fact that we have been very prudent in making reservations in the past number of quarters. You've seen significant overlays that we put in the second and third quarters. Macroeconomic outlooks are improving, and that also means that we released some EUR 600 million of those overlays. To be prudent again, we put again over EUR 400 million overlays on top of it to counter that effect of the releases of the EUR 600 million. Based on our conservative stance, the limited inflow and watch list, the low NPL level, largely collateralized loan book, and the good diversification that we have in the book, we are confident our risk costs will go back to a more normalized level and, therefore, move towards the through-the-cycle average. Now that is separate from the loan growth as such, but we believe, what we have seen in our main markets is that loan growth subsided on the back of lower working capital needs after the initial spike in March 2020 with lower investments. We believe that if we look at Asia and the US, there we see already loan growth coming. Hence, if also in Europe, due to the speed of the inoculation programs, GDP will again be positive, we will get back to a more normal economic activity. Those peripheral investments mean that loan growth will start to kick in. That being said, where that is at, again, it’s not definite that we will reach the same levels of what we have seen over the '16, '19 period, but we will, of course, remain prudent within our risk framework. We will also remain prudent in pricing because we believe it's important to be very strict on pricing in that regard. However, we believe we will see both mortgage growth and some business growth in the second half of 2021. On costs, you've seen the announcements we've made in November on the Wholesale Bank and on Maggie, the branch network in the Netherlands in July, and the branch network in Belgium. We are working on optimization in challengers and growth countries. I will continue to focus on optimizing our network in line with our digital offering. COVID-19 has proven that our digital model is the right one and that we benefit from a digital-first and mobile-first mindset. I will also review business lines, and Tanate and I are continuing to review business lines, to see whether through the cycle, we make the appropriate return. If not, we will take appropriate action. When we take that action, we will announce it. I want to be clear that the nose of the cost plane needs to come further down. The second element of that is that I want to be clear on execution certainty. As soon as we've analyzed further, we will make further announcements on next measures.

Operator, Operator

Our next question is from Mr. Thomas Dewasmes of Goldman Sachs.

Thomas Dewasmes, Analyst

Two questions, please. First one on costs. Just to confirm on your last comment on challenger markets. Are you then saying that your decision on what to do with costs is going to depend on the rate trajectory from here and perhaps how fast the curve can return to what it used to be just before the quick cuts with COVID-19? Then just on the cost of risk again, I appreciate that there have been quite a few lumpy items in 2020 with the fraud case, the Swiss franc mortgages, and the oil price being very volatile. If I take your 25 bps guidance for next year, given you're seeing 6%, 7% year-on-year growth in deposits in Retail Banking, what is worrying you the most? Is that SME lending? Is that consumer lending? Where do you expect the cost of risk to materialize in the retail segment, please?

Steven Van Rijswijk, CEO

On cost, let me make one thing clear. We hope for the best, but we cater for the worst. I look at what the current interest rate curve is doing, and I will base myself on that. I will not hope for better interest rates at a later point in time. We take measures with the current picture of the world in mind, not with a hopeful future picture in mind. Hence, I will continue to take action and not hope for interest rates to return to pre-COVID levels. That's number one. On the cost of risk guidance for 2021, as I presented in the investor presentation in 2019, we have a very well-diversified book, present in many countries. We have sector caps on some of the more volatile sectors, such as leveraged finance and real estate. We have put caps on those already a few years ago. Our exposure in a number of the more higher-risk sectors such as leisure, cafés, bars, restaurants, hotels, travel, airlines, transportation, and agriculture is quite limited. As I've said before, we have provided in the last number of quarters with management overlays for potential risk costs that may come on a number of those high-risk sectors. Based on our diversification, strong risk management framework, and being a low NPL bank, I'm confident about the cost of risk levels next year.

Operator, Operator

Next question is from Mr. Jon Peace, Crédit Suisse.

Jon Peace, Analyst

What will influence your decision to allocate the full year's 2019 funds between dividends and buybacks? Have you consulted with the ECB regarding their comfort level with you potentially returning a double-digit percentage of your market cap later this year? How do you view the stress test in this context?

Steven Van Rijswijk, CEO

Jon, you were breaking up a little bit, but clearly your question was about dividends. In that sense, I will give the word to Tanate.

Tanate Phutrakul, CFO

What you're asking is if we have been in a bit of consultation with the ECB with respect to our dividend announcement. We have been in discussions on this and we have been making sure that what we announced is in line with the ECB recommendations, right? What we are doing in terms of dividend announcements is all been very much in line with our dividend policy. Whether it's 2019, not that we're paying extra, simply paying what we originally thought that we could afford to pay and based on 2020, it's the same thing, based on our 50% of resilient profit. That's all we're doing in terms of capital return intentions. In terms of discussions around 2019, we will simply look at a balance between cash distribution in the form of dividend and also in terms of share buyback, and we maintain that flexibility. It's really depending on how we see the intrinsic value based on the stock price at that prevailing moment in time.

Operator, Operator

Next question is from Mr. Benjamin Goy, Deutsche Bank.

Benjamin Goy, Analyst

Two questions from my side, please. First, on primary customers. You added 600,000 in 2020, which is a good number, but it's lower than what you delivered in previous years, and about 60% was driven by Germany. In a year like 2020, where many people probably got comfortable using digital-only banks, why wasn't this growing faster and on a more broad-based basis? Or on a positive spin, do you expect 2021 to see higher growth and then also in other countries outside of Germany? Secondly, a question for Ljiljana. Given the risk function is obviously crucial, particularly in these times, I was just wondering on her first impressions with some fresh eyes on ING's risk management.

Steven Van Rijswijk, CEO

On the primary customers, in a year where there is subdued economic activity, you will see that customers typically stick with their existing banks or do not use an additional amount of products. Growing with this amount of primary customers, while also growing the number of mobile sales on our app, was impressive, given the low economic activity and contraction. When economic activity returns to more normalized levels, we will benefit in terms of primary customers and in terms of profitable growth. I want to have profitable growth, not just primary customers for the sake of primary customers; it has to come with a beneficial relationship for both the client and ING. Over to Ljiljana. What are your first impressions?

Ljiljana Cortan, CRO

Fresh pair of eyes confirms what has been shared with the markets already for years, that ING has a very stable and well-built risk management framework in place. Building further on this strong basis, I'm sure we are going to be able to capture the opportunities of the future, both with respect to our positioning as a digital leader and growth. As already said many times, we do have a structured framework around portfolio in sense of risk policies, concentration limits, caps, and some of those are actually already there for some years. I believe we are on the journey toward recovery. I believe, as also correctly said by Steven, we are going to go towards the cycle average. However, that journey is going to be long, and we do not account for certain eventual bumps due to the uncertainties in front of us. However, I'm very comfortable that we're going to be there, as already shared.

Operator, Operator

Next question is from Mr. Raul Sinha, JP Morgan.

Raul Sinha, Analyst

I've got a question on Basel IV capital. You're choosing not to disclose a ratio on the slides. I wanted to ask why that might be the case given your ambition clearly is Basel IV fully loaded 12.5% long term. If you could give us perhaps some of the moving parts that are still remaining to get from your current 15.5% down to a fully loaded Basel IV, that will be quite helpful. The second question is a broader question on mortgages. Looking at the loan book growth trajectory at ING, one of the features of this crisis has been the pickup in mortgage loan growth across your markets. What do you think is the outlook for mortgage growth into '21? Are you worried that this might start to slow down? Or do you think there are enough, say, positive structural drivers that could still continue to drive positive loan growth for you on the mortgage side?

Steven Van Rijswijk, CEO

On Basel IV, the 12.5% ambition level is the Basel IV ambition level. The 15.5% is our current position. We have, with all the measurements on Basel and other model adjustments, 50 basis points to go. So last quarter, it was 60 basis points. This quarter, we included an additional impact of around 10 basis points. That being said, we have 50 basis points to go. We are well capitalized to include all Basel effects if they still were to come. Regarding mortgage growth, house prices continue to increase on the back of low-interest rates. This has helped the value of these houses and the affordability for people to pay for their houses. A low-interest rate environment is stimulating that. However, we must be mindful of a cliff effect when measures taken by governments and banks alike stop, which would affect unemployment. In the previous crisis, we saw mortgage demand continue. We don't expect that to be different this time, especially not since the housing shortage in various countries underpins the fact that there is a need for more houses to be mortgaged.

Operator, Operator

Next question is from Mr. Kiri Vijayarajah of HSBC.

Kiri Vijayarajah, Analyst

A couple of questions from my side. Firstly, in the Wholesale Bank, the loan growth or rather the loan shrinkage there looks like it's moderating. Where are we on that? Are we coming towards the end of that de-risking process in areas like leveraged finance? Is the ambition, therefore, to start regrowing again more meaningfully in the Wholesale Bank as things recover? So is the message you're back in growth mode in wholesale for 2021? That's the first question. Secondly, just on the higher fee packages. I was just wondering if there are any particular geographies which have got more room to catch up in terms of the repricing effort? Also, kind of which geographies are you finding it harder to put fee increases through? Some color on that would be useful because, obviously, Germany is a big success story, but really on the other end of the spectrum, where are you finding challenges on the fee side?

Steven Van Rijswijk, CEO

In terms of package fees, it’s a good question. We come from an environment whereby we historically charge very limited package fees in many of the countries in which we operate. Many of the countries where we started as a direct bank, we charged zero. The good news is we have some upside. Hence, we look at costs and make it equitable for our clients. We have quite a bit of upside in most of the markets in terms of charging for our package fees, and that's what we will be doing. Many banks are in the same boat as we are. It will determine how the market will develop in that respect. Regarding loan growth, during the fourth quarter for Wholesale Banking was quite good, given the circumstances. Clients in Wholesale Banking decreasing their balances has resulted in a small decrease of EUR 700 million. However, we have seen an increase in daily banking and the trade environment, which is good, and is testimony to the first signals we see in Asia and the US. This means that if we can return to more normal economic levels, we believe that we will also see continued loan growth in Wholesale Banking.

Operator, Operator

Next question is from Ms. Daphne Tsang, Redburn Europe Limited.

Daphne Tsang, Analyst

I've got one on NII, please. Your NIM is very resilient this quarter, which is good news. But excluding the balance sheet effect you are seeing on this improvement on better lending margin. I know you don't guide on the specific impact from replication portfolio, but can you share some color on the dynamic there between the product lending spreads and the continued drag from lower replication income? Would you be able to leverage your pricing discipline to create that offset towards the direct we see in Q4? Also, on product lending spread, is there any mix shift effects there in 4Q that helps your margins which may not necessarily continue or may even reverse in the coming quarter as lending will kind of pick up in other areas outside of mortgage?

Tanate Phutrakul, CFO

What you're asking about the balance sheet impact and our net interest margin. A few points to make here: as we mentioned before, we have had compression in the past couple of quarters because of this FX ratio hedging impact, and that has plateaued during the course of Q4, in fact, it went up slightly. To see how that moves, we look at currencies like US dollar, Polish zloty, and Turkish lira against Euro. The bigger the difference, the better the FX ratio hedging results in ING's P&L. Secondly, we maintain risk and pricing discipline across the board, whether in consumer lending, business lending, mortgages, or other areas, and you will see in the more detailed disclosure later today that we maintain that pricing discipline in the origination of new loans. Lastly, we see that replication drag in our P&L. At the same time, we have introduced a number of actions on negative interest rates that will help mitigate some of that. Our NIM is down, but the impact of TLTRO having taken roughly EUR 55 billion of that funding, we have not booked any income against it, and that has a drag on our NIM of about six basis points.

Daphne Tsang, Analyst

Just a follow-up question, please. On charging negative rates, which yield do you see more room to charge negative rates based on the announced measures already in the Netherlands, Belgium, and other countries?

Tanate Phutrakul, CFO

Mostly in the Eurozone countries. As mentioned, it's about gradually lowering the threshold of this negative charging. We've decreased the threshold in the Netherlands from EUR 1 million to EUR 250,000. We started charging EUR 1 million in Belgium. In Germany, for new customers with savings of more than EUR 100,000, they are charged negative rates on deposits. In Spain, we've introduced some fees for customers with higher amounts but without a primary relationship with us.

Operator, Operator

Next question is from Ms. Anke Reingen of RBC.

Anke Reingen, Analyst

First is just on the cost. You stressed that you're looking at bringing the nose down. I just wanted to confirm that this basically implies that costs should be lower than the EUR 9.4 billion underlying in 2020 and '21. Then you put up the slide about the ESG leadership. Limiting it to the financial implications, can you talk about how you think this is a competitive financial advantage because other banks are talking about selling asset management products, which is less likely here or your potential on financing?

Steven Van Rijswijk, CEO

Come back to me with the ESG question because the line was breaking up a bit. But let me first answer the cost question. Yes, I can't make it any clearer than this. What you've now seen is that the cost over the past years went up, and this year, the last six months, we've shown that we have flattened the costs. I indicated that we intend to bring the costs playing or the cost plane further down, that we intend to bring down our costs from this level.

Anke Reingen, Analyst

On the ESG, can you talk a bit about the financial impact, opportunities and threats for ING?

Steven Van Rijswijk, CEO

First of all, we've been working on our climate profile since 2015, including the fact that we have decided to stop our coal investments or investments in coal and will completely stop that as of 2025. We have discussions with a number of auto sectors to decrease emissions. We work with those clients to decrease those emissions over a number of years. We try to do this in an inclusive way. The simplest way is to stop completely with financing industries, but then you change the bank book, but you do not change the world. We will work as much as we can with our clients for them to apply certain methodologies. We strictly measure this in our Terra report, issued now for the second time on our website, measuring whether we are in line with the Paris Accord. If not, we will take appropriate action. Our ESG profile, being prominent, means we engage in dialogue with many clients, which is why many of them choose us to issue green bonds and loans linked to particular targets.

Operator, Operator

Next question is from Mr. Farquhar Murray, Autonomous.

Farquhar Murray, Analyst

Just two brief questions from me. Firstly, on the latent impact of fee charge increases on travel-related card payments. Do you have a sense of how much more normal travel would add there? For instance, what are overseas transaction volumes running at currently versus more normal circumstances? Secondly, just on the FX mortgage book charge you've taken. Could you update me on how large that FX mortgage book is? I had a couple of hundred million in my head, but just wondered if it might have moved.

Steven Van Rijswijk, CEO

On fees, our international travel is currently almost 0. The impact in our payment business comes largely from the fact that people do not travel. We made it up by an increased number of payment packages, increasing the charge for payment packages. If you look at the payments business, the largest part of that impact comes from non-travel, which is still the case. So when travel returns again, we should have that amount back. The FX mortgages we had in Poland is around EUR 200 million.

Operator, Operator

Next question is from Ms. Giulia Aurora Miotto of Morgan Stanley.

Giulia Aurora Miotto, Analyst

I want to go back to the excess capital. We've talked a lot about capital distribution, but I wonder if there are any other plans about the excess capital, for example, considering potential M&A transactions or taking more restructuring costs to cut costs down further. So that's my first question. Then, Steven, strategically, after the first few quarters in your role, shall we expect an Investor Day with new updated targets towards the end of this year? Or how are you thinking about that one?

Steven Van Rijswijk, CEO

Regarding M&A plans, this is a question I've heard before. Clearly, we have capital, and we intend to distribute it. Regarding M&A, we are a mobile-first and digital-first bank, looking to provide a better and more diverse offer to our clients. We will look at company investments that improve our digital offer, technologies that enhance interaction for our clients. We are open to companies that can augment our services to earn more fees and commissions. When looking to an IR Day, this question was also asked before. We are still in a COVID crisis, with uncertainty. We believe that uncertainty will subside in the second half of this year. We will likely announce an Investor Day in the first part of 2021, probably in the first quarter of 2022.

Operator, Operator

Next question is from Mr. Tarik El Mejjad of Bank of America.

Tarik El Mejjad, Analyst

Very good clarification. In terms of the dividends you'll pay from September, I think the wording has been carefully chosen to give you some flexibility. Should we think about this payment being done within Q4? Or could it be spread out into 2022 as well?

Tanate Phutrakul, CFO

So Tarik, you recognized a finely crafted wording there. We just want to make sure we respect the ECB recommendations. When the ECB recommendations are lifted, we would take necessary steps to make those dividends available. So far, we confirm it will be after September '21.

Operator, Operator

Next question is from Mr. Jason Kalamboussis, KBC Securities.

Jason Kalamboussis, Analyst

Quick questions. First, you've highlighted overall, good outlook, how you're doing better in impairments, etc. versus peers. Costs remain probably the one area. They have slightly increased this year. I wanted to understand why you find it better to approach this from an ad hoc basis rather than putting a cost-targeter to drive the whole group to get there more efficiently over 12 months. The second question was on Wholesale Banking. In the third quarter, we discussed that by lowering your CET1 ratio at 12.5%, you were able to better price. I wanted to understand how was the fourth quarter versus the third quarter? Also, looking at the outlook for 2021, do you find that with some peers retrieving from areas, you are more likely to benefit and eventually be able to increase your pricing?

Steven Van Rijswijk, CEO

With regard to your first question on why we do things ad hoc rather than doing a big bang. Yes, I want to clarify that we do not do things ad hoc. Every decision we make will be based on execution certainty. We will focus on making the business lines sufficiently profitable and resilient through the cycle. We review business line per business line. If we identify a requirement to cut costs or redesign operations, we will do so, and we will do so with execution certainty. That’s important. As for pricing in the fourth quarter, we benefited from lower funding costs overall in our new production, and we have been able to price up across the board. However, we remain disciplined in pricing, either pricing with right returns and the right risk profile, or not doing it at all. We want to see profitable growth, not just growth for its own sake.

Stefan Nedialkov, Analyst

I requeued to ask two quick follow-ups. Is the 50 basis points of remaining regulatory impact, does that include everything, i.e., TRIM, whatever TRIM is left, plus the DMB floors, plus any additional Basel IV impact? Is all of that 50 basis points? My second question goes back to this big NII discussion we have been having on the call. What other levers could you potentially have to improve margins here?

Steven Van Rijswijk, CEO

Yes, 50 basis points include all.

Tanate Phutrakul, CFO

With respect to duration management, we don't take a P&L view on how we manage duration. It's purely driven by risk management. So the replication, the duration, is there to make sure that we offset any market risk in our banking book. We look at the management actions we are taking. As Steven mentioned at the top of the presentation, if we can make the TLTRO III targets, we would book around EUR 300 million in the first half of 2021 on that benefit. Again, it's too tight to call for now.

Operator, Operator

Next question is from Ms. Martina Matouskova, Jefferies.

Martina Matouskova, Analyst

Just one quick follow-up. Can you refresh my memory how you look at operational average, whether it's on a stated basis or adjusted basis? If I look at consensus and I adjust everything, I think revenues are flat and the underlying OpEx is flat as well, which doesn't really give much operational leverage. Is that something you target?

Steven Van Rijswijk, CEO

Yes, in the end, I will focus on positive operational leverage. We want to ensure a delta between revenue and costs. We're working on several things, be disciplined on our lending margins, charge negatively, and improve our app's usability to drive our transactions. This is how we will create operational leverage.

Operator, Operator

There are no further questions, sir. Please continue.

Steven Van Rijswijk, CEO

Thank you very much for your time, and I hope to talk to you soon. Have a great day, and everyone, have a great weekend. Thanks again.