Earnings Call Transcript - ING Q4 2021

Operator, Operator

Good morning. Welcome to ING's Fourth Quarter 2021 Conference Call. Before handing this conference call over to Steven Van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements 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, operator. Good morning and welcome to our full year 2021 results call. I hope you are all well and I'm joined by our CFO, Tanate Phutrakul; and our CRO, Ljiljana Cortan. And I'm happy to take you through today's presentation. After that, we will take your questions. A year ago, we were looking forward to circumstances normalizing again and now reflecting on 2021, we're not yet back to normal as COVID-19 is still present and the world faces strained supply chains, staff shortages, and rising prices. On the positive side, consumer confidence is up and businesses have become more optimistic. Economies have shown resilience and the same applies to ING. And I'm proud that our customers recognized our strength, resulting in further growth of our primary customer base and the number of sustainability deals. Our digital only, mobile-first focus continues to pay off with mobile becoming the main channel through which customers interact with ING in '21. This sector supports our efforts to diversify income and offset the continued pressure on liability income caused by a negative rate environment. Loan growth has always been important to counter this pressure. In 2021, loan growth returned on the corporate side, contributing to the overall €30.6 billion net core lending growth. At the same time, we were able to withstand the inflows of deposits. Fees grew by 70%, which is quite an accomplishment. On costs, we managed to keep full-year costs broadly flat, which means we absorbed CLA increases and higher costs related to employee performance and marketing, which were reduced in 2020, reflecting COVID-19 impact. Full-year risk costs were €516 million or 8 basis points over average customer lending, well below our through-the-cycle average. On asset quality, the Stage 3 ratio was lower at 1.5% and we remain confident in the quality of our loan book. The CET1 ratio improved to 15.9%, a 50% of the fourth quarter resilient reserved for future distribution. And we propose a €0.41 final cash dividend, bringing the full-year cash dividend for €0.21 to €0.62 subject to shareholder approval in April. Now before we move to this year's figures, let me spend some time on some key aspects of our strategy, which include our efforts to grow our primary customer base, our focus on the mobile channel, and on income diversification. Slide 4 shows that also in 2021, customers recognized our strength, resulting in almost 0.5 million new primary customers in '21. And keep in mind this is net growth as we have also taken actions to reduce savings, which resulted in some reduction of primary customers and it excludes retail markets that we exited in '21. Growth of primary customers continues to be a strategic priority and we'll come back to this during our strategy update in June this year. We've talked before about the transition opportunity and how ING is well-positioned to benefit from that; the exponential growth of sustainability deals supports that in '21, proving that clients turn to us for financing solutions related to transition challenges. One transaction we're highlighting this quarter is a sustainability loan for CEMEX, which is active in the cement industry and serves as a good example of our support for initiatives to abate CO2 intensive sectors. We believe that as a bank, we play an important role in financing the transition to a low-carbon society, and we will continue to focus on providing this support with our inclusive approach. We are working on translating this also into more concrete targets, which we will address on our Investor Day in June. I have said before, we can't do this alone. As the urgency for climate action increases, corporations, governments, and regulators have to work together to define new ways of doing business that align economic growth with positive environmental and social impacts. On Slide 5, you can see that our focus on the digital mobile-first customer proposition has benefited us, as we saw customers increasingly turning to these channels during the pandemic. Also in 2021, the share of mobile-only customers increased. Mobile is not only the main channel through which our customers interact with us, but it is also reflected in a number of mobile interactions growing to a 91% share, while the number of total interactions continued to grow as well. We also saw a strong upward trend in our mobile product sales. Over 2020, we highlight our digital investment in Germany as an example of how we successfully offer a digital-only and differentiating customer experience. Looking at '21, we see the success of the story continued. We opened 390,000 new investment accounts, outpacing the 226,000 opened in 2020. Also worth mentioning is that over 20% of those new accounts were opened by customers who were new to ING, demonstrating that our digital offering continues to attract new customers. Now on to Slide 6, our ability to grow primary customers and focus on diversifying income support income growth in '21 despite the continued liability drag. Fees have been an important contributor, growing by 17% in '21 and by a 7% CAGR over the past 5 years. During that period, the share of fee income on total income increased from 15% to 90%, helping to reduce dependency on NII and reiterates our 5% to 10% growth ambition going forward. Looking at loan growth, net core lending growth was back at levels more comparable to pre-COVID. Half of the growth was in mortgages and in '21 Wholesale Banking grew as well, partly reflecting TLTRO. We also see a strong pipeline so that is a positive signal going into 2022 and supports our 3% to 4% loan growth ambition. Our actions to delimit the deposit inflow have also paid off, most visibly in Retail Germany, where we introduced negative interest rates in November. The pressure from low interest rates was clearly visible in the declining contributing - contribution of liability NII. I want to emphasize that this graph is backward looking, and the development of income components is not the guidance going forward. Specifically, the liability income is not a linear drag; we generally invest in maturities ranging from overnights to 10 years, and quarterly impacts depend on what rolls off and how we reinvest. Pressure on the liability income will continue, also with longer maturity in our replicating portfolio having repriced to today's environment. That said though, the yield development curve is positive for us, as we expect pressure on liability income to reduce from what we saw in '22. In '21, the pressure was clear though; however, we were able to more than offset it by continuing to focus on diversifying our income. Slide 7 shows full year NII and fees and first NII. As you saw in the previous slides, liability NII has been declining, and the counter pressure was successful until the pandemic started in 2020. In '21, loan growth again offered some support; however, liability pressure remains high. If we exclude TLTRO benefits, NII was down. While we're optimistic about the yield curve development, the continuing pressure reinforces our strategy to diversify income and reduce dependency on NII. 2021 was a very successful year, with fee growth fully compensating for lower NII while excluding TLTRO benefits. We believe this higher fee level is largely structural, as it is driven by primary customer growth, structural fee growth in daily banking, and growth in investment accounts and assets under management. Future fee growth is supported by the fact that we are not back at pre-COVID levels for international transactions, and also lending fees are still at lower levels. In Germany, the consultative process for new and increased fees is well underway, and for the Netherlands, an increase in package fees has been announced. Aside from that, we see several factors and drivers. The first being continued growth of our primary customer base. Secondly, we see possibilities to further increase daily banking fees, which we need to do as the cost of operating an account has been increasing for banks. Some of our largest markets still have low fee levels, and peers are either initiating or following an increase; in other markets, we are still cheaper than peers. Thirdly, regarding our products, we continue to work on new and improved propositions. The digital investment proposition in Germany is an example where it is clearly materializing. Now we go to expenses on Slide 8. Our regulatory costs were up, mainly reflecting an incidental 50% increase in Dutch Bank tax. '21 expenses included €522 million in incidental items, primarily reflecting provisions for strategic measures we announced over the past two years, such as the exit from several European Retail Banking Markets, and a further reduction of the branch network in Retail Benelux. The expenses also include the provision for compensation of certain consumer credit products. Excluding these items, operating expenses were broadly flat compared to 2020. We had a focus on costs that almost fully offset contractual salary increases and higher expenses related to performance and marketing, as these returned to more normal levels after being reduced in 2020. Going forward, we could expect to see some inflationary pressure in our expenses and CLAs. Overall, we will continue to focus on managing costs and aim to absorb inflationary effects and keep costs at least flat in 2022. Slide 9 shows risk developments, with 2021 risk costs coming in at €516 million. In Stage 1 and 2, we saw an overall release of around €470 million, primarily driven by releases of management overlays taken in previous quarters, reflecting clients being removed from watchlists and moving back to Stage 1. Total additions in Stage 3 included €254 million in specific provisions taken in the fourth quarter, which I'll come back to later. The remaining Stage 3 provisioning was largely in retail banking, with several additional updates in Retail Belgium and collective provisioning in our Challenger & Growth markets. Stage 3 additions in Wholesale Banking were limited and mainly reflected these additions to existing files. Our Stage 3 ratio remained low at 1.5%. Although the current environment is not without challenges, we feel confident about the quality of our loan book, supported by the fact that it is well diversified and avoids concentration risk. The loan book is practically all senior and well collateralized. In Wholesale Banking, we mainly work with investment-grade companies. Historically, our provisioning has been prudent without surprises when we move into the recovery phase. Finally, on Slide 10, you see that ROE recovered from the low level in 2020, primarily reflecting lower loan loss provisioning. Our factors have remained unchanged, such as high incidental costs and high capital levels. Reviewing ROE through the cycle, the recovery of our ROE level in '21 supports our belief that we can reach the 10% to 12% ambition. Going forward, this should be supported by several factors such as forward growth of primary customers, loans, and fees, combined with continued discipline on controllable expenses. At the same time, we intend to reduce equity levels over time, and we are taking management actions to control RWAs, bringing the CET ratio more in line with our ambition level. Now on Slide 11, in line with our distribution policy, we intend to pay out a final dividend of €0.41 per share over 2021, subject to shareholder approval. This means that the full-year dividend over '21 amounts to €0.62 per share. This year, we nearly completed the €1.7 billion share buyback program that started in October last year. Overall yield in '21 was 9.4%, and the share buyback will improve earnings per share, dividend per share, and return on equity. We see the run ratio at 15.9%. We have significant excess capital, and we are in constructive dialogue with the ECB about our distribution plans. We will announce next steps if and when we have received the necessary approvals. As you can see on Slide 12, the CET1 ratio is well above our target. Our REIT has significantly improved with ongoing growth, and by focusing on costs and capital, we have upheld our goals and plan to continue delivering net purchase total return. To reiterate, the cost-income ratio is crucial for ROE, and we are still aiming for our target of 50% to 52% in this area. Regarding distribution, we have proposed a full-year dividend of €0.62, which is subject to shareholder approval for the final dividend. Now, let's discuss our fourth quarter results on Slide 14, and I'll keep it brief. Year on year, NII, excluding TLTRO, was slightly lower mainly due to pressure on liability income and a €23 million reclassification from our income to NII. This was partially offset by increased negative interest rate charges in the Retail Benelux compared to last year; the thresholds in the Netherlands have been gradually reduced, and in Belgium, charging began in early '21. NII from lending increased, driven primarily by higher average volumes, and if we exclude reclassification, NII rose slightly from the previous quarter as the increase in lending NII and rising interest rates outweighed the pressure on liability income this quarter. Our net interest margin decreased by one basis point to 137 basis points, due to the earlier reclassification as increased negative interest rate charges mitigated most of this quarter's pressure. Slide 15 shows net core lending growth. Overall, strong growth continued in Retail, while in the fourth quarter, Wholesale Banking also had a strong contribution, resulting in a net core lending growth of €13.4 billion. In Retail, mortgages were the primary driver of lending growth, with some growth also visible in consumer business lending. Mortgages were strong in Germany but also in Spain, Australia, and Poland. In Wholesale Banking, loan growth returned, partly reflecting TLTRO-eligible deals, so the number for the fourth quarter should not be extrapolated. However, when we look at the pipeline, we see signs that demand remains strong, and we are positive on loan growth and also banking going forward. Net customer deposit growth was minus €2.1 billion and Retail sales were down by €2.7 billion, with inflows in the Netherlands and other Eurozone countries, while we saw an outflow in Germany and France. For Germany, this was mainly the result of the introduction of net negative rate charging in November. Wholesale Banking recorded an outflow of €4.9 billion, mainly in PCM. And turning to fees on Slide 16. Year-on-year, fee income grew by 20%, with both growth in Retail and Wholesale. Retail fees were up 70%, with an impressive 27% increase in daily banking reflecting growth in primary customers, the increase in payment package fees, and further recovery. The level of domestic payments was basically back at pre-COVID levels. Conversely, international payment levels remained subdued in transactions. In investment accounts products, fees were 12% higher, reflecting growth in accounts, as I mentioned. In trades, the wholesale banking fees were 26% higher with growth across all four groups, and sequentially, retail fees were 3% higher driven by investment products and daily banking. In Wholesale Banking, fees were up 9%, mainly reflecting higher fees in financial markets and corporate finance. Slide 17 shows expenses, which this quarter included €166 million in incidental items, mainly reflecting €141 million in provisions and impairments related to the announced closure of the French Retail Banking activities. Excluding regulatory costs and incidentals, operating expenses remained under control. Year-over-year, these costs were slightly higher, mainly reflecting a lower VAT refund and higher stock expenses related to CLA increases and pro forma related expenses, which were reduced to lower levels in the fourth quarter of last year, that is 2020. Program Contour was also largely driven by the staff-related cost increases, while also marketing activity trends were higher. Regulatory costs were up, including the Dutch Bank tax, which was 50% higher in '21 and '22. These levels should normalize again. Overall, I'm pleased with how our operating costs are developing. We already see some effects of measures taken so far; we will always keep focusing on optimizing where we invest our capital, and further measures can always materialize. But at the same time, we also need to look forward and we will invest in areas where we can get the best returns. Now we go to risk costs, that's Page 18. In Q4, our costs were €346 million or 22 basis points over average customer lending. The increased level compared to the previous quarter reflected our prudent approach. In certain environments, we do hold €30 million to reflect uncertainty in COVID scenarios and valuation risks in asset classes, mainly in Wholesale Banking. Additionally, we took €24 million related to residential mortgages, recognizing that increasing inflation and interest rates could affect customers' ability to pay, which could impact house prices. This was partly offset by €124 million in releases of management overlays taken in previous quarters, mainly related to payment holidays and sector-based overlays, predominantly as a result of reductions in losses. Aside from these releases, Retail Benelux risk was mainly reflected in more cases in Belgium and some individual Stage 3 releases. However, in challenging growth markets, risk was further reflected by collective provisioning mainly in Spain and Poland, while the Wholesale Banking Stage 3 risk costs included limited additions to existing files. The Stage 3 ratio was stable. Slide 19 shows that our CET1 ratio increased to 15.9%. CET1 capital was €600 million higher, mainly due to the inclusion of 50% of net profit for the quarter. With net profit equaling resilient net profits, the other 50% was reserved for future distribution in line with our policy. RWAs waste increased mainly due to the higher markets and operational RWAs. Credit RWAs were down, mainly reflecting the overall improved profile of the loan book. Regulatory RWA inflation is known at this moment ahead of the 2025 Basel IV implementation and has been almost fully incorporated. We still expect RWA impact from the postponed implementation of risk-weighted mortgages in the Netherlands, which we estimate at around €7.5 billion. However, we expect this floor to be temporary as it lowers the outlook for under Basel IV, and besides that, we will continue to see releases or additions to RWA from regular mobile updates. To wrap up with the highlights of the quarter on Page 21. Our customers continue to recognize our strengths, resulting in further growth of our primary customer base, as well as the number of sustainability deals. Our digital-only mobile-first focus continued to pay off with mobile becoming the main channel through which customers interact with ING in 2021. These factors support our efforts to diversify income, with full-year loan growth returning and fees increasing by almost €0.5 billion or 17%. This has offset the continued pressure on liability income caused by the negative rate environments. On costs, we managed to keep full-year costs flat. Full year risk costs were €560 million, or 8 basis points over average customer lending, well below our through-the-cycle average, and included some prudent adjustments to Stage 3 provisioning on existing files. The CET1 ratio improved to 15.9% with 50% of the fourth quarter resilient net profits reserved for future distribution. We proposed a €0.41 final cash dividend, bringing the full-year cash dividends to €0.62, subject to the AGM approval in April. That concludes the presentation, and I will now open the floor for Q&A.

Operator, Operator

Thank you. We are now beginning the question-and-answer session. Our first question is from Mr. Benjamin Goy of Deutsche Bank. Please go ahead, your line is open.

Benjamin Goy, Analyst

Yes. Hi, good morning. I have two questions, please. First on cost, maybe just to double check, in the absence of restructuring costs and incidental costs, should we expect then that the underlying cost base is stable? And can you also absorb investments, bank and the likes in 2022? Secondly, you are obviously guiding towards payouts about 100%, yes, 100% going forward. I was wondering how the discussions with regulators have evolved over the last month? I mean, we saw a large appeal of you announcing effectively that plan. Do you think the likelihood of that has also become more or has increased for ING? Thank you.

Steven Van Rijswijk, CEO

Thank you very much, Ben. I will answer the first question, and then Tanate will answer the question on payout. Yes, the cost base is stable. Please know that the fourth quarter was impacted by CLA and by performance-related salaries. And of course, by slightly increased marketing and R&D expenses. On the back of growth, we want to continue to grow our business. Now gradually, we see some of the impacts we made as a result of the announcements on some of our retail markets and other activities kicking in; that is gradually kicking in over 2021. But will continue to kick in over 2022. That means that despite what we currently see in inflation and CLA pressure, we intend to keep our costs at least flat over the year 2022.

Tanate Phutrakul, CFO

Hi, Benjamin. So I think just on capital returns, our discussions with the regulators are constructive. If you look at what we have announced so far, €0.41 in dividend payments, €1.7 billion share buyback, which is coming to its conclusion, and rising levels of core Tier 1s. So that capital strength means our conversation with the regulator has been constructive, as we say. These discussions are ongoing, but we expect that we will conclude our discussion before we announce our first quarter results.

Benjamin Goy, Analyst

Understood. Thank you.

Operator, Operator

Next questions are from Mr. Benoit Petrarque from Kepler Cheuvreux. Go ahead, please. Your line is open.

Benoit Petrarque, Analyst

Yes, good morning, guys. The first one will be on NII. The red curve is moving quite fast now. I just wanted to discuss this gradual positive effect on the replicating portfolio, especially at which point - when do you expect kind of loan growth at a 3%-4% level to offset the pressure on liability income? Are we getting closer at current levels to that point? I was wondering if that could be something we will start to see in 2022? Also, a little bit awful on the rate increase. What is your sensitivity again to having a 50 bps hike of ECB rates on NII that would be very useful please? And then the second question will be on the fees. Do you see fees growing in 2022? I mean, you're coming from a very strong year at almost 20% year-on-year. Do you still expect some of this uplift? Do you think that includes some structural and market-related effects, or do you see this growth into '22? That would be very useful. Thank you.

Steven Van Rijswijk, CEO

Thank you very much, Benoit. I will answer the question on fees, and Tanate will talk about NII. If you look at fees, most of the elements we currently see in our fee buildup are structural. We have increased the number of people that have investments, public accounts with us. For example, in Germany, in 2020, we grew the number of accounts for investments by 326,000; this year, it was 390,000. So in total, more than 2 million clients in Germany are currently investing through us. We have increased the number of payments, increased the payment packages in some countries, as a result of which our fees went up as well. We also do more insurance with a number of our clients in different countries. However, please note that we also continue to grow our primary customers. If we grow our primary customers, that means that we have clients doing more with us. As we always say, clients who do more with us are more sustainable on both sides from advance and also from our side in doing business together. And you see that on one of the pages in terms of mobile sales, which also increased quite dramatically compared to the year before. So all these elements play a role. Higher number of primary clients, increasing payment packages, more clients that do investments with us, and more clients that do insurance with us. I think that is the reason why I am confident, as if you look at the lending fees in Wholesale Banking, they are not yet back at the level we saw pre-COVID. International payment volume is still not back where it was before the COVID crisis; we see domestic payments coming back, but international payments are still subdued. That's a significant part of net income, so in that sense, I'm positive and confident. Therefore, we continue to guide for growth in fee income of 5% to 10% per annum for the years going forward. Tanate, on NII.

Tanate Phutrakul, CFO

Benoit, just on NII, let me give you a bit of color on what's some headwinds and what's some tailwinds. Going into 2022, the assumption is that the TLTRO program will end, meaning that we will miss about €300 million in NII compared to 2021. However, if we look at the other components, we are confident that based on what we see in Q4, the 3% to 4% loan growth is there and it should be across both retail and wholesale banking. Additionally, we've seen a strong pick-up in high-margin business in our Central European business, which should also contribute to NII uplift. The positive impact comes from negative rate charging; for 2021, we had a positive impact from that negative rate charging of approximately €220 million, which would rise to about €300 million for 2022. These components represent significant positive tailwinds. Regarding the short end of the curve moving, it is a dynamic calculation that we will need to make. These rate movements will be incredibly helpful in mitigating some of the compression we saw in 2021.

Benoit Petrarque, Analyst

This is very useful. On the 50 bps, I mentioned the short end of the curve. So if the ECB acts with a 50 bps hike in guidance on that?

Tanate Phutrakul, CFO

We see really good evolutions in the long end. So indeed, if the short end would move, it will be very helpful.

Benoit Petrarque, Analyst

Okay, great. Thanks.

Operator, Operator

Our next question is from Mr. Stefan Nedialkov of Citi. Go ahead. Your line is open.

Stefan Nedialkov, Analyst

Hi, guys. Good morning. I want to ask a couple of questions here. The counter-cyclical buffer has gone up by around 20 bps at the group level. I'm assuming that the buffer increase is impacting the management target as we are now at 10.7% swap, which means that the buffer to the management target has shrunk by 20 bps. Is this something that you will look to absorb within the management buffer? Or are you thinking that maybe as regulatory states in the counter-cyclical buffers across Europe may move higher, maybe closer towards 13% or so? That's one question. The second question is on costs. It's encouraging to see that you're aiming to absorb inflation for '22. That will presumably come via restructuring in the business as you have been doing over the past couple of years. Is it fair to assume that the flat guidance or at most flat guidance is exclusive of any restructuring costs that we may see from the various businesses? Thank you.

Steven Van Rijswijk, CEO

Thanks so much, Stefan. I will do the question on costs. Tanate will do the question on the counter-cyclical buffers. Your insight is correct. So yes, the guidance on the costs excludes restructuring costs if they arise. We have enacted quite a bit of restructuring in 2021 with markets such as Czech Republic, Austria, and France; we have also provisioned some of the branch networks in the Benelux. Not all of those benefits have materialized yet. The announcements we made earlier this year mean that it takes quite a lot of time to run those businesses. Let me take the Czech Republic and Austria, that has taken until the end of this year to roll off. It indeed takes time. The benefits of some of these announcements made in 2021 and 2020 will also materialize in 2022 and that's going to help us. But indeed, it excludes any new restructuring, if these take place.

Tanate Phutrakul, CFO

Stefan, just addressing the question on counter-cyclical buffer, we clearly issued a press release on our new MDA target. In calculating our 12.5% capital targets, we already assume rising levels of the counter-cyclical buffer. We find about six or seven material countries have increased this buffer, which is contained in our numbers. We stick with our 12.5% core Tier 1 guidance.

Stefan Nedialkov, Analyst

Great, thank you.

Operator, Operator

Next question is from Mr. Omar Fall of Barclays. Go ahead, please. Your line is open.

Omar Fall, Analyst

Hi there. You mentioned the very helpful impact from higher policy rates. Just to clarify, is there an expectation then that if and when actual policy rates increase, you'd be able to maintain the negative rate charging you're currently providing and the €300 million benefits? Would you also have some positive beta there for some periods? Secondly, just to help us with our modeling, could you give us the cost base of France, Retail Austria, and Czech Republic? Or just some slightly better clarification of the component of OpEx that you'd expect to see removed in 2022? That would be very helpful.

Steven Van Rijswijk, CEO

Thanks, Omar for our questions. On policy rates, as you clearly mentioned, what is the beta there; that is a good word because it depends on the beta tracking that we will then do. Clearly, as long as the rates are negative, the beta will probably be higher, while if the ratio is positive, then the beta tracking will probably be lower. However, it also depends on what competition is doing and how rates do move, both in the short term and long term. So it's not a one-sided answer that you can easily provide. What will of course help is that we see the market rates at the low end increasing. We note that mortgage rates are more linked to the long end of the spectrum, while the ECB is more focused on the shorter end. We will need to remain alert on ECB announcements today as well as the next quarter.

Tanate Phutrakul, CFO

We don't disclose the absolute cost numbers. However, we have disclosed the number of employees affected by these closures. For Czech Republic and Austria, we have announced numbers affecting around 560 staff. For France, we announced recently that it will affect 460 FTEs.

Operator, Operator

Next questions up from Giulia Miotto of Morgan Stanley. Go ahead, your line is open.

Giulia Miotto, Analyst

Yes. Hi. Good morning. Can you hear me?

Steven Van Rijswijk, CEO

Yes, very well.

Giulia Miotto, Analyst

Perfect. Okay. Thank you. So two questions on my side. I want to go back to the NI sensitivity question. The perception among investors is that ING might be less sensitive compared to peripheral European banks because the mortgage book is mostly fixed. If I look at what you disclosed in the annual report, I think that is €60 million impact for 100 basis points more in one year, which is basically a negligible impact. However, we've seen through the years that the impact was clearly greater. So it would be very helpful if you could provide any sort of sensitivity for either a parallel or a front-end move. So that's my first question. The second question is on fees. I understand the structural dynamics regarding retail fees. However, what about the wholesale banking fees? €322 million in the quarter is pretty high also by pre-COVID standards. Is that sustainable? What is driving that? Any color you could provide on wholesale banking fees would be greatly appreciated. Thank you.

Steven Van Rijswijk, CEO

Thanks very much, Giulia. You're correct. The wholesale banking fees were good this quarter. That was a result of more event-driven fees also in financial markets and corporate finance. That said, if you look at the lending fees within that, because most of the fees we make in wholesale banking are still from syndicated loans and underwriting activities. That market is not completely back yet; it's still a take-hold market, and several of these elements will depend on M&A activity, which has more to come. Therefore, yes, we experienced positive one-offs this quarter in terms of event-driven fees, but we have not yet benefited from the syndication loan market returning completely. Regarding NII sensitivity, in most of our markets, we have fixed-rate mortgage loans, but this does not imply that we keep that long-dated interest rate position. From a hedging perspective, as long as we originate the loans, we begin swapping down to levels of interest rate risk that we are comfortable with. If you want to see sensitivity, you should look at the 3 to 7-year segment of the curve.

Tanate Phutrakul, CFO

We don’t give that information specifically, but about €600 billion of liability is a fairly significant part of the Eurozone base indeed.

Operator, Operator

Next question is from Mr. Kiri Vijayarajah of HSBC. Go ahead, please. Your line is open.

Kiri Vijayarajah, Analyst

Yes, sir. Good morning, everyone. A couple of questions. Firstly, on the wholesale bank and the rapid lending growth you're seeing there. If you go back, you have been doing some de-risking there since you first became the CEO. My question is how can we be sure you haven't simply backtracked on your risk appetite in the wholesale bank? Can you give us comfort that you haven't gone back and restarted some of the old lending in wholesale banking? The second question is on the retail side regarding the extra provisioning you're taking. You've planned for higher inflation, higher interest rates, and a risk of falling property values. What early warning signs are you seeing that triggered this? Are you observing anything that some of your peers have not noticed yet? Also, putting aside Turkey, which was a fairly minor element — it is mentioned in the slides but not in your verbal commentary — where does Turkey fit into the extra provisioning you've taken on the retail side this quarter? Thank you.

Steven Van Rijswijk, CEO

Sorry, the last part was? We couldn't quite get that.

Kiri Vijayarajah, Analyst

When you flagged the extra provisioning triggered by debt servicing, higher inflation, higher interest rates, and also falling property values for the extra provision. You didn’t mention Turkey in detail but did flag it in slides.

Steven Van Rijswijk, CEO

If you look at the lending and wholesale banking, I mean, I used to work in wholesale banking, and then I was a CRO and I became the CEO. However, I hope I’ve not become schizophrenic. My sentiment is that we have not changed or tightened policies regarding the more cyclical sectors in real estate finance and leveraged finance. Given the growth in wholesale banking this year, it is fully in line with the policies we have had since then, focused mostly on investment grade. In this quarter, we saw some pull forward from TLTRO short-term facilities and also from trade, as supported by higher commodity prices. On the provisioning, Ljiljana will answer on the early warning signs and the provisioning for Turkey we are taking.

Ljiljana Cortan, CRO

Hi, Kiri. Yes. The early warning signs we're observing are not related to asset quality. On the contrary, we see the metrics showing further strong and improving asset quality. The signs we talked about are related to the forward-looking macro indicators that have been, I would say, accelerated in the fourth quarter, specifically the outlook on inflation staying high for longer, and its impact on other macro variables. Inflation peaked in December, as we know, in the Eurozone to the highest since the euro introduction. Also, Q4 inflation nearly doubled in some core markets compared to Q3, driven mainly by energy price increases. Additionally, in the last few years of the pandemic, we have noticed double-digit growth in property valuations overall while household incomes have been benign. We are taking this prudent stance. The provisions were targeted primarily at the Stage 3 portfolio, with the expectation that the impact materializes first on this weaker part of the portfolio, not on the entire book.

Kiri Vijayarajah, Analyst

Very clear. Thank you.

Operator, Operator

Our next question is from Mr. Farquhar Murray, Autonomous. Go ahead, please. Your line is open.

Farquhar Murray, Analyst

Good morning, all. Just two questions if I may. Firstly on costs, you mentioned the impact of a risk profile reduction on regulatory costs in the quarter. Can I ask if you could elaborate on the mechanics of that? Has that only really just kicked in for this final quarter, or did it support the whole of the year? Secondly, coming back to the counter-cyclical buffer, are you willing to elaborate on the assumptions you underpin your target for that? More generally, can we mechanically increase the counter-cyclical buffer? It narrows the headroom to MDA, and can we take everything else as a given within that? I ask this because obviously, if we move to a landscape with much larger counter-cyclical buffers, does the domestic buffer of 2.5% still make sense? It looks like it was built for a different environment.

Tanate Phutrakul, CFO

Okay. Regarding the calculation of DGS, it calculates based on each bank's specific metrics along various dimensions. One of the drivers of the contribution to DGS is the level of leverage ratio, which improved for ING, resulting in a reduction to the DGS.

Steven Van Rijswijk, CEO

Regarding the counter-cyclical buffer, that is really a bottom-up exercise. Once countries start levying these counter-cyclical buffers, we incorporate that into our capital calculations. We currently believe that our 12.5% capital target still holds even with potential increases in the counter-cyclical buffer.

Farquhar Murray, Analyst

Okay. Thanks a lot.

Operator, Operator

Our next question is from Mr. Tarik El Mejjad of Bank of America. Go ahead, please. Your line is open.

Tarik El Mejjad, Analyst

Hi, good morning. Just coming back to the counter-cyclical buffer. I understand that you're seeing compensation of the higher potential buffer in the Netherlands through the lower domestic savings buffer you had in March 2020. But regarding the 2.5%, how much volatility is there in the context where LTVs are lower since the last 10 years it has been in place? Are you in discussions with the DNB about this 2.5%? Considering a different context, does it make sense to keep this as it is?

Steven Van Rijswijk, CEO

There's another question. The answer is no. Look, I cannot comment on the future views of DNB. That's up to the DNB. I don't have particular concerns regarding that. It's certainly not an element that is currently on the table when we discuss distribution plans.

Tarik El Mejjad, Analyst

Thank you very much.

Operator, Operator

Next questions are from Mr. Jon Peace of Credit Suisse. Go ahead, please. Your line is open.

Jon Peace, Analyst

Thank you. So my first question is just following on from Tarik's points, it would be quite helpful to manage our expectations. Could you give us a rough idea of how quickly you plan to get to your 12.5% targets? I know you've mentioned maybe a couple of times last year, the phrase a couple of years. Could you clarify if you still think 2 to 3 years is reasonable rather than 4 to 5 years to return to a 12.5% target? My second question is regarding the cost of risk. How much do you see that normalizing in 2022? Given you still have some overlays, and the underlying run rate is still pretty good. Should we expect it to be below or even well below the through-the-cycle rates? Is Q4 a good proxy for the potential cost of risk next year or would that be slightly conservative given the extra provisioning? Thanks.

Steven Van Rijswijk, CEO

Ljiljana will address the cost of risk, but regarding this idea of getting to 12.5%, we believe we’d reach this in the next couple of years. I’m not going to speculate on the exact number of years, but it’s clear that starting from our current level of 15.9%, we have €10 billion of excess capital. Last year, we started the share buyback based on capital preservation. We have communicated that we will announce conclusions from our discussions with the ECB regarding excess capital before the first quarter figures this year.

Ljiljana Cortan, CRO

I would not take Q4 as a proxy for '22 in terms of extra provisioning. As we explained, we took specific management overlays this quarter, and there are very specific macro indicators that will not necessarily materialize in '22. The overall cost of risk is currently at 8 bps, well below the through-the-cycle level. We expect to continue in line with our guidance through the cycle.

Jon Peace, Analyst

Thank you.

Operator, Operator

The next questions are from Mr. Jean Neuez, Goldman Sachs. Go ahead, please. Your line is open.

Jean Neuez, Analyst

Hi there. I have two questions, please. One on the net interest income pricing component. You noted in one of your slides that there were strong volumes in Q4, which were then attributed to the ramp-up towards TLTRO, or the cutoff date. I know it's early in the year, but are you noticing changes in competitive behavior when it comes to loan book pricing, particularly for non-financial corporates in the various markets where you operate? I expect that the comments regarding the €300 million TLTRO is all else equal for the loss of income. However, I think that TLTRO overtime had its desired effect from a monetary perspective, which was to bring down the cost of lending for companies. So I'm trying to understand whether that can reverse or partially reverse? My second question is regarding the cost line. I wanted to see if you could give us examples of how you plan to achieve costs that will be roughly flat or at least flat in 2022 and how you would counter the picking up inflation, trying to understand how meaningful the structural progress is versus non-structural measures.

Tanate Phutrakul, CFO

In terms of loan volumes, there was some full force utilized of the loans in wholesale banking from TLTRO. In the end, we still see that there's a lot of liquidity in the market, which determines price levels in their particular loan books. So what we observed, also in Q4, is a good pipeline — I particularly highlighted that. So that's also encouraging for our loan growth in 2022, which we shouldn’t extrapolate strictly from the fourth quarter in '21. But we are indeed typically aiming for that 3% to 4% long rows.

Steven Van Rijswijk, CEO

We will certainly pull the digital lever to improve customer experience and further enhance our cost-to-serve. Our strategy for 2022 is focused on growing our customer experience, and if we increase and improve this experience, we will capture more primary clients doing more transactions and business with us. That is what we believe in, and that's what we are good at, and it’s going to help us manage costs very carefully over the coming years.

Jean Neuez, Analyst

So just to clarify, you’re not combating inflation by freezing investments or delaying things that you would otherwise have done?

Tanate Phutrakul, CFO

No, not at all. In the end, you need to focus on continuously improving your client experience. That's the only way you can compete long term.

Operator, Operator

Next question is from Mr. Guillaume Tiberghien, Exane BNP Paribas. Your line is open. Go ahead.

Guillaume Tiberghien, Analyst

Thank you. Good morning. I've got two questions and one clarification. Could you provide the fees generated from international payments in '19 and in '21? You highlight that as a source of growth, so I wanted to see what the base was? Secondly, could you give us a flavor about how your commercial real estate portfolio is developing in a changing world with people working less from the office and going less to shops? For the clarifications, on the Belgian €23 million NII transfer to other income, does that represent a new normal, a new run-rate for NII, or is it just a one-off movement? And we go back to previous levels? Lastly, is the Q4 number, actually a number we could utilize for '22?

Steven Van Rijswijk, CEO

If you look at international payments from 2019 and 2020, we don't disclose the figures as such, but our payment fees consist of two parts. The first part is the monthly package fees that people pay, and the second depends on the type of package received and include transaction payments. International payments in that second part is a significant share of this second element of daily banking fees, especially in the Netherlands and Belgium, which are largely debit card-driven markets.

Ljiljana Cortan, CRO

Regarding the commercial real estate portfolio, we have kept growth in that area over four years to manage concentration risk, especially considering COVID. The overall outstanding remains stable at approximately €49 billion, with a low NP ratio of 1.2%. Our underwriting principles and originating LTVs are very conservative, reflecting our cautious approach.

Steven Van Rijswijk, CEO

Regarding the minus €23 million, it came from other income to interest income, therefore was a one-off. Subsequently, you can ignore that going forward for Belgux. On the cost of risk, if you look at guidance and the real saver, I will give the floor to Ljiljana.

Ljiljana Cortan, CRO

As you said, 25 bps is our through-the-cycle average, but it's not necessarily for the year, so we believe the Q4 number does not reflect the provisioning for the entire portfolio.

Guillaume Tiberghien, Analyst

Thank you very much.

Operator, Operator

Our next question is from Anke Reingen of RBC. Go ahead, your line is open.

Anke Reingen, Analyst

Yes. Thank you very much for taking my question. The first one is cost of risk as well. I want to understand the €124 million management overlay related to residential mortgages. I understand Stage 2 and 3, but trying to understand how €124 million doesn't seem large is if you're really concerned about customers' ability to pay and the changing property valuations. So how much of a risk is it that this number keeps going up in the next quarter? On capital return, could that expectation that you announced a special dividend and a new buyback program today happen? I mean, is that not happening because the discussions are still ongoing? I saw the buyback program significantly slowed down so it's not completed, but at some point, it looked as if you were done today. So this is basically still discussions ongoing. Is the special dividend a full-year event, or would you also potentially consider a special dividend or an interim dividend?

Steven Van Rijswijk, CEO

First, we will take the €124 million overlay. Ljiljana?

Ljiljana Cortan, CRO

Hi, Anke. Yes, as you correctly mentioned, it does not seem large. This number is not big as we have not taken the overlay on the overall portfolio. We have taken that overlay prominently on the credit risks in the portfolio, particularly Stage 3 and Stage 2. The overall loan book is healthy, as our underwriting principles and LTVs have continued to remain strict, so I wouldn’t say there's a worry with the overall level; it's more with those particular elements of the portfolio that we’re being cautious.

Tanate Phutrakul, CFO

We have three touchpoints with respect to capital returns. The first clearly is an interim dividend payment, which we have at the end of the Q2 results. Currently, we announced the final year dividend. When discussing further capital returns, we have done the share buyback; it’s still ongoing and yet to finish. The discussions with the ECB are constructive, and we will update you before the end of the Q1 results.

Anke Reingen, Analyst

Okay, thank you very much.

Operator, Operator

Next question is from Miss Flora Bocahut of Jefferies. Go ahead, please. Your line is open.

Flora Bocahut, Analyst

Yes, thank you. Good morning. I have two questions I wanted to ask you specifically on your Belgian business. Firstly, on the NII, even if we adjust for the €23 million reclassification this quarter Belgian NII, we still have the NII down high-single digits versus Q3 and that's despite loans being roughly flat. So that implies quite a deterioration in Belgium this quarter. Just wanted to understand what happened there. Secondly, if I look at the cost, ex-regulatory costs, they were down 2% year-on-year in Q4, and that's despite inflation hitting very high levels in a country where core inflation transfers directly into wage inflation. Strong performance, could you explain to what extent this is because you managed to offset the wage inflation with savings elsewhere? Or is it just that there's a delay and we should expect wage inflation to kick off more likely in Q1? Thank you.

Steven Van Rijswijk, CEO

If you look at NII down in Belgium, the negative impact was indeed due to the €23 million reclassification. If you look at the production in Belgium, we see a positive lending margin in our new production compared to what we saw in the previous quarter. So in this case, the significant impact stems from the aforementioned negative reclassification, rather than pricing.

Tanate Phutrakul, CFO

Yes, we have plans in Belgium regarding our Route 24. That plan is ongoing to digitize and improve efficiencies in Belgium. We expect that despite the wage inflation we expect that through branch rationalization and reductions in staff, we can offset wage inflation balances. While these conditions are quite challenging, we remain committed to our plans.

Robin van den Broek, Analyst

Yes, good morning. So first of all, on the buyback. It was my understanding that your buybacks were outsourced. How come the pace has slowed down materially since mid to end of December? Also, what kind of liquidity do your shares offer to buybacks in general? You mentioned €10 billion in excess capital, but how much can your liquidity absorb in a one-year window?

Steven Van Rijswijk, CEO

Regarding the slowdown in the buyback, yes, we did outsource it, and there is a market abuse regulation, so we cannot interfere. It’s not particularly helpful; let me put it that way. Regarding your question surrounding our €10 billion excess capital and how much liquidity can absorb, we have a strong liquidity position; I’m not sure if that answers your question specifically. The better and holistic approach would be a year’s growth. However, we have not taken a decision on future distributions of excess capital for shareholders yet; we expect to announce our intentions at or before the first quarter figures.

Robin van den Broek, Analyst

Thank you.

Tarik El Mejjad, Analyst

Just to follow up on the counter-cyclical buffer, are you seeing some push from regulators to limit overall distributions?

Steven Van Rijswijk, CEO

There hasn't been a definite ceiling in discussions with the ECB, indicating that we can discuss excess capital return; they recognize we've achieved solvency and are managing strong performance.

Operator, Operator

There are no further questions. Sir, please continue.

Steven Van Rijswijk, CEO

Thank you very much indeed. Thank you all for your time. I'm sure we'll speak again in three months. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes the ING fourth quarter 2021 analyst call. Thank you for your attention. You may now disconnect your lines.