Aug 8, 2007
TRANSCRIPT SPONSOR
Executives
Unidentified Company Representative Michel J. Tilmant - CEO John C.R.
Hele - CFO Koos J.V. Timmermans - Chief Risk Officer Peter A.F.W.
Elverding - Chairman, Executive Board Dick H. Harryvan - Member, Executive Board
Analysts
Zenon Voyiatzis - Merrill Lynch Farooq Hanif - Morgan Stanley Paul Goodhind - Bear Stearns William Elderkin - Citigroup Investment Research Ton Gietman - Petercam Christopher Hitchings - Keefe Bruyette Woods Nicholas Holmes - Lehman Brothers
Unidentified Company Representative
Good morning and welcoming you to ING's Second Quarter 2007 Conference Call. Before handing this conference call over to Michel Tilmant, Chief Executive Officer of ING Group, John Hele, Chief Financial Officer; and Koos Timmermans, Chief Risk Officer.
Let me first say that any forward-looking statements in today's comments are subject to a number of variables including interest rates, foreign exchange rates, inflation rates, movements in securities markets, including equity markets, and underlying economic changes and conditions. The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.
Good morning, Michel. Good morning, John.
Michel, over to you.
Michel J. Tilmant - Chief Executive Officer
Thank you very much. Welcome to all of you to this record quarterly earnings meeting.
We are here with John Hele and Koos Timmermans. And there will be four parts of our presentation.
I will first give you the results highlights then John Hele will go through the second quarter results in detail. After that Koos Timmermans will address the risk management and I will close the meeting by making a few inroads in… our strategy overview.
But first of all, let’s go back to the key points of this quarter, and I encourage you to go to slide three, which I think you can see on your screen. And indeed this quarter, we have registered record quarter results.
Our underlying net profits are up 36.7% to EUR2.747 billion. The realized gain of ABN AMRO were EUR573 million, but excluding this gain, underlying net profits were up 8.2%.
We are pleased to say as we will [inaudible] to that expense remain under control, and that we further invest in growth. Earnings per share is EUR1.18, up 27% and we are pleased to inform that the value of new business improved significantly from the first quarter ’07.
But if we take the accounting noise out, then we can see that there is a strong performance of the business. Indeed, Insurance Europe, pretax results excluding the volatility due to separate accounts in the Netherlands is up 25%.
Insurance Americas, pretax results are up 30% and for USFS alone in U.S. dollar term plus 85%.
Insurance Asia/Pacific, pretax results excluding the impact of the SPVA volatility in Japan is plus 19%. On the Wholesale side, gross results excluding risk costs and adjusted for asymmetrical tax treatment is plus 15%.
Retail banking gross result excluding risk costs plus 14% and ING Direct gross result excluding risk costs were down minus 6%. We are happy to report that we have a limited exposure to the sub-prime mortgage CDO, CLO, and leverage finance.
And based on today’s market circumstances, we do not expect any material impact on 2007 earnings. Further, we will continue to reinvest in growing the business.
As you have seen, we have invested in Latin America to basically become a major player in the pension business in Latin America, we have invested in Oyak Bank in Turkey. We are announcing that we are going to start a bank in… a retail bank in Ukraine and that we are continuing to grow ING Direct.
We have also announced that our interim dividend will be EUR0.66 per share, equal as it is our policy to half of the total dividend paid over 2006. If you look slide four, you can see the evolution of our quarterly profits and how strong our second quarter ’07 is.
And I think that… this graph is very clear and show a steady improvement of our earnings since ’05. Turning to the slide five, I would like to put the capital gains of ABN AMRO into perspective, because as you know, the ABN AMRO investments was part of our overall policy to invest in Dutch equity.
And if you look historically, to the total net return on the on Dutch equity portfolio ING Insurance, since 1996, you can see that it has been pretty strong in terms of return, but you should know that on average, ING has outperformed the benchmark by 2.7% per annum over the last 11.5 years. And that the average, total net return was 15.2% per annum over the last 11.5 years, which I believe is an extraordinary performance.
And I think that we have to realize that, although, there's ABN AMRO profits are exceptional in nature because they have come this quarter in a bulk, they are not exceptional at all if you look it as part of our overall Dutch portfolio management. And indeed if you go to slide six, what you see is that this drives recurring realized gain on shares year-after-year since 1997.
And over the period of 1997 to 2006, ING realized on average around EUR500 million net capital gains on shares on an annual basis, and even EUR1.2 billion including capital gain excluded for the distribution base. As you know, there used to be a time when we would make proactive sale of part of our portfolio to fund some acquisition, and that at the time we had to exclude that from the gains, but nevertheless, there were… those businesses were part all those investments were part of our portfolio.
So, you can see over that long period of time that we had steady and systematic capital gains over the years. This has been equivalent to approximately 3% annually of the average portfolio.
Today and… as a matter of fact by the end of June, we had a portfolio of equity of EUR17.8 billion. And of which EUR5.9 billion unrealized capital gains after tax.
Let me remind everybody here that the portfolio benefits are very strong in the Netherlands because of their very tax efficient. But at the same time, our portfolio management is based on pure economic factors and investment management criteria.
As off today, we expect as we have said that we… for the remainder of the year between our stake in ABN AMRO and Numico we will have an additional EUR1.5 billion capital gain which will come in addition to the capital gain we have already announced by the sale of our insurance broker business in Belgium. I hope that this… these two slides will be convincing you that those gains are really part of our business, and therefore, I will let you judge which kind of feel you should give to those earnings.
I would like to turn to the value of new business and go to slide seven. And I think if you should look to slide seven, you have seen that the value of the new business improved significantly from the first quarter.
It was up 21% in the Asia/Pacific, plus 61% in Americas, and plus 4% in Europe for total change of 23%. I think I am pleased to say that one of the area of concern in the last quarter was Japan.
We told you that we were going to launch a new product, which we thought it was a competitive product and indeed when we launched the product in the second quarter '07, and sales were up very strongly. And we have recovered most of our market share during the second quarter.
In Europe, Central Europe has produced very good growth, which has more than offset the decline in the Netherlands. In the U.S., captives are now in place adding to EUR28 million to the value of new business.
So, I think one of the concern was the value of new business of the last quarter and I think we can show this quarter that we have… there is still… a bit growth in that area. I would like to insist to page eight that our operating expense remained under control.
You have to remember that we continue to invest in growing the commercial franchise that part of ING strategy is to invest in greenfield and grow organically. And the consequence of that is that we believe that we have to let the expense grow in the fast growing business.
And indeed it went year-to-year up by 13%. At the same time, we feel very much that the recurring expense need to be very much controlled in other businesses, and you can see that their expense only went up 2.9%.
These good results led up to announce a dividend of EUR0.66 per share. This interim dividend is fixed according to a policy of 50% of last year dividend.
Let me say that ING shares will be quoted ex-interim dividend from 9 of August and dividend net payable on that 16 of August. Let me turn to John Hele for the detailed analysis of the numbers.
John C.R. Hele - Chief Financial Officer
Good morning. I will first do a brief overview of Insurance and Banking and then go line-by-line to give you some more details.
As Michel mentioned, we have had a strong business performance, although, at times IFRS earnings does… seem to match some of this. In Europe it EUR694 million, down 1.4%, but there is a swing of a EUR154 million quarter-on-quarter due to the revaluation of the separate account shortfalls in the Netherlands.
We have a strong growth in Central Europe and continue to drive sales in business, which offset a decline in the non-life business in Europe. In the Americas, we had a very strong growth of 30% to EUR593 million where we had increased assets under management buoyed by favorable equity markets and good net flows.
The USFS alone in U.S. dollar terms of 85% in underlying profit before tax.
Asia/Pacific saw higher results in Australia and strong new sales at the SPVA business. Profit was down slightly 2.5%, but we also had the swing in the valuation of the single premium variable annuities in Japan due to implied hedging and taking that out, Asia/Pacific would have been 19%.
The corporate line benefited from the gain on the ABN AMRO shares. So, in total, we are up almost 50% in Insurance.
Turning to the Banking side and Wholesale continue to benefit from benign credit environment and the growth in ING real estate. In fact, overall, for the bank, we on a 3 basis points of net risk cost or EUR25 million.
So, still very favorable credit experience in our overall bank. Wholesale banking has… the earnings were down 6.8%, but this was also driven by an asymmetrical tax treatment of some trading activities in our financial markets area.
So, if you gross up these results, before tax, the gross results before the risk cost is up 15% and the underlying profit before tax is up 5%. Of course, this flows-through to the net profit after tax per banking where you see the benefit.
In retail, the volume growth more than offset, the impact of the flat yield curve, the growth results was up 14% excluding risk costs and we have strong profit growth outside the Benelux, notably Poland that was up 162% to EUR34 million. ING Direct continue to have strong earnings in the challenging interest rate environment and all those down 10% from the year ago, is up compared to Q1.
The growth result including risk cost year-on-year was down 6%, but at the same time, in the second quarter, we had acquisition and growth costs or investments in our business of EUR90 million spread between mortgages, payment accounts and ING Direct in Japan. Looking at our overall financial results on slide 13.
The underlying profit before tax in total for Insurance and Banking was EUR3.3 billion, up 24% from a year ago due to the asymmetrical tax treatment in wholesale banking as well as the tax advantage gains on our equity portfolio, the taxation rate dropped, having underlying net profit up 37%. We have special items this quarter of EUR188 million after tax, which is set up for the combination of ING bank and Postbank in the Netherlands as EUR252 million pretax of the EUR300 million we announced for this year, given us a net profit of EUR2.559 billion, up 27% over a year ago.
Our underlined tax rate was 14% in the quarter and our guidance on this for the year is between 15% to 20%. Looking at the insurance lines of business and insurance Europe on slide 15.
As I said earlier the underlying net profit before tax was essentially stable compared to a strong second quarter '06 as Central Europe and Belgium largely compensated for a swing in the revaluation of the separate account shortfalls. The life results were up driven by Central Europe and Belgium, offset by slight decline in the Netherlands.
Looking at the Central Europe including the rest of Europe where the APE was up 25%, VNB up 31% and is really firing on all cylinders. The non-life results were down due to pricing pressure in the Netherlands and Belgium and strengthening of claims provisions.
The value of new business was flat, where the increase in Central and rest of Europe was offset by decline in the Netherlands. The operating expenses were flat as the rise was offset by the same in Netherlands and Belgium, but we are continuing to new initiatives to accelerate the growth in Central Europe.
We have launched our business in Russia and sold to new policies and we have just announced that we will start selling single premium variable annuities in Hungary. We also reached an agreement in the quarter that sell ING Belgium's broker and employee benefit business.
Going forward, we will focus in Belgium on selling insurance products through the retail the bank. On slide 16 Insurance Americas which has benefited from increased assets in under management buoyed by favorable equity markets.
The underlying profit before taxes up 30% where we had earnings growth in both U.S. and Latin America, excluding currency, this was actually up 37%.
The Life profit was up 85% in the U.S. as we said earlier as well as Latin America.
Sales in the variable annuity business were up 20% from the first quarter. The sales U.S.
retirement services products were down 9% from a very strong second quarter ’06, where we have two large acquisitions and contracts. Excluding these two large sales, sales grew 18% on a U.S.
basis. Non-life results were down due to less favorable underwriting experience in Canada, but our Canadian business is well positioned given its leading market position, scale and pricing sophistication relative to the market.
The operating expenses increased 6% excluding currency effects as we continue to add customer service and support for distribution. Our VNB did recover in the second quarter with EUR53 million.
For Insurance Americas, we did out in place a major portion, the reinsurance for the redundant reserves, and the EUR28 million reflected, a EUR11 million of which was a catch-up from the first quarter. We also announced in the quarter the acquisition of Santander pension business which will boost ING to be the number two pension provider in Latin America.
Looking at Insurance Asia/Pacific with higher results in Australasia and strong sales with our SPVA product in Japan. The slight decline in underlying net profit before tax was driven with higher results in Australasia offset by a decline in Japan and South Korea.
Japan was affected negatively by increased volatility from un-hedged positions in the single premium variable annuity books. We do delta hedging on these guarantees that we offer in the single premium portfolio in Japan but we do not hedge implied market volatility because these average out overtime.
In the quarter, volatilities were up in most of the markets that these products are in and we have a swing. This total swing was EUR32 million in the single premium variable annuity line.
So, year we made EUR20 million on this line, in this quarter with a loss of EUR12 million, so this is EUR32 million. But excluding this swing, overall, Asia/Pacific was doing quite well.
The decline in South Korea is because year ago we had a one-time adjustment to reserves and DAC in ’06. And profit in Australia and New Zealand were up 42% from higher industrial income and a lease of some provisions due to claims.
Our strong growth in Life premiums continues. In South Korea up 25% and Taiwan 9% and our strengths reflect the continued investment to support our growth.
Our value of business was 21% from the first quarter driven by the strong single premium variable annuity sales in Japan. The reserve adequacy in Taiwan is at 70% confidence level now, due to rise in interest rates in the quarter in Taiwan and from 50% from the 70% last quarter.
As we may get asked if interest rate keep going up in Taiwan, when would we think about having profit from that? Our policy is such that as things stay or above 70% and stay above 70%, we may start to take the portion of profit in the following years.
So, we will keep you posted on how that evolves with the interest rates in Taiwan. In the corporate line on slide 18, we try to detail for you some of the key items including the interest on the core debt and our hybrids.
Here you can see the gain on the equities where any gain above 3% is reflected in the corporate line as well as some swings on fair value changes in derivatives. Turning to our banking line of business on slide 20.
Also banking continue to benefit from the benign credit environment and also had strong growth in ING Real Estate. The risk costs are still negative, minus 4 basis points in wholesale banking, but not quite as good as a year ago, still very low by historical standards.
The profit development though and it’s important to recognize is obscured by an asymmetrical tax treatment of some of our trading activities at financial markets, and correcting for this, in other words, grossing up the pretax results to reflect the… how the tax has worked. The gross result actually was up by 15% and the underlying profit before tax was up 5% instead of down 6.8%.
The profit at ING Real Estate was up 50% to EUR194 million due to the growth of the portfolio revaluation in sales. The volume growth in our payments and cash management’s business helped to offset the margins compression particularly in the mid corporate sector.
The structured finance area saw strong demand in most product areas and Koos will cover our existing portfolio in that area. The expenses were impacted by compliance related costs and growth in ING Real Estate and other core areas as we prepare for the single European payments area.
Looking at retail banking, we had excellent volume growth which continued to help offset the flat yield curve. The underlying profits rose 22%.
Profits in the Netherlands were up 11%, driven by substantial volume growth in all product groups. Belgium also saw strong volume growth in savings and deposits, mortgages and current accounts.
However, in Belgium, margins did come under pressure due to increased client rates and a shift from savings to term deposits. A key area to highlight is our great success in Poland where we had strong volume growth in mortgages and current accounts with 45,000 new retail customers in the second quarter.
The profit in private banking was up 14%, and we only had a slight increase in total underlying expenses. The RAROC is still excellent after tax of 43%.
We continue to rollout in retail banking. Our greenfield efforts in Romania with nine new outlets in the second quarter and we will be introducing the concept in the Ukraine next year.
The project to combine Postbank and ING Bank is on track. We recognize EUR252 million, EUR188 million after tax of a special item that was provisioned in the quarter.
ING Direct on slide 22. The underlying profit was down 10% compared to Q2, but is up compared to the first quarter of 2007.
The margins remain stable. The interest margins at 75 basis points.
The high results in all the European countries, except the U.K. and Australia offset lower results in the U.S.
and Canada due to increases in client rates. Our focus is primarily now on mortgages in all of our countries and with EUR8.2 billion increase in residential mortgages EUR7 billion in constant currency bringing us to EUR83 billion of mortgages.
Our total client retail balances, which is our savings accounts, our off balance sheet, our residential mortgages and consumer loans, increased to just over EUR300 billion in the quarter. The new payment accounts in the U.S.
and Spain continued to gain popularity among new and existing customers and we added 0.5 million new customers in the second quarter bringing ING Direct to 18.7 million customers worldwide. These results have to be seen in light of the flattening yield curves, but also the large investments that we are making to continue to grow.
And we added… spent over EUR90 million in the quarter to grow our mortgage business, our payment accounts, and also prepare for our introduction in Japan. The corporate line of banking, we continue to breakout some of the costs of capital management will fluctuate quarter-to-quarter as you can see here and some other basic costs that are not allocated.
Last, I would just like to highlight the interest margins have stabilized at 95 basis points. And there is often some accounting asymmetry in this, but these have evened out over the quarter and with the same interest margin in the second quarter as we had in the first.
I will now turn it over to Koos Timmermans, our Chief Risk Officer to speak about risk management.
Koos J.V. Timmermans - Chief Risk Officer
Okay. Thanks John.
On the risk management chart, I will take you through our sub-prime exposure, but doing so I will first talk a bit about our total balance sheet composition. And from our total balance sheet competition… composition we will zoom in on sub-prime and next on that we will look at all the potential knock-on effects.
So, on page 27 or 26 what you see is our total asset group composition. The biggest component of the EUR1.3 trillion balance sheet for both the Bank and the Insurance companies is the business loans, it’s the fixed income portfolio and the mortgages.
An important thing to note with mortgages is that those are originative mortgages and we don't originate sub-prime mortgages. So, the important part then to see is where do we find sub-prime that is in the category which we have classified as ABS.
So, I will come back on that. But before doing so, it’s important to note that this is our total group asset composition which looks pretty diversified over the different kind of categories and all of this is both, part of the result of business decisions looking at risks as well as independent risk management function doing so.
So, let's zoom in on page 27, on the ABS portfolio. This is what we call ABS and what we have in there that is in EUR94 billion.
What we have in there is a very small portion of CDOs and CLOs. And I will come back on that a bit later.
We have our ABSs and then we are talking about student loans, credit cards, all the loans. The biggest bulk of it is what we call the RMBS portfolio.
So, at a Group level that is the biggest part of our broader asset class ABSs. What you see there is a 3.4% slice which is called the sub-prime MBS portfolio and I will come back on that part right now and we will do that on page number 28.
If you look at our sub-prime mortgages, what we have in portfolio, please note that I will give you the exposures here for the 31 of July and not the 30 of June, because its integrating markets have developed since then. So, we are a bit ahead here in our numbers.
We have in total EUR3.2 billion exposure to assets, which are backed with sub-prime securities, and basically, what we have is our own investment processes on there. So, it’s not pure rating buying, we do our own analysis on this.
Nevertheless, what you see is that 93% of that EUR3.2 billion portfolio is rated as AAA to AA. So, in essence, if we go back, our total slice of sub-prime in our ABS portfolio is relatively small that 3.4%, and out of that 3.4%, 93% is rated AAA and AA.
So, far we have not experienced any impairments in this portfolio, and if you look at the negative revaluation reserve that was at the 31 of July EUR58 million. Turning next to the portfolios… the other portfolio, which might be affected.
We are talking about our CDO and CLO's exposure. I first need to make a comment upfront and that is we are not a big manufacturer of CDOs and CLOs ourselves, which means that we are not owning a lot of either equity tranches of these type of portfolios.
We are more an investor in these kind of instruments. And in total, we have 0.07% of our Group assets in CDOs and CLOs, which is EUR0.9 billion.
That includes both the cash as well as the synthetics. And If you look at CDOs with an underlying component of sub-prime, yes, we have it, but it’s EUR23 million in total.
So, if we look at our CDOs and CLOs, and we see like how much value… what were the value change there, the negative revaluation reserve on this CDOs and CLOs in the order of EUR35 million at the 31 of July. Then let's move on to the next markets which are in the news these days, which is the leverage finance market.
Just a quick note there. Yes, in leverage finance one of the things is we underwrite larger amounts.
Partially, we will distribute it and that is what we call our pipeline. If we haven't distributed it and parking, we have a hold book and those are the slices or the pieces of investment which we continue to hold.
If you look at our leverage finance pipelines, so, that's the part which we still like to syndicate out. We are talking about the EUR2.3 billion pipeline which comprises of 14 separate transactions.
If I hear the total market overhang of something like EUR300 billion, we have a share but not than normal market share. If you look at our hold book, our total hold book is EUR5.3 billion there.
But that is spread out over 210 deals. So, that reflects the smaller tranches which we like to hold there.
One thing what I would like to know there is, yes, we do have rigorous credit risk assessments on this. We are negligible in our holdings in payment in kind type of bonds or mezzanine tranches and covenant lite structures, as they were entering Europe, we are very light on covenant lite as well.
So, then let's move onto the equity markets as the final page on my side… equity markets there. You know we have an equity portfolio with a total market value of EUR18.3 billion.
At the same time there are two mitigants, I would like to note in that portfolio. One is we bought put options on the stock safety and we do that time to time if we see that markets are pressurized.
And we have done already at the start of this year and a couple of months ago. So, we have EUR4 billion worth of put options.
At this same time also, out of this EUR18.3 billion, EUR2.3 billion of this portfolio is invested in stocks which are in near cash because there are underlying bids going on. So, in a nutshell and that is on page 32, EUR1.3 billion asset base, with a large originated mortgage book because we are successful in originating mortgages but there we don't do sub-prime.
And we have limited exposure in the sub-prime for EUR3.2 billion exposure. CDO/CLOs is less than EUR1 billion and our underwriting pipeline at this moment EUR2.3 billion.
No net impairments to second quarter and based on today’s marked circumstances, no material impact on 2007 earnings.
Michel J. Tilmant - Chief Executive Officer
Thank you very much Koos. I hope that those exceptional results that those exceptional results that you have seen and also the presentation on risk management show how much we have exercised discipline in execution, discipline in risk management.
And also what I would like to show you in the last part of this presentation is how much we discipline in our strategic vision and we execute our strategy. On page 35, I would like to remind you that we are well positioned to capitalize on global trends in financial services.
If you will look world-wide, we see people living longer, we see increase in global wealth and we see technology changing the distribution and from the customer standpoint, we see that they feel of risk of outliving their savings and they want some value for money and they want convenience. This is exactly inline with our mission, which is setting the standard in helping our customers manage their financial future and what… in the three core aspects of it, first that we want to give up high performance productivities, we want to develop strong distribution reach and we want to do as a leading branch.
And we believe that high product performance capabilities, good distribution and branding will show sustainable, profitable growth opportunities for the foreseeable future. Now, we are also, page 36, very… in starting of strategy, we are disciplined in managing our capital.
And we want to develop and we have our own efficient capital management to allocate resources to drive growth in return for shareholders. And we originate capital because of our business profit, because of systematic divestments of less strategic business and by external capital funding to hybrid securitizations and bonds.
This creates capital and we basically a very productive dynamic capital management and that help us to apply the capital to allocate to establish business and help organic growth, which is the core of our strategy but also to invest in growth to Bolt-on acquisitions and rollout of greenfield in selective products and selective countries. And at the same time provide a very nice return to shareholders through dividends and more recently to return excess capital after all those investments to shareholders via the share buyback programs, so a very dynamic capital management on our side.
On the same time, we have been able to show a number of initiatives in 2007 and when you look at those initiatives, you see that they are extremely consistent with our strategy in terms of rationale and in terms of their impact in the timeline. And you can see on this slide, now that you look at the slide but you can see that we are systematically investing to strengthen our retail distribution, to be in the core of wealth accumulation and the high growth market and that we expect the evolution in the return of those activities and investments to have an impact throughout the full timeline.
And I hope that’s… that evidence how much discipline we are in investing in growth. Now, I would just like to update you on the share buyback program.
I think you got the details on the slides 38, but let me say just in that that we have bought back about 21.9% at least on the 3rd of August of our program. So, we are going along with our program but also you have to realize that this was partially offset by issuing the shares that we have to issue inline with the exercise of warrants recently.
And therefore part of that share buyback has been offset by the… in the recent past by the issuance of shares as warrants were exercised. Now, I would like maybe focus on three issues.
First the potential market, second, our banking franchise in Central and Eastern Europe and third, ING Direct. Now, I don’t want to go again into the detail of the Santander acquisition that you can see on page 40.
But on page 41, what is very clear is that we are progressively building a very strong pension business across the continent. We are now in Latin America, the second pension fund manager with strong position in Mexico, Chile, Columbia, Uruguay, Peru and Brazil.
And we are still working on Argentina. As you know, in Central Europe, we are a leading pension provider being number two in Poland, number three in Hungary, number five in Czech Republic, number one in Slovak Republic for the pillar three and number four in pillar two.
In Romania, we have recently started and we are very confident that the new regulation there will help us develop our business and in Bulgaria, we are number four. At the same time in Asia/Pacific, if the pure pension market is not as developed yet as in the other area.
I think we are capturing to some extent the pension business to our life business and through our asset management business. And we are now also trying to give up as much as we can to pension business.
For instance, we are the leader in employee benefits in Malaysia and we are also managing some government funds in China and South Korea. So, there is a systematic effort by us to be very much engaged in the pension business to all the developing market.
If we turn to page 43, I would like to give you an overview of how we look at the banking initiatives we take in Central and Eastern Europe Strategy that we can think the rollout more broadly. First of all, I think that we have three ways to enter those markets.
Either we got to ING Direct or we make some acquisitions of banking platform or we start greenfield. And it very much depends on the maturity if the market.
These markets are very matured with relatively moderate growth and sophisticated banking markets. As we have said, we are not… we don’t have an intention to buy large retail network, rather we penetrate to ING Direct and with the objective to be… it was in the top 10 overall retail bank in those countries.
That’s our objective and that’s what we are on our way to achieve with ING Direct, including, for instance 10 years after the launch of ING Direct in Canada in 1997, we are launch Japan later in this year. In established markets, which have nevertheless, high growth and relatively well-established banking market partly technically, we believe that the best way is that ING Direct is not yet appropriate to enter those markets but those markets are sufficiently sophisticated to require sophisticated distribution, we then make acquisitions via acquiring banking platform.
This is the case in Poland and this has been more a case recently in Turkey with the acquisition Oyak Bank. And the idea there is that we want to grow those platforms, who acquire market share in wealth accumulation, distribution.
In developing markets, where our growth in the banking market is in development and/or where local franchise are very expensive to acquire in relationship to the market share, we enter in a different way and we enter via greenfields and in Romania, we have started through the Self'Bank innovative franchise model in 2004 and we are now announcing that we are going to launch Ukraine in 2008 and the idea is with a minimum of expense. And I remember to you, in Romania, we spent about in order of EUR50 million to develop a very strong position in retail banking which is much more efficient in capital smart than to buy large platforms at a very expensive price.
That’s the way we look at those entry strategies. The way we look at countries is of course we are looking about putting priorities to large countries with significant growth potential and you can see a list of those countries we feel are important.
As we have covered Poland, Romania, Turkey, Ukraine. And we have covered most of the large countries; it is fair to say that our strategy in Russia is still under development that we are looking what is the best way to enter the banking market in Russia.
But that we have certainly not made any decisions on that front yet. I let you look at page 45.
On our Poland, I would like to say and it a matter of fact that we have rejuvenated Poland a few years ago by signing a new General Manager coming from ING Direct. And he has basically reenergized Bank Slaski.
And we can see that we have now grown systematically since 2004 very strongly in deposits and in investment funds. So… and more recently in the loan portfolio, so we are now a bank which shows not only commercial results but which has improved also in terms of financial results very strongly in the last few years.
I will let you also revisit the details of our acquisition in Oyak bank on page 46. Since in went through this very recently, I am not going to do it again.
And as well as page 47, I will let you take a look at the Romania statistics and what we have done Romania recently and show in page 48. If we applied the Romanian model to start and to… delivering a model to Ukraine, we believe that Ukraine is a very large market with 47 million people, highly educated population and growing middle class.
They have stable macroeconomics and high growth potential, due to rapidly rising real disposable income. And therefore, you can see in Ukraine a rapidly growing retail banking market.
And we feel that by applying the concept and the distinctive value proposition that we can bring from Romania, we will be successful in Ukraine. Moving to ING Direct.
I think page 50, I want to remind that objective of ING Direct is to become the world’s most preferred consumer bank. About few core principles, customer experience, simplicity and transparency, low cost and the fleet of companies.
I think that we want to get involved in four simple product categories… savings, lending and mortgages, investment products and payment accounts and we are rolling out those products systematically in across all the countries. Page 51, I would like to remind you and put in perspective the strong track record of ING Direct.
If you look in terms total client retail balances between funds entrusted, off-balance sheet funds, residential mortgages and consumer loans, where, today, ING Direct has reached the EUR300 billion mark and I think it is a remarkable results certainly in current interest environment. I think that what we can see is that ING Direct continues to deliver strong volume growth in the challenging environment and we intend to continue to invest in ING Direct to accelerate and build this commercial success.
Now page 52, I let you see the evolution of the yield curve and I think that this doesn’t need very long explanation to all of you. But this is clear evidence that the yield curve is one, not very favorable and two that this not-favorable environment has lasted more than it had lasted in the past.
That’s probably a situation that we see right now in the market may reverse this trend and probably help us, hopefully, next year. Now, I think on page 53, you can see the evolution of the mortgage.
As you know, we have decided to invest heavily in mortgages since 2005 because, first, we believe it's structurally we have a very good product to put in front of our assets and second because it over time, increases the profitability of the business. At the same time, mortgage has a short-term negative impact because as you grow very fast the business, you have also to incur the upfront expense of putting those mortgages on the books.
But we are very confident and willing to continue to develop this business in the future. Page 54, you can see that we have also decided to develop aggressively our payment accounts, because we believe that, over the long-term, this will improve stickiness of our balances.
And, as you can see on the statistics payment… total payment accounts at ING Direct are now about 500,000 which is about double compared to the end of 2006. And we have launched that in 2005, Spain in 2006 in United States and this has been so far a success.
So, I believe very much that we are doing the job and I hope that, you look at our recent investments and you can see that are very disciplined, they are absolutely inline with our strategy and they are absolutely inline what the market can expect in terms of size and sweet spot. I would like also to insist that you might have read in the press release that we are committed also to accelerate investment in ING Direct in the second part of the year.
And we are going to put an additional EUR65 million investment during the second part of year in addition to what was announced previously, so that you can adapt your view on the future profits of ING Direct. Therefore, I would like, just as a conclusion and before we take questions, reiterate the fact that this a record quarter before and after ABN AMRO that we have a strong performance of the underlying business when… particularly when you exclude the noise of the accounting volatility, that we have limited exposure to those markets which are now in the publicity, that we continue to be very disciplined in our execution, very disciplined in our capital management, very disciplined in our strategy and that we are able to provide a good return and growth to our shareholders.
And therefore I think, looking forward, we believe ING proprietary investment portfolio is expected to produce substantial gains in the second half. And we intend also to partially reinvest those capital gains to support further organic growth.
And we believe also the current market have been very recently turbulent, but, however, based on today's market circumstances, we expect no material impact from 2008 earnings and the commercial performance of business remain robust and we confident that ING risk profile and the diversification of our businesses will enable ING to continue to create value for shareholders who are focusing on long-term growth. Thank you very much for having being so patient to listen to this long presentation, but I thought that given the market circumstances, it was useful to talk not only on the execution, but also spend some time on risk management and on reiterate and reconfirm our strategy.
At this point, we are more than happy to respond to all your questions. Question and Answer
Operator
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session.
[Operator Instructions]. The first question comes from Zenon Voyiatzis.
Please state your name and company name followed by your question.
Zenon Voyiatzis - Merrill Lynch
Hi, good morning. It’s Zenon from Merrill Lynch.
I have three quick questions if I may. First one is on loan growth.
In the second quarter, you had very strong acceleration to 6.5% versus 4.8% in the first one. Most of this seems to be in Holland, where risk weighted assets went up by 8%.
I was a little bit surprised by that, given the interest rate environment and comments earlier from ABN AMRO. I just wonder if you can just give us a bit more color what is driving this strong growth and how sustainable it is we were to look India in the second half of the year.
The second question is surprisingly on the sub-prime exposure. Not a big expert on this, but it seems that IKB's travails seems to have been driven by exposure to asset-backed commercial paper conduits where IKB was providing liquidity.
I notice you sponsor $32 billion of such conduits, I just wonder whether firstly, I am right on this and, secondly, whether you reflect this in your numbers you just given us in the 4.4 billion or indeed whether you should reflect it or not. And the third question is fairly quick.
Credit spreads have widened in July by between 10 basis points and 20 basis points. I just wondered and you have fairly big corporate bond portfolio.
So, I just wonder whether you have expect any material impact either on equity or I guess to a lesser extent earnings? Thanks.
Michel J. Tilmant - Chief Executive Officer
Okay. Let me first answer the first question.
The loan growth in the Netherlands has been affected by the transfer of a mortgage book from the Insurance to the Bank to amount of EUR9.4 billion. And this transfer was made because it was more efficient capital vise and ALM wise, asset and liability management wise, to have this portfolio in the Bank rather than the Insurance.
So that's essentially the explanation of the good part of this increase. Koos Timmermans respond to this… the two more… to the other questions.
Koos J.V. Timmermans - Chief Risk Officer
May be go to the second question if we look at our total sub-prime mortgages exposure we gave you outstanding there and that includes indeed we have two conduits in which we warehouse exposures as well. Those ones are included at the moment.
What we get in there is fresh sub-prime exposure, which is rated to the new underwriting standards. So, Peter, if you want to add anything on this.
Peter A.F.W. Elverding - Chairman, Executive Board
Yes. The conduits are being tracked on delinquencies.
It's basically indirect exposure. It's highly rated paper and there is an element of sub-prime in those conduits.
It's not entirely sub-prime exposure and also our exposure in that conduit, but there is an element of sub-primer in the conduits, but the overall amounts are not significant.
Zenon Voyiatzis - Merrill Lynch
Thanks.
Koos J.V. Timmermans - Chief Risk Officer
Okay. Shall we maybe go to the third question, the credit spread widening.
First and foremost let me say that where we are holding bonds, where credit spreads are widening, the two portfolios where that's the biggest is in the insurance company and it's in ING Direct where we hold those portfolios for… by a whole. I mean so credit spread widening, is it for us an opportunity because we can buy at better spread or it is threat, I mean we are not a forced sellers of this type of bonds.
What you do you see at the moment is yes indeed a credit spread widening and at the same time interest rates going down. So, typical example if I look at it over a July then what we have seen in the America, in the mortgage exposures as well ING Direct that there is a netting effect between interest rate going down and credit spread widening which dampens to a very large extent.
Zenon Voyiatzis - Merrill Lynch
Okay. Perfect.
Operator
Thank you. The next question comes from Farooq Hanif.
Please state your name and company name followed by your question.
Farooq Hanif - Morgan Stanley
Hi there. This is Farooq Hanif from Morgan Stanley.
I have got two questions. First about using the realized gains on Numico and ABN in the second half of the year, partially for organic growth, are you set up some of the options for the using your surplus capital.
I was just wondering, near term where you see your priorities? That's sort of question number one.
The question number two is you have continuing impressive mortgage growth. I was wondering what the headwinds were like in the U.S.
at the moment, given the mortgage market there and globally. Thank you.
That's my second question.
Michel J. Tilmant - Chief Executive Officer
Yes. I think that first of all on the capital gains.
I think that as we get those significant capital gains in second quarter, I mean those capital gains will be put, generally speaking in our capital management, systematic approach. So we need to look at those inflows and these excess profits as part of our capital management for this year and next year.
And to be disciplined way where we deployed this, the capital we are getting. So we are not going to change our discipline on that.
On the other hand, I think that… I think those gains this year and probably a lowest to accelerate the process of investing in some areas and the way it is for instance our priorities are essentially to invest, to accelerate the growth in our some business. And to be honest I have asked some of my colleagues to come up with some ideas to increase the commercial impact in some areas.
For instance in ING Direct we have already and we are able to announce that today a program of accelerating the growth by putting an additional EUR65 million of expense in developing payment accounts, in developing mortgages and in developing some U.S. regions by putting more marketing, more branding and more product development.
I think that certainly given the circumstances we have to look at is there a possibility to make some additional investment in infrastructure upfront, so that we can basically improve our future earnings. So, we are looking to various to ways to use largely part of those capital gains, but you can rest assured that we will exercise the same discipline by using those capital gains either to put them in… redeploy them in the JR capital management that we do or to investment I mean additional clear projects to increase our commercial traction and that's what we intent to do.
Farooq Hanif - Morgan Stanley
On the mortgage share.
Michel J. Tilmant - Chief Executive Officer
Yes, the mortgage. Dick Harryvan, our Board member in charge of ING Direct, will respond about the mortgage in ING Direct.
Dick H. Harryvan - Member, Executive Board
Good morning. The question was on mortgage growth in the U.S.
We have seen… we are encouraged actually by a quite strong growth there, not because of relaxing our strict underwriting criteria. As Koos Timmermans mentioned before we have no sub-primer mortgages in the U.S.
market, so the strict underwriting policies there. The average loan to value is 67%.
We are seeing continued strong growth at this point is because our underwriting process is highly automated, making for a very quick turnaround and this something that the mortgage brokers appreciate on lots. So we expect to see continued good development of mortgages in the U.S.
market, no immediate slowdown anticipated. We are only… the question is what kind of mortgages.
We are only in prime mortgages as I mentioned, with a loan to value of 67%. And we are only in the ARM business, so five-year ARMs is the main lets say product that we are selling at this moment.
We may consider introducing a third year mortgage for, which would be securitized into the market, but that something for next year. It's a portfolio well spread over states that we… over states of California being about 40% of the portfolio and the rest spread out over a large number of states.
Farooq Hanif - Morgan Stanley
Very comprehensive. Thank you.
Operator
Thank you. The next question comes from Mr.
Paul Goodhind. Please state your name and the company name followed by your question.
Paul Goodhind - Bear Stearns
Hi. Paul Goodhind with Bear Stearns.
I have three questions on ING Direct please. You give a figure of EUR90 million, which is acquisition and investment in growth.
Could you break that down between the two components of the acquisition cost and I presume you mean that's the losses on the other products. And link to that could you just give the profit for the quarter, break it down by product that you have in the past, so the mortgage profit, saving profit and the other products profit or loss.
And lastly how does the level of savings marketing expenditure compared in Q2, this year with what you spent in Q2 last year? Thanks.
Dick H. Harryvan - Member, Executive Board
Yes. So Paul that's a… and obviously goes a bit further than what we typically disclose on our investments in products.
We did want to get some insight into the investments going into, let's say, the new product lines and geographies as we have announced to become the most preferred consumer bank. We are expanding.
So the EUR66 million that you in mortgages is the operational cost associated with getting it in the books. And this is compared to Q1 some EUR9 million higher.
The payment accounts, there is a very big push on and Michel has referred to that we have more than EUR0.5 million. Payment accounts as we speak, almost a doubling since the end of last year.
The EUR90 million there is again the cost associated with getting it in the books as compares to EUR10 million in the first quarter, so another EUR9 million increase there in terms of borrower cost. So, those first two items are EUR90 million additional investment vis-à-vis Q1 2007.
Finally we have Japan. We are getting very close to launch and expect that second half of this year.
And that quite an organization already up, almost ready to run, as you can imagine the cost of in the second quarter was EUR5 million, which second quarter last year was nil, so of course has an impact vis-à-vis second quarter of last year. Just in a general sense I can say Paul that our shift in emphasis on growth has been as we mentioned very strongly towards the mortgages.
So if you look at the second quarter you see EUR8 billion growth in mortgages, only EUR2 billion growth in on balance savings and EUR1 billion in off balance. So there is a, let's say some compensation in moving marketing dollars from savings to the other product lines and Japan as a new country and U.S.
the new territory as you may be call we have launched in Chicago Atlanta and Miami and just in the past month also in Seattle. So, we continue to expand to national scale in the U.S.
Paul Goodhind - Bear Stearns
Great. I was trying to get a feel just really whether the mortgages were in profit and what that profit was looking like, I guess you have got strong improvement there offset by a more muted performance on the savings side.
So is savings profit standalone stable now or t still going down? I mean obviously, the margin seems to be fairly stable sequentially, but in terms of the operating contribution, is that stable as well?
Dick H. Harryvan - Member, Executive Board
The savings indeed is quite stable, as you mentioned, some mortgages are profitable. We mentioned at the end of last year that it, the business line went into profit.
I would be happy Paul to give you those numbers separately after this meeting.
Michel J. Tilmant - Chief Executive Officer
Or we make them available through the system to everybody.
John C.R. Hele - Chief Financial Officer
Paul, it's John. What we do have happening is less marketing going to the savings as Dick said.
Our operating expenses including marketing year-on-year were up 4% to EUR15 million. And so there is a combination of the higher cost of course of our payments and these other areas and additional cost for mortgages, which do cost us more to process at issue than a savings account does, offset by slightly lower marketing costs overall and in particular from the savings accounts.
Paul Goodhind - Bear Stearns
Thanks.
Operator
[Operator Instructions]. Your next question comes from Mr.
William Elderkin. Please state your name and company name followed by your question.
William Elderkin - Citigroup Investment Research
Good morning everyone. It's William Elderkin from Citi Investment Research.
Just coming back to the sub-prime issue two questions, really. One, can you give us an idea of how liquidity issues in the ABS sub-prime market and any downgrades on higher tranches where you are mostly affected would actually feed through into any impairment decision that you might take?
And secondly, can you give us an idea of how much of the ABS portfolio is represented by, I think, Alt-A mortgages or self-certified mortgages where there have been some concerns as well? And finally and separately, can you give any guidance where you expect the full year Banking risk cost to end up for 2007?
Michel J. Tilmant - Chief Executive Officer
Why don't I first start with the liquidity and the downgrade in the sub-prime portfolio? What you see right now is actually in our total portfolio of sub-prime mortgages, I think we had in total EUR4 million of downgrades.
So if you look at the total categories of which Moody's and S&P downgrade, it's far… it's a lot more, but the tranches which we bought it's EUR4 million. So it's actually relatively low.
If you look at the liquidity aspect, yes, that is what I mentioned already what you do see even in the higher tranches, you do see over the month of July, you will see interest rates moving down by 25 basis points and at the same time credit spread widening and those two affects or largely offsetting and that is what we have witness in our portfolio. If you look at it in terms of impairments that we don't at this moment see any impairment necessary in the portfolio of what we have.
If I then move to the wider section of Alt-A that's a more difficult question to answer in a sense that in the U.S. portfolio on the insurance side we have EUR2.6 billion I believe of mortgage, which are could be rated as Alt-A and on the… if take the ING Direct portfolio there we have in total RMBSs in the order of EUR36 billion, out of which 25 could qualify as Alt-A, but there we have to be very careful in looking at the criteria, because if we… if I would take the criteria that the FICO score should be, of this portfolio in the order of 650 to 700.
And if the loan to value is between 70 and 80 then I only end up with a portfolio of Alt-A of EUR2.3 billion. And so that is… I think the most important message which our Alt-A is that in ING Direct is the largest owner 99.9% that is AAA rated.
And in this portfolio what we have seen again, that is what I reiterate. Over the last month you have seen the spread widening offset by the interest decline there in this portfolio.
And that's a… yes maybe one of the other things to note on that, even spread widening to reiterate we are holding onto this portfolio and we are not forced to liquidate and we don't want to liquidate. And in the end, a spread widening will be good news for us there.
Yes.
William Elderkin - Citigroup Investment Research
I just come back on one point you made. How… in another way how confident are you in the resilience of sub-prime ABS instruments currently rated AAA or AA if within those same instruments, lower tranches have been downgraded?
Koos J.V. Timmermans - Chief Risk Officer
What we do note is, at this moment we know that the system of rating this there is a sort of base default on these tranches and then normally the AAA and AA tranches, they have more collateral in the order of four to five times or three and half times as compared to the base case losses. Now, what really happened in the market is the losses there on the sub-prime, they are more in the order of 7%, which means that your BB tranches on which we own only a small part that is where we do… those tranches could be affected.
But then again that is the very small part on the other one the AAA and the AA, I still think that the distance also collateral, which we own in abundance, as compared to the losses is sufficient at this.
John C.R. Hele - Chief Financial Officer
John Hele. Just in terms of the overall credit losses in the quarter, we had a gross addition to credit losses of 22 basis points for the bank, but then we had a release of 19 basis points for another three.
In the first quarter, we had a gross of 25 and a release of 25. So, for the last six quarters and so, almost seven quarters, we have been averaging between 20 basis points to 25 basis points gross, but had releases.
So, for the first half year, we’re at 1 basis point. We have not seen a turn yet in the gross amount, but we do expect over time that the releases will be less, but exactly when that will occur is often hard to predict.
The economy is still doing well in Europe and there is currently, of course, a sub-prime mortgage area in the U.S. and potential housing slowdown.
But nevertheless the economy still appear to be hanging in there quite well. So, I think we have given the guidance that over time over the coming years we see between 25 basis points to 30 basis points as risk provisions, but we have not yet seen a turn in our portfolio on a gross basis.
William Elderkin - Citigroup Investment Research
Thank you.
Operator
Thank you. The next question comes from Mr.
Ton Gietman. Please state your name and company name followed by your question.
Ton Gietman - Petercam
Good Morning. Ton Gietman with Petercam.
Two questions if I may. First, you are going to sell another amount of shares in ABN AMRO and Numico in the second half EUR2.3 billion receipt.
How are you going to reinvest in equities again or… and if so, is it going to be in the Netherlands? My second question is perhaps it's a bit too early, could you comment on the integration of Postbank and ING Bank in the Netherlands.
Is that progressing, and what are your thoughts on the most likely merger between Fortis bank in the Netherlands and ABN AMRO?
Michel J. Tilmant - Chief Executive Officer
Okay. First of all, on the reinvestment in equities, let me put this way.
I think that, generally speaking, you have seen that our equity portfolio has performed extremely well in the last three years. And that has been a recurrent income over the last few years.
And we feel that it’s important for us to continue to capitalize on our capabilities in that area and therefore for us to have as equity portfolio of growing systematically with the size of ING balance sheet and probably the interest balance sheet is just the right thing to do. At the same time, I am not going to tell you when we are going to reinvest this money.
First of all, we don't have the cash yet. And second, when the cash will be there, we will see where the market is and then you should… you have the overall direction I think the timing of it is something we want to use smartly.
And therefore, there might be period that which we want to be more exposed and the period we want less exposed. It's just happened that by today's spent… by today’s situation.
The equity portfolio is quite large, and Koos just told you that part of it is quite like cash and part of it is hedge, and we feel good that way. I think that in the next coming month, we will continue to manage the portfolio dynamically.
Now second question about is where we are going to invest this equities. We… first of all, we are long-term investors.
So, we are investing there in companies… in strong companies with long-term value. And I think that's… over the long-term what pays off, because you can see that over the long-term the value of strong companies always rebased to their values.
So, that's what we have seen…
Ton Gietman - Petercam
Sorry, are you suggesting that ABN AMRO was a very strong long-term investment for you.
Michel J. Tilmant - Chief Executive Officer
I think that we felt very clearly that ABN AMRO was a very good investment over the long-term, because we would expect that something would happen one way or the other. So, we thought it was a good trade to keep on your book.
So… and I think we were proven right. I think that what we… so, this is the geography of the field of the portfolio.
We have in the past mostly invested in Dutch equities, because we have a very attractive tax incentive to do so, and as you know, the real return on Dutch equities has been extremely attractive over the last few years for us and for our shareholders. As you know, the tax regime is going to change and will open the same criteria for Europe in equities and as we do so there is a likelihood that we will redeploy part of those equities more global… more on the European scene.
But the overall, physiology of buying strong equities stories over the long-term will stay and we will diversify from the Netherlands throughout the world. But we will do that slowly and systematically.
What are the… your questions are, Ton?
Ton Gietman - Petercam
Thank you. Thank you very much.
Michel J. Tilmant - Chief Executive Officer
You asked also another question of Postbank and IBN. I think on Postbank and IBN, I think that we have now 50 work stream working on them.
We have now a structure of… in place. We are going to propose the structure to the work counsel in the next few weeks and the project is on track.
So, there is no delay. And it’s on track in terms of time and it’s on track in terms of budget.
In terms of Fortis and ABN AMRO, Ton, I have taken the clear view that I don’t comment on this, because I think there is enough noise in the market for me to abstain.
Ton Gietman - Petercam
That's it. Okay.
Thank you.
Operator
Thank you. The next question comes from Mr.
Christopher Hitchings. Please state your name and company name followed by your question.
Christopher Hitchings - Keefe Bruyette Woods
Hi. It’s Chris Hitchings here from KBW.
Just a very simple question. How many shares in ABN did you sell in the first half and how do you still retain?
But I can't seem to reconcile what that profit was with what you say is the value of your holding now and what you’re filing… your SEC filing said you are holding was at the start of the year.
John C.R. Hele - Chief Financial Officer
Hi, Chris.
Christopher Hitchings - Keefe Bruyette Woods
Hi.
John C.R. Hele - Chief Financial Officer
We sold 25 million shares to the end of the second quarter, and as at that time, we still had 36 million shares remaining.
Christopher Hitchings - Keefe Bruyette Woods
But your SEC filing said you earned 109 million at the start of the year.
John C.R. Hele - Chief Financial Officer
We also hold…, I have to check on that filing. Don’t recognize the number.
We also hold some for clients as well, which can distort some of the filed figures. I mean we can do it ones on our own account.
Christopher Hitchings - Keefe Bruyette Woods
So, the 25 plus 36 is what you held on your own account?
John C.R. Hele - Chief Financial Officer
Yes.
Christopher Hitchings - Keefe Bruyette Woods
And that is what you say is worth EUR1.3 billion now. That's for EUR36 million in your… in the slide wherever it is.
John C.R. Hele - Chief Financial Officer
Yes.
Christopher Hitchings - Keefe Bruyette Woods
Slide 6. Okay.
Thanks so much.
Operator
Thank you. The last question comes from Sir Nick Holmes.
Please state your name and company name followed by your question.
Nicholas Holmes - Lehman Brothers
Yes. Hi.
Nick Holmes at Lehman. I am asking the last question.
I am surprised at that. Couple of questions.
First one is turning back to your equity gains, I wondered if your new risk model suggests that having such a large equity portfolio which is really in the Dutch Insurance business, isn't it, makes economic sense. And I wonder whether your considering reducing the equity exposure some of your insurance peers doing or planning to do.
Second question is coming back to the Bank bad debt releases. I wondered can you can give us an age profile of the lending book that's generating these releases.
I am just interested for a bit more color on which lending years it is that are mainly generating these releases. Thank you very much.
Koos J.V. Timmermans - Chief Risk Officer
Yes, on the equity portfolio. First of all, if we look at… when we look at the overall risk profile of the group, we clearly at the equity risk profile that is in our business, both in terms of profit at risk and capital at risk.
By the way, we will in the symposium in September we will show further of this declaration so look like. I think that in the years, we have also reduced… in the overall portfolio that we have there, there is a big part in the Dutch equities but in more recently in the last few years, we have shifted parts of the equity exposure to other businesses in the U.S.
and Canada and Japan and Asia. So, why, because some of those countries needed some equities to match some long-term liabilities and they needed to have part of that in their overall local portfolio.
So, we have allowed that to happen at the expense of the Dutch portfolio, but within some limits. I think that the equity portfolio has been extremely profitable as you have seen over the years, the return has been fantastic, I think 3% over benchmark systematically over the last few years.
I think that that’s pretty good investment performance and therefore the overall cash flow for the Company in terms of capital gains has been pretty nice so I think that from that standpoint its hard to say that was not a good thing to add. And I think only those who don’t have these gains just claim that they should reduce them.
So, I think that I heard that … sorry before but I just hear it from the people who don’t have a chance to make this kind of portfolio. So, I think that the only thing you can ask yourselves and I am really going to be very frank on this is that the only thing is it seems that… your question seems to evidence that some people don’t put a lot of PE on and value on this equity capital gains despite the fact that they are coming over the last 11 years on a recurrent basis.
And therefore, that might be the only reason why you might want to shift this portfolio and do something else with the economic capital which is attached with this portfolio. But then you have to make the choice between what is right economically which is to keep that portfolio or what might be right just from a perception standpoint, which might be to shift that exposure somewhere else.
And so far we have chosen for being economically consistent.
Nicholas Holmes - Lehman Brothers
Just following-up on that. I mean, clearly, you have done very well out of this portfolio but I am intrigued as where you see this portfolio within your business because in origin it is within the Dutch insurance business, isn’t it?
Now, do you still see it as integral to insurance or do you see it as really a separately managed equity portfolio?
Michel J. Tilmant - Chief Executive Officer
I think that's a very good question I think that … first of all as I said before we have reallocated part of this portfolio to other business entities we need equities. So, if you would look to the portfolio five years ago, even four years ago it was 100% Dutch and now it is not 100% Dutch, its probably 70% Dutch.
So, we have 30% of equities which are put into various business. Why do we do this?
Because the equity business needs a portfolio to manage their liabilities. So, I think that a very good part of that portfolio is really intrinsic to the asset and liability management of our business unit including Nationale Nederlanden and since Nationale Nederlanden is such a big portfolio of business in the first place… okay and historical back book I mean these equities are part of the ALM of the back book.
No, it is fair to say that a portion of that portfolio could be moved to the corporate level okay because some of our existing business units are over capitalized partly Nationale Nederlanden. And I think that there is a study going on in the Company to look right now about how much capital does Nationale Nederlanden exactly meets therefore what should be the exact ALM and portfolio of Nationale Nederlanden going forward, what is the capital that could be a strength to the group.
And of that capital how much equity should be moved at the group level, but I think that's where we are at this point. And then you could argue that part of that portfolio is a good part of that portfolio, a great majority of that portfolio.
The interesting part about business that there is also a portion that we are managing purely on proprietary basis and that amount can be moved to the corporate level.
Nicholas Holmes - Lehman Brothers
And so, how much would say is managed on a purely proprietary basis? Would it be--?
Michel J. Tilmant - Chief Executive Officer
I think that if you don’t… let me give you a rule of thumb, without that I have a precise number because we are just precisely working on this right now, I would say that the rule of thumb would be that about EUR4 billion are probably the part of the portfolio that would be exclusively on the proprietary basis.
Nicholas Holmes - Lehman Brothers
And would you say that the remainder sort of represents the surplus capital, the investment of the surplus capital from the insurance unit within your risk models. I am just curious to see how this equity exposure fits in?
John C. R. Hele - Chief Financial Officer
Hello Nick, it's John. In terms of the asset allocation, its surplus as well as for a piece of the liability to the asset liability strategies of various businesses.
And so, the allocation that Michel spoke about is this is what we think are needed in the businesses to drive the earnings of the business. And this portfolio has done extremely well, so over the time, there's likely around this EUR4 billion although this number is still under discussion and analysis but we need to tighten down over the coming months.
Nicholas Holmes - Lehman Brothers
Right, thank you very much. And just quickly on the bad debt releases?
Michel J. Tilmant - Chief Executive Officer
Nick, Koos wants to add something on this.
Koos J.V. Timmermans - Chief Risk Officer
Maybe Nick, on this next current year you also asked a question about the history of releases and if we express loan loss or releases in terms of basis point values or so, I think what we can do is give you a bit of a history there on what those releases had been over the past years. Peter, you can fill that in?
Peter A.F.W. Elverding - Chairman, Executive Board
Yes, I can…
Nicholas Holmes - Lehman Brothers
Yes, my question was actually, can you give us the age profile of the lending book that is generating these releases. I am just wondering whether there are some years which are particularly productive, particularly benign in terms of credit experience.
Whether 2003, 2004 or something like that is generating the bulk of your releases.
Peter A.F.W. Elverding - Chairman, Executive Board
The releases… obviously we moved to IFRS in 2005, so there will be a split into specific provisions that we notably find in the wholesale bank and portfolio provisions that you will find in ING Direct and ING Retail. Your inventory of specific provisions in the wholesale bank is basically coming down at a certain moment in time that pot has gone.
That's why John has just indicated that we would return to normalized levels. What we are releasing currently are our older vintages.
We are releasing provisions taken in the Asia crisis but we have been still managing those exposures down. When we sold BHF, we retained a portfolio of bad loans; those are currently being worked out.
So, it's basically releases out of… lets say 1998 till to date, actually, I mean as a certain long-term as an example you could be worried about the U.S. airline industry and then… that basically emerged out of September 11.
But you also have to realize that a lot of our releases are basically provided because of the enormous amount of refinancing that is taking place. So, you are having a loan exposure but it's being refinanced.
And ING at that moment in time could have opted not to take place in that refinancing. So, it's basically a mixture of 1998 till to date.
We are looking at the specific files on basically day-to-day basis
Nicholas Holmes - Lehman Brothers
Okay. Thank you very much indeed.
Operator
Excuse me sir, there are no further questions at this time. Please continue with any other points you wish to raise.
Michel J. Tilmant - Chief Executive Officer
Well, thank you. Thank you very much for joining us today.
And I hope that you will remember for this quarter a very good record quarter in terms of earnings. A record quarter in terms of business performance and also a lot of discipline in risk management, lot of discipline in strategy and a lot of discipline in execution.
Thank you very much. And we will see you later.
Thank you.
Operator
Ladies and gentlemen this concludes the second quarter results and earnings conference call. Thank you for participating you may now disconnect.