May 6, 2011
Executives
Jan Hommen – Chairman and CEO Patrick Flynn – CFO Koos Timmermans – Chief Risk Officer
Analysts
Duncan Russell – JP Morgan Farooq Hanif – Morgan Stanley William Hawkins – KBW Johnny Vo – Goldman Sachs Spencer Horgan – Deutsche Bank Securities William Elderkin – Societe Generale Thomas Nagtegaal - RBS Michael van Wegen – Bank of Amercia/Merrill Lynch Andrew Coombs - Citi Jan Willem Weidema – ABN AMRO Benoit Petrarque – Kepler Capital Markets Andrew Coombs – Citigroup Johnny Vo – Goldman Sachs & Co Dirk Peeters – KBC Securities Farquhar Murray – Autonomous Research Hans Pluijgers – CA Cheuvreux Lemer Salah – SNS Securities Marcus Maldavi [ph] – Morgan Stanley Tony Silverman – Standard & Poor’s Equity Research Francois Boissin – Exane BNP Paribas
Operator
Ladies and gentlemen, thank you for holding. This is Yvonne welcoming you to ING’s Q1 2011 conference call.
Before handing this call over to Mr. Jan Hommen, Chief Executive Officer of ING Group, let me first say that any forward looking statements in today’s comments are subject to a number of current views.
Assumptions and variables include interest rates, foreign exchange rates, inflation rates, movements in security markets include equity markets and underlying economic conditions and changes. They are set out in greater detail in our public filings, which we would urge you to read.
The realization of forward looking statements could be materially altered by unexpected movements in any or all of these and other variables. Good morning, Jan, over to you.
Jan Hommen
Thank you very much, and welcome everyone to the ING conference call on the first quarter results, 2011. I’m happy to report that bank posted another strong quarter.
And that the insurance company showed significant improvements in the first quarter as well. I will talk you through the presentation.
And then afterwards Koos Timmermans, Patrick Flynn and Matt Rider are here with me. And we are all available to answer your questions.
I’m going to page two. The ING Group reported an underlying profits, net profits of $1.492 million in the first quarter, that was up from the $923 million that we had last year.
The bank posted another strong quarter, an underlying result before tax of $1.7 billion. The bank results benefited from a healthy interest margin from higher client balances, lower risk cost, and an improvement in expenses compared to Q4 last year.
Underlying results of the insurance company showed a significant improvement compared to a year ago. They were up 280% from Q1 last year to $461 million.
Insurance result benefited from higher fees, and premium-based revenues and an improvement in the investment margin, and especially also very good cost control. Restructuring of the group is on track.
We continue to work towards the physical separation of the banking and insurance activities. We have already an arms-lenth arrangement with each other that was put in place at the end of last year.
But at the same time, we are laying the foundation for two IPOs, one for the U.S. and one for the European-Asian insurance business.
And then we are looking at the repurchase of the $2 billion of core Tier 1 securities from the Dutch state. We plan to do that next week on May 13.
And we will also pay a premium of $1 billion when we make the $2 billion payments. On page three, you see the results from bank and insurance strong numbers in this quarter.
Significant improvement for the insurance company operating results of $561 million, a 35% increase compared with the first quarter of last year. And the negative impact on non-operating results diminished significantly.
For the group, the net to underlying profits, net profits, of $1.492 million, up significantly compared to a year ago and also the fourtht quarter of last year. And then a net profit of $1.3, $1.4 billion included a negative $111 million for special items primarily related to the restructuring programs and some of the separation costs that we are still having.
Page four, good progress compared to the ambition that we have set for the year 2013. Income growth is supported by healthy margins and higher client balances.
Cost income ratio declined to 55%. Risk costs are trending down to more normalized levels.
And the return on equity at 20.3% that is based on the target of 7.5% core Tier 1. And if you calculated based on current equity on IFRS accounting, then the returns for the bank on equity was 13.7%.
Insurance also good progress on the ambition we set for the year 2013. Investment margin continued to improve following the reinvestments we did last year.
Administrative expenses were down from a peak in the first quarter 2010 led by reductions in the Benelux in the U.S. Ratio of administrative expense improved to 40%.
The first quarter is seasonally low, so the full year number is expected to be below the level of last year, but we will remain focused on the ambition that we have set of 35%. And then a positive return on equity of 6.2%.
Still work here to be done. We still need to do to double-digit levels here, but clearly a good improvement by insurance.
Our separation and investment process is on track. We anticipate that we will spend this year about $200 million in architect costs.
And mainly be using that for replacing temporary solutions for more permanent solutions. In the first quarter, the separation costs were low, only $20 million because of the cost is queued to the second half of the year.
In 2011, the main priority is that we prepare the businesses for the two best cases, two IPOs. And no final decision yet on what we are going to do in Latin America.
We continue to look for the strategic options that we have for that business. And we are taking steps that we can meet the early requirements that we had from the European commission, including the divestment of U.S.
ING Direct and the carve out of the Western Deutsche Bank from our retail operations in the Netherlands. But the overall restructuring is on schedule and we expect that to be completed by the end of 2013.
Page seven, you see what we are doing with the repayment of the Dutch core Tier 1. As said earlier, we plan to repay on May 13, $2 billion of the core tier one plus a premium of $1 billion.
And then the total amount that we will pay so far if you look at all the numbers we have done add to $400 million of interest payment we did in May plus the payments we made earlier, $5 billion plus $600 million premium. Then we will have already paid $9 billion, so we’re very close to the full amount of $10 billion.
And then next year, we expect that we will repay the remainder. The remainder is $3 billion assuming that market circumstances will stay favorable.
In page number eight, you see the second drawings of the state aid will be repaid out of returned earnings. Again, we had a good quarter.
We had a net profit of $1.4 billion. It was basically offset by foreign exchange changes and by revalues of our debt securities.
We ended up as an equity of $40.1 billion. And on the right side, you see what happens when we pay the core Tier 1.
Our ration core Tier 1 ratio will go down to 9.1% on a Performa basis when we do the repayment to the Dutch states. On Page nine, you see the ALT-A market values are recovering.
And the repayments continue and the cash losses remain rather limited. And we have put this in because we have a number of questions from you to help you understanding where we are.
We see that the market value of the portfolio has increased to 66.4% at the end of first quarter. At the same time, the face value of the portfolio that we sold to the Dutch state has declined from $24 billion to $14.3 billion at the end of the first quarter.
And that happened because we had faster repayments and faster pre-payments than we had anticipated in the original plan. Also currency movements have helped here.
The government has used the excess cash that was generated to reduce the receivable that it has from ING. So that has come down from $21.6 billion at the end of 2/08 to $11 billion now at the end of theis quarter.
Let me go to the bank and discuss the numbers of the bank in more detail. On Page 11, you see the good quarter that we had.
And gross results rose by almost 14% compared to a year ago. And increment increase by 8% supported by continued solid interest margin and higher client balances.
Risk costs continued to trend downwards to more normalized level. Mainly driven by improvements in the mid-corporate and the SMB segments in the Benelux.
Underlying results increased to $1.7 billion compared with $1.3 billion in the first quarter of last year. And $1.5 billion in Q4 last year.
Interest result held up well in the first quarter. We’re rising 4.1% compared with the quarter a year ago driven by growth in client balances and interest margins remained very healthy at 144 basis points.
We saw a decline compared with Q4 of 3 basis points. And that was – and general lending held up quite well compared with Q4.
Margins for mortgages and of course savings was somewhat lower especially in the Netherlands where we saw some quite competition. Interest margins in the mid-corporate and SMB segments were flat in the Netherlands, but improved slightly compared to most other countries.
On the volume side, Page 13, net production and residential mortgages was $4.6 billion, slightly lower than the previous quarter and underlying, showed a net increase of $4.9 billion basically driven by growth in structured finance and retail in central Europe. The net production of [inaudible] and [inaudible] at retail banking was $12.5 billion driven by ING Direct.
Commercial banking reported a decline of $12 billion net outflow, but is showing a seasonal effect because always in Q4, you get a little corporate treasurers to work excess cash with the banks and then taking that up again after year end. And that happened again this year.
Same happened in fact the year before. When you look at expense, expenses are up 3.4% compared with a year ago.
But they are down 1.9% compared with last quarter. And you see the underlying cost income ratio down to 55% compared with 57.2% in the previous quarter.
The target still is 50% for 2013. And we are looking to do that with structural improvements.
But at the same time, we want to continue to invest in our business and in the future of our franchise mainly in IT and in operational excellence in the one-bank structure that we have designed. Risk costs gradually declining to more normalized level.
We saw a small uptake in Q4 as a result of modal updates on the mortgage portfolio. But again, risk cost decline in Q1 this year 42 basis points over average risk rated assets.
A very low number of incidents, especially in the mid-corporate segment in retail Benelux. For the quarters ahead, we are seeing risk costs as a percent of risk rated assets that are expected to remain below the average of 2010.
Net performing loans, slight decrease to 2.1%. And we saw that risk costs declined by $83 million.
The decline was mainly visible in mid-corporate in Benelux and retail. And lower risk costs for the Dutch mortgage portfolio after the modal updates that we did in Q4.
And on the right hand side of the slides, you can see that the non-performing loans as a percentage of total loans declined to 2.1%. You see on Page 17, retail banking results increased sharply compared with a year ago.
And also compared with the previous quarter. And underlying result before tax rose to 12.7% compared to the first quarter mainly driven by ING Direct and by retail Netherlands.
Strong performance also from the commercial bank and real estate continued to be profitable. The commercial bank posted the record result in Q1, up 13% compared with a year ago.
And driven especially by lending activities in structured finance and leasing as well as high results in financial markets. But financial markets basically all driven by client relations.
And our real estate business ended the quarter in positive underlying results. And that reflects the ongoing recovery that we are seeing in real estate markets.
Our core Tier 1 ratio strengthened to 10%. We generated $1 billion of core Tier 1 capital as the net profit loss offset by a small increase in risk-rated assets.
The strong capital generation from the bank provides important strategic flexibility as we work towards the repurchasing of the remaining outstanding core Tier 1 securities by the Dutch state. And also in this context, the upcoming regulatory changes in the Basel 3, ING Bank will continue to focus on maintaining a strong capital position.
And then the last slide for the bank, Slide number 20, the loan-to-deposit ratio is 1.06, a good funding mix with little dependence on short-term professional funding. And basically, we have met already at this moment more than our – we have already raised $10 billion so far this year, which is almost all the requirement we have for refunding the outstanding maturities that are coming due this year.
Let’s go to the insurance now, Page 22. Insurance had good results in the year first quarter.
Operating result of $561 million. That was up 35%.
Good growth in sales and assets on the management that drove fees and premium-based revenue higher. Investment margins continued to improve, and gradual reinvestments and higher yielding assets.
The negative impact of non-operating results diminished significantly in both this quarter and last quarter. And the underlying results before tax was up to $461 million.
On Slide 23, you see the spreads had further improved to 95 basis points. That’s an increase of about 19% compared to the year ago quarter mainly due to reinvestment into fixed income securities in the Netherlands and in the U.S.
as well as accretion of assets that were previously impaired in particular in the U.S. When you look in Page 24, you see that on the left side, the fees and premium-based revenues are the greatest contributor to the insurance earnings.
In Q1, that was – they grew by 10.5% compared with the year, same quarter a year ago primarily driven by increases in Asia in IM and in the U.S. And the increase in Asia related to reflective with boost sales coupled with higher renewal premiums.
And at ING IM, fees increased as a result of higher assets on the management. Administrative expenses declined, in fact sharply compared with the last quarter of last year.
And they were up just 0.8% compared with a year ago if you exclude the foreign exchange impact. So good cost containment in particular in the U.S.
and the Benelux as well as non-recurring releases that had an impact of $22 million in particularly related to incentive compensation in the U.S. On the right hand, you see that ratio of administrative expense operating income declined to 40%.
And while the first quarter is always seasonally low, the full-year number is expected to be below the level that we had last year. And we remain focused on moving to that 35% goal that we have set for 2013.
You see on Page 26, the operating results in all the units, and basically doing well everywhere except and Central and the rest of Europe. And there was some pressure there due to the financial institution tax that was set in Hungary as well some regulatory changes that impacted the pension business in Hungary.
Also higher costs that we have to make in order to make ourselves ready for solvency too. And the margins that we had on insurance products were a little bit lower in this area as well.
Page 27, you see the interest rates sensitivities. They have been significantly reduced because we had changes in our hedging strategy for the separate account pension contract in the Netherlands.
The revised hedging strategy reduces earning volatility. But at the same time, offering an equivalent economic hedge.
And we use long-duration government bonds here to replace the interest rate swaps as the strategy to hedge our interest rate risk. Then we see that equity-related earnings sensitivities reflect the direct equity exposure primarily in the Benelux.
And indirect equity exposure that arises primarily from the U.S. DAC and looking and hedging activities.
Effective in the first quarter of 2011 and in line with U.S. peers, we have seen main reversion methodology that will be utilized in determining the short-term equity growth assumptions in U.S.
DAC calculations again reducing the sensitivity to earnings movements in equity markets as we go forward. And in the markets, related impact has been negative in the past years.
However, after the measures that we took in Q4 last year on the U.S. V.A and in Q1 this year on hedging in the Benelux, we believe that the volatility will clearly have diminished.
And that non-operating results going forward could be positively impacted by that. You see sales on Page 28 increased by 11%.
If you eliminate the impact of foreign exchange, then there was 8%. Sales in central and the rest of Europe and Latin America declined compared with the first quarter of last year.
But they were higher in Asia-Pacific in the Benelux and in the U.S. In Latin America, the decline was mainly because we had some lower mandatory pension sales as new regulations led to a reduction in transfer activity.
In fact, that is good news for us because lower transfer activity means more stable levels of income for our business in Mexico. Our capital ratios are solid, good.
The insurance solvency ratio remains stable at 241%. And the RBC ratio improved significantly to 456%.
And that reflects the favorable impact of higher equity markets on the U.S. closed book.
That will do it for now. I would say we are ready to answer your questions.
And we have Patrick, Koos, and Matt here available to do that together with me.
Operator
(Operator Instructions). The first question is from Duncan Russell.
Please go ahead.
Duncan Russell – JP Morgan
Thanks, from JP Morgan. First question is, have you got any update on your ability to call hybrids from these?
Have you been in any discussions with – in that respect? I know you’ve got about 1.2 billion of cash in the holding company and I’m assuming that’s there for that purpose.
Could you just update me on that? And the second thing is, on ING Direct USA, you said you were thinking about transferring the ING within IG Group.
Is there any regulating readings we need to be aware of when doing that? And then secondly, you’re ability to strip out capital from RG Direct USA, are there any regulatory things you need to think about there as well?
Thanks.
Jan Hommen
Okay, on the hybrids, we cannot make any comments. There’s no news on that.
On ING Direct US, okay Koos, you want to take that one?
Koos Timmermans
Yeah, on the [inaudible] side, what we want to do is following, we want to make sure that if something would happen with ING Direct, in case you would come to a sale that you don’t automatically become a forced seller open all day transaction, then we realized that the government does not want to be directly related with a US entity, so simply what we are doing right now is looking at potentially the rehanging Alt-A portfolio outside of ING Direct US into ING Bank NV and continuing the transaction as is. That is our first priority.
Duncan Russell – JP Morgan
And there’s no regulator issues in doing that, the US regulated, you don’t have to do anything to do that?
Koos Timmermans
It depends on the precise way how to structure that. There’s different ways how you can rehang that.
Duncan Russell – JP Morgan
Right. Okay.
And then the capital? Excess capital in ING Direct USA?
Koos Timmermans
Excess capital in ING Direct USA, that is a question that we need to evaluate here as well. It depends on what the transaction will be, that will be done.
So I don’t think we can comment on that at this moment yet.
Duncan Russell – JP Morgan
Okay. Thank you.
Operator
Thank you. The next question is Farooq Hanif.
Please state your company name followed by your question.
Farooq Hanif – Morgan Stanley
Hi. Farooq Hanif with Morgan Stanley.
Actually, I want to follow up on the point that Duncan raised. Firstly, when you say rehang the ALT-A is that as straightforward as basically taking cash from a European balance sheet and putting it in place of the ALT-A in the US?
I mean, would that not actually recognize a loss? That’s question number one.
Question number two is – I mean, I understand obviously that in the US, kind of Quarter 1 ratios that you use, that you see are primarily kind of above the one type of model, would that be a big change if you moved Basel 3 and you looked at the quarter one ratio of the US – ING Direct US in a Basel 3 basis. Would it be sort of actually positive?
And another question is the competition that you’re seeing in the interest margin, is that going to be quite [inaudible] going forward or do you think it’s just a small blip? Those are all my questions.
Thank you.
Jan Hommen
Farooq, maybe on the first one on the all day, what we have right now is ING Direct US owns a government receivable and it owns 20% all day itself. Potentially, what would happen in such a case is that ING Bank would be buying these two assets for cash and it needs to look at financing for this and that financing could potentially also come from ING Direct US.
So I don’t need to do anything with European assets on this. It’s just more focusing on those particular assets on the balance sheet of ING Direct in the US.
But again, there is various options on how we want to do that and that is what we are still exploring. So I don’t have a definitive answer on this.
Farooq Hanif – Morgan Stanley
Okay. On Basel 1, Basel 3?
Jan Hommen
I think if you look at, you know, we have Basel 3 for us, it’s more on a consolidated basis. If you look at our WAs, that is something which you have under US GAAP in the local filing, they look approximately equivalent as what you have seen under IFRS.
Farooq Hanif – Morgan Stanley
So basically the [inaudible] wouldn’t really effect the raito, capital ratio?
Jan Hommen
No.
Farooq Hanif – Morgan Stanley
Okay. In respect to bank interest margin, I presume you’re referring to the overall bank and not just ING Direct US?
Jan Hommen
Yes. That’s right.
The interest margin has come down a little bit and that’s broadly in line with what we said last quarter the interest margin was 147 basis points. We indicated that it would come down a little bit from that and that’s generally what’s happened, it’s come down to 144.
That, in part, reflects some lower demand on increased competition in mid corporates and a little bit of pressure emerging on terms of our mortgage portfolio in the [inaudible]. On the other hand, our specialized finance activities, we’ve had strong production there with good margins.
Perhaps they’re a little bit lower than Q4, but they’re still way ahead of where they were pre-crisis. On the financial markets, well, as you know, we’ve said before it’s volatile, that can be a volatile factor.
Good [inaudible] markers this quarter, which is a typical seasonal effect when corporate treasures get active again. On the liability side, we’re seeing some pressure on savings and deposits and since no client rate increase in Q1 developed.
And as mentioned before, you know, deposit competition in ING Direct countries like Spain yet remain strong. You know, however, overall our margins are strong.
We expect them to decline a small rate but remain elevated as compared to historical levels.
Farooq Hanif – Morgan Stanley
Okay. Can I just come back on one things.
Sorry to take so long. But just of the ALT-A, when you said that you might fund it by a disposal, I mean, the conclusion from that is you wouldn’t have the liquidity to do it without a disposal.
Is that correct? Is that what – in transferring the ALT-A from one balance see to another?
Jan Hommen
Farooq, on this case, if we would have to fund that transaction, I mean, in fact the government receivable is an asset which you should normally be able to fund it because there’s liquidity in a market like this whether it precisely works in the current structure how it is done as a loan or whether you need to change something on that and that that is what we are looking into, but I think we can manage that.
Farooq Hanif – Morgan Stanley
Okay. Thank you very much.
Operator
Thank you. The next question comes from William Hawkins.
Please state your company name followed by your question.
William Hawkins - KBW
Two questions. With regards to the total bank, in the past you’ve given guidance to the potential Basel 3 impact on the Quarter 1 ratio.
Forgive me, I haven’t seen that in this. Could you maybe give us an update?
So I’m seeing the 10% Quarter 1, I know that you say that comes down 95 basis points post the final repayment to the Dutch state. But what would the pro forma impact be of Basel 3?
I think the last number was a count of 75 basis points. If you could update?
And then secondly, in the insurance business on Slide 26, strong operating result in the Benelux division. There’s clearly ongoing regulatory pressure around specific products that may be broadening, so why the regulatory pressure on profitability in Dutch insurance?
Can you just give us sort of some kind of updates of what the potential costs of regulation in the Dutch life insurance market could be and whether you view this becoming a systemic issue or just something you have to deal with on the front?
Jan Hommen
Maybe William, first it’s close on the Basel 3 effect, what we have stated, we have a Quarter 1 ratio of 7% right now. What we have done in the past, you refer to a 70-basis point decline, which under Basel 3 that is what we have said in the past and we have given an update and that was at the investor conference later on, that it was somewhere around 130.
Let me make a few points on this. First one is what we did at that time when we defined it, is we said like, if we implement it as off now.
And as off now means no catching up of BTAs, no future profitability and we are defending a bit on the revaluation reserve and whether that will be basically neutralized through IRF9. So there’s plenty of uncertainties under there and that makes a big impact.
Overall, we feel that the way how our core Tier 1 is developing is very favorable and we feel in that sense good. This bulk of debt is something which we don’t want to give every quarter.
Nevertheless, you can calculate it yourself easily because maybe the changing particle is both our profitability because that’s a plus and you have a revaluation reserve, which is a plus or a minus depending on whether the interest rates go down or up. But overall, I think we have relatively comfortable starting position on Basel 3.
Matt Rider
And maybe on the regulatory developments in the Netherlands, I think they’re probably two important ones. The first is a requirement by the end of 2012 to go to a unisex pricing for all insurance contracts.
Our reading of it right is that it would apply only to new contracts, but that’s unclear at this moment. It will probably have operational implications but not so much profitability implications, especially if it’s going forward in pricing.
The second one relates to discussions that have been going on, especially in the press and in the parliament around this so called [Inaudible] contracts. Now, you may recall back in [inaudible], ING had reached an agreement with various consumer organizations to compensate contract holders and we had established provisions of something like 365 million EUR up through that time.
And we thought that that agreement had been – that that was done. It is now a big reopened in parliament and now it goes to the Minister of Finance, who has asked for a study to be done on the various arrangements that individual insurance companies have done to compensate these claims.
So I think it’s a little bit too early to talk about what the potential impact of that might be. This will be an ongoing discussion within the industry within the Netherlands.
William Hawkins - KBW
My overall question is do you judge by systemic risks to the sustainable profitability that you’re reporting to the operating result or is it something that work to and reprice for?
Matt Rider
With respect to the [inaudible]?
William Hawkins - KBW
Yeah.
Matt Rider
Yeah, it would be a one-time event.
William Hawkins - KBW
Thank you.
Operator
Thank you. The next question is from Johnny Vo.
Please state your company name followed by your questions.
Johnny Vo – Goldman Sachs
Hi. It’s Johnny from Goldman Sachs.
The question is, can you give us an update on the EC Appeal that you’ve put in motion? That’s the first question.
The second question is just in terms of your, your business sales on the insurance side, you seem to be growing quite effectively and in particular, the US seems to be showing some growth. Can you just talk about the growth that you’re seeing in the US, insurance side?
Thanks.
Jan Hommen
Okay, Johnny. On the EC Appeal, we have been notified but we have read it ourselves and that the European Court plans to have all hearings in July of this year.
We don’t know anything more than that. We don’t know who will be requested to appear.
So we have no further information on that, just that there will be oral hearings in July.
Johnny Vo – Goldman Sachs
Okay.
Jan Hommen
And that’s all.
Matt Rider
Yeah, with respect to the sales in the US, yeah, I think the sales are actually quite encouraging. You’re seeing some very nice upticks in the retirement services business and the individual life side seems to be doing extremely well, up 43% in terms of application volumes over the first quarter of last year.
So we’re seeing it pretty much in all segments, actually quite a good performance.
Johnny Vo – Goldman Sachs
All right. Thanks very much.
Operator
Thank you. The next question is from Spencer Horgan.
Please state your company name followed by your question.
Spencer Horgan – Deutsche Bank
Thank you very much. Good morning.
It’s Spencer Horgan from Deutsche Bank. Can I just ask two small questions back on the topic of the Quarter 1 ratio.
Firstly, when the 130 basis points impacted as you mentioned before, can you remind me how much of that relates to deferred tax. And if the profitability of the bank were to stay at current levels, for example, how long would that take in effect to unwind?
And the second piece is, you talked about sort of the bank folks are having strong capital ratios. You seem to have changed your view on where the Quarter 1 ratios should be conceptually in the future.
Maybe you can give us your thoughts on that. Thank you.
Koos Timmermans
Maybe, Spencer, let me otherwise quickly update you on the Quarter 1 ratio, had 130. Again, the one thing I want to remind there, the deduction there was based on both DTAs as well as the fact that we have IRF9.
So there were various impacts If you look at the DTAs, it was approximately 40 basis points. So normally, what you would expect, if you take 40 basis points and then we are now calculating out loud a little bit, 40 basis points is little in excess of a billion, so you know our run rate profits.
So that is something which you should be able to catch up in the reasonable time.
Spencer Horgan – Deutsche Bank
That makes sense. And in terms of the target to the Quarter 1 prospectively?
Koos Timmersmans
Yes. Maybe on the target, the point is we are comfortable where we are right now, clearly because otherwise we wouldn’t be making our repayment to the state.
But giving a final target is a difficult one because we also have to look at the regulators and it does not make a lot of sense at the moment to make a target. We want to keep it in line with the major banks and the major deposit-taking banks.
But at the same time, we also have to recognize that regulators have not given their final target yet. So rather than giving two updates, we want to do that just one more time after debt fueled is s but more stabilized as well.
Spencer Horgan – Deutsche Bank
Okay. And have you got any expectations as to when that might be or what the new music from the regulators is?
Jan Hommen
Spencer, we had been in touch, as Koos was saying, with all the regulators. The deal was this topic and in fact we participate heavily in the discursions there.
I would say that we expect more clarity as some time in the middle of the year. And that final decisions will be made by the end of the year when the get together at the G20.
I believe the G20 ultimately will make that decision.
Spencer Horgan – Deutsche Bank
Okay, great. Thanks very much.
Operator
Thank you. The next question is from William Elderkin.
Please state your company name and your question.
William Elderkin – Societe Generale
Good morning, everyone. It’s William Elderkin from Societe Generale.
Three questions please. First of all in terms of the new business sales, can you just give us a sense of how the margins on those new sales are developing, you know, just in the course of sense.
Secondly, you can reach rates at 50%, costing can raise your targets in the bank. Given the comments you’ve made in terms of the likely trend of net interest margin, can you give us – or remind us again what kind of assumptions you’re making in terms of absolute revenue and cost grades from here?
And then finally, can you give us an update in terms of how discussions in respect to the mass American insurance business are developing, particularly in terms of any potential trade buyers?
Matt Rider
On the sales and our margins, in general these – they’re actually either staying stable in some areas or improving. It’s generally an upwards tend.
Koos Timmermans
On the cost income ratio target for the bank, yes, we’re keeping the target at 50%. It did come down from 57 to 55 in the first quarter.
Getting it to 50% is going to require focusing on structure improvements and those include things like procurement, professionalizing our procurement process. It also includes the transformation programs we have in the Benelux, and IT programs which are designed to eliminate complexity.
So this is structural work, which will take time to deliver. In addition, we also have to invest and will invest in the business and continue to build the franchise and invest in marketing.
So this will be a long-term process of taking our structural costs over time.
Jan Hommen
Let me add to that that we want to make sure that we continue to have, you know, we’re not running the business for the next week or the next quarter. We’re running the business for the long term.
We want to make this a very sound, very professional loan bank that has very local, but at the same time has fantastic systems that can stand the test of time. We want to build an excellent operational performance system.
And so we will continue to make investments when we need it. This is something fundamental because I believe that once you do that that you will create savings themselves that allow you to make the professional investments that are needed to constantly upgrade your business.
So cost reductions, yes, but also upgrading our business and making the performance for our clients much more acceptable and much more attractive.
William Elderkin – Societe Generale
Any updates on the Latin-American prices?
Jan Hommen
Latin-America, we are at this moment still where we thought we would be in our plan. We are reviewing our options, the strategic options we have and I would expect sometime later this year that we can give you an update what that would mean.
No decisions have been made yet.
William Elderkin – Societe Generale
Okay. Thank you.
Operator
Thank you. The next question is from Thomas Nagtegaal.
Please state your company name and your questions.
Thomas Nagtegaal - RBS
Good morning, gentlemen. Thomas Nagtegaal, RBS.
I have two questions. First of all, you again had some [inaudible] growth migration effect on your risk credit.
That’s in Q1. What do you expect there for the remainder of the year.
And second, coming back to Basel 3, I know that the negative impacts for you is relatively limited. Do you still see any potential additional mitigation, what you can do going forward?
Thanks.
Jan Hommen
Thomas, two points. If we look at the credit migration, yes we have seen a slight positive migration in the first quarter.
What we would expect actually over the next quarters is on some level of dates, a slightly negative development there. I mean, we’re not talking about big numbers, but you know, I don’t expect the same level of migration positive as what we had in Q1.
So a slightly negative number there, but not big numbers. If you look at the Basel 3 negative impact and mitigation, let’s take the starting point.
The starting point is we are at a core Tier 1 of 10 right now and after repayment of the state it will be nine. That 9% is well above the minimum 7 as we know it right now.
So I think we don’t need to do a lot of mitigation. I mean, if you look at us right now, we are making a decent profit.
We have a decent capital number, so mitigation is not something I’m looking forward – or looking forward to at the moment.
Thomas Nagtegaal - RBS
That’s very clear. Thanks.
Operator
Thank you. The next question is from Michael van Wegen.
Please go ahead with your question.
Michael van Wegen – Bank of Amercia/Merrill Lynch
Yes. Good morning.
It’s Mike from Bank of America/Merrill Lynch. One question please.
You talked about your conversations with regulators with regard to the future levels of core Tier 1. Can you update us maybe specifically on what – how you see the Dutch central bank developing currently, it’s way of thinking with regards to the implementation of SIFI and potentially any additional buffers on top of that You just talked about 7% as an minimum and you feel comfortable with 9, but what are you getting back from your main regulator on this topic?
Jan Hommen
Well, we have discussions with them on a regular basis. I think we see quite – let’s say on the one hand – modest, but on the other hands quite a strong relationship where we see them not going to the extreme, but somewhere in the middle of the pack I would say.
Michael van Wegen – Bank of Amercia/Merrill Lynch
Okay. Thank you.
Operator
Thank you. The next question is from Andrew Coombs.
Please state your company name followed by your question.
Andrew Coombs - Citi
Good morning. It’s Andrew Coombs from Citi Group.
I have two questions, please. Firstly, just coming back to ING Direct USA.
You talk about having the right structure in place to transfer the ALT-A assets. I was just wondering if you could give us a feel for how long the timeline might be in order to get that right structure in place?
And also therefore, what the implications are for [inaudible] Direct USA, should we be thinking of that more as a 2011 or 2012 event? My second question just comes on the financial market’s division within the bank.
If I look at your 2010 pre-tax profit numbers, I think 41% of the pre-tax profit came in the first quarter in that division. Do you think this year was just similar levels seasonality or do you think it’s more likely to be less pronounced, say perhaps close to 30% for example being booked in the first quarter this year?
Thank you.
Jan Hommen
The process we are following is a very diligent one. We earlier indicated that we would wait as long as possible.
We have now decided that we are going to canvas the options earlier because of the complexity of this transaction potentially. If you do the unwinding of the ALT-A or you need to restructure that together with governments, that will take some time.
So we are reviewing all the options we have including what we can do with the ALT-A. I cannot make a prediction.
I think it’s quite unlikely that it will happen to be a deal this year. I cannot rule it out, but it’s more likely 2012 in my opinion.
But still, it all depends on how quickly that you come to agreements on these, again, very complex type of searches that we need to resolve. With respect to the financial market division, yeah, they do quite well, always in Q1 because a lot of customers do their business in Q1 when they do their hedging and they’re looking at the exposures that they have.
So Q1 is always the big development, this year the same as last year. Always very difficult to say, but I cannot give a good prediction of what that will be.
But maybe if you look at what they have done in the past, I must say, they did – this division, this unit has performed extremely well in the last three years and never lost anything in any quarter. So quite a good performance there.
Andrew Coombs - Citi
Thank you very much.
Operator
Thank you. The next questions is from Jan Willem Weidema.
Please state your company name and your questions.
Jan Willem Weidema – ABN AMRO
Good morning. Jan Weidema, ABN AMRO.
I have two questions. The sales insurance in Benelux are higher.
Could you give us how much of that is from renewals and how much is especially from a new benching contracts? And ING Direct US, Q on Q, had online results down quite a bit, could you help me, what are these except for exchange rate exchanges?
Matt Rider
So on sales in the Benelux, you rightfully picked up – the sales are definitely up largely due to renewals of group pension contracts, but also due to new sales of group pension contracts. I don’t have a specific split, but I think we can get that data for you later.
Koos Timmermans
On ING Direct US, yeah, we had a model update in our loan loss provisions, which gave it a one-time and a step up in loan loss provisions this quarter, which is a primary reason they’re lower PDT as compared to Q4.
Jan Willem Weidema – ABN AMRO
Okay. Thank you.
Operator
Thank you. The next question is from Benoit Petrarque.
Please state your name followed by your question.
Benoit Petrarque – Kepler Capital Markets
Good morning. Benoit Petrarque, from Kepler Amsterdam.
A couple of questions. The first one is on the ING Direct, ING Direct US.
You have [inaudible] to the business for just 30 billion of risk covered assets. So I was wondering, could you give us detail in terms of whether you leverage the bank holding, i.e.
follow [inaudible] to ING Direct US is not – call it [inaudible] but it might also be debt holding – bank debt holding. Can you just clarify that?
Could you also give us a bit of more details on the funding structure of [inaudible]? I know you have been [inaudible].
Does that bring savings and do you improve the balance sheet? Did you improve the balance last quarter?
Also, on the DTA, I see the DTA and the report of the bank stable in 2010 versus 2009. I see the DTA down sharply in the US, which makes sense because of the reach of the US operation.
But it look s like you have new DTA in other jurisdiction. So can you clarify that?
And do you still think the DTA can come further in the coming years? And then can you remember us what is the risk core assets riding on the upward please.
Thank you.
Jan Hommen
Well, in respect to the Westland ING Direct, we are trying to build that franchise and improve the ability to write local deposits or else supporting the business in terms of its ability to start to think about issuing long-term debt to support it. Building the deposit franchise will take some time, but it’s a step in the right direction.
In term so of the overall DTAs, there’re, particularly in the respect of DTAs on the [inaudible] they are coming down to less than a billion. And as referred to in an earlier question, you know, given the – if current profitability picks up, you know, they’ll come down reasonably rapidly.
I don’t have a breakdown to handle country by country. I’ve given that before.
Koos Timmermans
Yeah, with regards to risk weighted assets, Benoit, I don’t have a breakdown of risk rated assets for individual titles, categories like [inaudible]. So that is not the type of breakdown I have available for you.
Benoit Petrarque – Kepler Capital Markets
On ING Direct, you have a big amount of [inaudible] allocated to the US for a relatively small amount of risk core assets to the business. So I was wondering if you have debt leverage at bank-holding level which you infected as liquidity in the US subsidiary because this could be, you know, relevant in [inaudible] them in the excess capital you have in your business?
Jan Hommen
They don’t own that. You are right.
I mean, what you have, and you can see in the local files, you have an operating company and a holding company involved in the operating company your total equity is higher. That’s approximately 8 billion and in the holding company there are some leverage above it.
The reason why this is done this way is that the U.S. is also still run on a Basel 1 type of metric rather than on a Basel 2.
So the difference is what you see in that holding.
Benoit Petrarque – Kepler Capital Markets
All right, thanks.
Operator
Thank you, the next question is from Farquhar Murray. Please state your company name followed by your question.
Farquhar Murray – Autonomous Research
Good morning, it’s Farquhar Murray, Autonomous Research. Just one quick question for me, really a follow-up on ING Direct U.S.
Are there actually any tech class implications from either a disposal of that business or a shift in the [inaudible] farrior. And I don’t know whether – I know you said that you don’t have the detail breakdown by country, by might you just have the one for the U.S.
by chance? Thanks.
Jan Hommen
I didn’t catch the first part of your question. Could you repeat it?
Sorry about that. Can you hear better now?
Can you hear better now?
Farquhar Murray – Autonomous Research
Yes. Okay, just a final follow-up on ING Direct U.S.
I was just wondering, are there any actual tax asset implications from a disposal of ING Direct U.S. or indeed a shift in the old tape portfolio?
And I know you said you aren’t giving the details by country, but I just wondered where you might have the U.S. in Direct One by chance.
Jan Hommen
I mean in theory, there is Section 382 when you dispose can give rise to potential haircuts for the acquire on DTAs. After you meet certain thresholds on change of ownership clauses.
But at this juncture, we’re not in a position to confirm whether that would be the case or not. And I don’t happen to have the breakout from the U.S.
Farquhar Murray – Autonomous Research
Okay, thanks.
Operator
Thank you, the next question is from Hans Pluijgers. Please state your company name followed by your question.
Hans Pluijgers – CA Cheuvreux
Yes, good morning, Hans Pluijers, CA Cheuvreux. Three questions if I may.
First of all, looking at the insurance side of the cost was quite strong, 40% expense/income ratio. Could you talk us through what you expect to change for the coming quarters and what measures still you’re taking to reduce cost there.
Secondly on the [inaudible] sheet, 241 and stable against compared to the end of last year is partly in the increase in the interest rate, could you give some indication how the sensitivity of the solvency is compared to changes in interest currently? And lastly, on ING Direct, are you still looking or more into ING Direct and the strategic review on what the total business could be for the future.
Do you see more assets as offending company for other parts of the business? And do you potentially strive for excess deposits at ING Direct, especially the Benelux operations or do you believe that you see some part of the operations, but still do not have the good profile going forwards to remain in the company?
I’m more referring to of course Australia, which has been ruined that you’re looking at. Could you a little bit give some more feeling on how you see ING Direct within the group?
Jan Hommen
Let me deal with the last one and then Matt will deal with the insurance questions. We see ING Direct as a very important vehicle in the future of our bank.
And why, because we do have the ability to as a universal bank use the assets or the liability generating capability of ING Direct. And combine that with the strong capability we have on the commercial bank side to generate assets.
That will create a very powerful combination. We can do that in different countries in different regions.
We are not doing that in the U.S. for a number of reasons, but we are doing that in other places where we can.
And so we see that as a very important part of our business. And rumors, normally we don’t comment on rumors because we make a day job out of that.
But in this case, I will say, ING Direct Australia is not for sale. And Matt, can you deal with the other topics?
Matt Rider
Yes, so with respect to the sort of the cost/income ratio for the insurance and investment manager, we saw that come down to 40% in the first quarter. And that’s obviously a very good number against our overall target of 35%.
However, important to note that the first quarter is generally seasonally a little bit low. We generally see lower expenses in the first quarter.
Also, I think Jan had mentioned in his opening remarks that there were some provision releases for us for some incentive compensations. So that drove the number down maybe a little bit, maybe by a percentage point or so.
We would expect this number for the balance of the year to go up slightly. We still have some measures that we intend to take as a management team.
But for the balance of the year, we would expect to see it somewhat below the level of the full year last year. Now your other question was with respect to the solvency one IGD ratio.
We had seen it stable from the fourth quarter. It’s actually not a number that incredibly sensitive to interest rates.
And you can see that over the past several years, this thing has been extremely stable, something between 240% and 260%. So increasingly, we’re going to be looking obviously as the rest of the industry at more solvency T-type measures, but that’s to come.
Hans Pluijgers – CA Cheuvreux
Okay, thank you.
Operator
Thank you, the next question is from Lemer Salah. Please state your company name followed by your question.
Lemer Salah – SNS Securities
Good morning gentlemen. Lemer Salah from SNS Securities.
I have two questions. First of all, can you elaborate a bit on the timing of the Latin American insurance disposal.
I mean the timing at this moment is really beneficial for financials. And taking into account that you have to do two IPOs in 2012, would it be more beneficial for you to do a trade sale or another divestment structure for the Latin American insurance division in 2011?
That’s my first question. My second question is, I missed in your presentation the net stable funding ratio and the liquidity coverage ratio at this moment for ING.
Do you have the numbers in front of you? Can you share it with us?
Jan Hommen
Okay, Lemer, let me deal with the first question and Koos will take the second one. Timing for Latin, we are doing our strategic review for Latin.
And we are very progressing staying very well. I realize together issue that we see a good market.
And so we are completing that review with some urgency here as well. But we take a time.
We need to do it right. We need to do our processes in a diligent way.
And that will happen. I cannot make any further comment, but I promised earlier that as soon as we have made our decision, you will know as the first one.
And that means U.S. collectively you.
Lemer Salah – SNS Securities
Wonderful.
Koos Timmermans
Lemer, on the energy in the LCR, indeed we didn’t give an update. And that is for two reasons.
One, there is not a material change in that. As you know, we have a long to deposit ration one of six.
And our liquidity coverage ratio was around the 90’s. And we have not seen a material change.
If you look at the net stable earnings ratio, I think for me it makes not a lot of sense to update all the time on this. This is an implementation 2018.
And so therefore, we want to ask that, yes, we need to be proactive in reporting, but this is a 2018 measure. So it’s a bit far away.
And therefore, from time to time we give an update if we have significant changes.
Lemer Salah – SNS Securities
At least I have your answers. Thank you very much.
Operator
Thank you, the next question is from Marcus Maldavi [ph]. Please state your company name followed by your question.
Marcus Maldavi [ph] – Morgan Stanley
Good morning, it’s Marcus Maldavi here from Morgan Stanley. My first question please is on the pace of the appeal to the EC.
If you’ll still dispute with the EC come May next year, would that impact your decision to press ahead with paying the remaining state aid to the Dutch state? My second question is unfortunately around hybrid cars I’m afraid.
If ultimately you do push on the repayment of that remaining billion, but you’re still in dispute around the premium paid on the first trance, would that in your opinion impact your ability or prevent you from calling hybrids? And then finally, a very specific one.
We all see there’s a hybrid call in the insurance business coming up very shortly. You were given some very clear guidance of significance previous hybrid calls.
Do you expect that the EC might change their view on allowing you to call that bond given IPO prospects for the insurance operations? Thank you.
Jan Hommen
Mark, we are on the appeal. It’s very difficult to make any comments on the appeal.
We don’t know what the end result will be. We are not speculating on what it might be.
I think it’s not what we are doing here. I cannot tell you what that might do.
I can only say that we will do our best when we are called, but no more than that. With the hybrids and then the second question related to if we are still arguing the premium.
Again here, I cannot speculate on that. In fact, we cannot make any comments whatsoever with respect to hybrids because we each time have to request whether we can do so by the European commission.
And they basically determine whether we can or not. So I cannot make any comments on this.
Marcus Maldavi [ph] – Morgan Stanley
But can I just go back to your statement you make in the report around your target of repaying state support by May, 2012. What are you thinking around the dispute when setting out that target?
Jan Hommen
Well, the target is to repay the core tier one, to buy back the core tier one securities. And we will have to do what we have to do when we know what the rules are at that time.
I cannot predict what they are. The worst thing that we can do is plan for the worst, which is we assume that we have to pay a 50% premium.
But we cannot say anything else on that.
Marcus Maldavi [ph] – Morgan Stanley
Okay, thank you very much.
Operator
Thank you, the next question is from Tony Silverman. Please state your company name followed by your question.
Tony Silverman – Standard & Poor’s Equity Research
It’s Tony Silverman from Standard & Poor’s Equity Research. It’s just a question about the profitability of ING Direct in the U.S.
As you’ve mentioned, you’re progressing the sale. And I may have missed it here, but I don’t see a sort of line or column for ING Direct in the U.S.
specifically. Wonder what you can say about its profitability and the capital that any profitability number is based on.
Thank you.
Jan Hommen
Well, you know it’s a little separate segment in our results compared within ING Direct itself although we do give some data in the statistical supplement on the profitability of PBT. Therefore, it stands alone.
I mean as I said earlier, it did come down as compared to the fourth quarter, which was due to a one-time update to the total loss we modeled.
Tony Silverman – Standard & Poor’s Equity Research
And what would the – when you’re looking at the profitability, what is the NAV of it? Just looking at the statistical supplements, I don’t see a column for ING Direct in the U.S.
Jan Hommen
It’s there and perhaps we can help you after the call. We’ll point you directly to it.
Tony Silverman – Standard & Poor’s Equity Research
Yeah, the ING Direct column obviously. Okay, I’ll do it offline.
Thank you.
Operator
Thank you, the next question is from Francios Boissin. Please state your company name followed by your question.
Francois Boissin – Exane BNP Paribas
Yes, good morning gentlemen. Francois Boissin from Exand BNP Paribas.
Two questions on my side. The first one is related to [inaudible].
Basically, what kind of timeframe are you looking at on that? And basically if you had the choice, would you be happier keeping these assets or basically are you happy to sell it?
Second question is with regard to ING Direct. You mentioned that clearly balance sheet integration is a key issue for ING Direct.
I was just wondering to what extent this applies to various geographies, i.e., if it’s just a European matter or does this entail Canada and Australia as well. Thank you.
Koos Timmermans
Maybe Francois, it’s Koos. Let me start on the ING Direct.
I think the easiest integration for us indeed is in Europe. And that is what you see is also in this quarter.
We did $2 billion more of balance sheet integration, so that is something which is happening. I think the other parts are less significant in order to do that.
I meant there is limited Australian auctions because balance sheet integration simply means if we have an access of savings in ING Direct and we can connect that to other assets, which we are funding externally in the market. But the biggest opportunity is clearly in Europe.
You are right on that.
Francois Boissin – Exane BNP Paribas
Okay, so I mean, as a follow-up question is, would at some point in time reconsider your exposures elsewhere than Europe or ING Direct as a total?
Jan Hommen
No, I think ING Direct is a very important franchise for us. And it has done extremely well.
But looking at – and it’s still a growth opportunity that we have with ING Direct. I think we want to look through that very carefully.
And as I said earlier, at this moment, we’re very happy with the business. We’re still growing the business and it is doing extremely well.
So there’s no need to making any change here.
Francois Boissin – Exane BNP Paribas
Okay. Thank you.
And Basel 3?
Jan Hommen
Yeah, we are. Of course we have carved out the business.
It is standalone, it is running basically on itself. The only relation we have is the funding is still being done by ING and they are actively pursuing new opportunities to fund themselves as you can see in the marketplace here in the Netherlands.
The timing of that is still open. We’d like to do it, of course when we can, but we need to have further right type of counter parties to execute a transaction here.
And we have not found them yet.
Francois Boissin – Exane BNP Paribas
Okay, and I guess, if you were – if you were unable to find a good client for that, would you come back to the [inaudible] rights, funding is just too important, keeping the asset makes more sense for us?
Jan Hommen
Yeah. We are not starting on that premise.
I think we are still starting on the premise that we need to do what we have been told by the European Commission, that we signed an agreement in November 2009 and we are going further on that premise. So we’re not looking at maintaining that in house.
Francois Boissin – Exane BNP Paribas
Okay. Thank you very much.
Operator
Thank you. (Operator Instructions).
There appear to be no further – I beg your pardon. We have a question from Dirk Peeters.
Please go ahead with your question.
Dirk Peeters – KBC Securities
Hi. It’s Dirk Peeters from KBC Securities.
I have two small questions. Your currently in the litigation with Europe regarding the condition of state aid and the pricing restrictions and so on.
But at the same time you haven’t paid dividends for two years. Now, I’ve seen [inaudible] that triggers a notification report, which in turn could trigger some [inaudible] and so from the European Commission.
I just wanted to check that if you win the case would you, in the summertime, [inaudible] linked to the fact that you don’t pay any dividends. And then secondly, when I look at Basel 3, and the slide you showed with the assumption that you have 113 basis points impact.
You mentioned that you don’t know yet whether you’d be considered in the as a system bank where I think most investors do believe that you will be considered a [inaudible] bank. But when I look at the print I have the impression that the Dutch government wants to speed up this process after introduction of Basel 3.
And then I would like to know what this could mean for you if you’re considering a system bank and you need 1 or 2% more solvency capital?
Jan Hommen
Okay, with respect to the renotification, we have no paid dividends, but we are repaying the Dutch states and we’re paying that with a big premium. So I think we need to wait what that means and I cannot really anticipate on whatever can happen in the court case.
It’s too complex and we don’t want to speculate on that. With respect to Basel 3 I know that the regulators are looking to make some implementations, but at the same time I think there is also good coordination between the other regulators.
This is with respect to the implementation of Basel 3. So are we a [inaudible] as of now?
We don’t know yet. The regulators will determine that and if we are a [inaudible], yes we may need additional capital But we will only know that by the time that we have been notified and that we know exactly what type of [inaudible] we are.
Dirk Peeters – KBC Securities
Okay. Thank you.
Operator
Thank you. There are no further questions.
Jan Hommen
Okay. Let me thank you very much for participating in the call.
I wish you a very good day. Thank you, again.
Bye, bye.
Operator
Thank you, sir. Thank you, ladies and gentlemen.
This does conclude today’s presentation. Thank you for participating.
You may now disconnect.