Feb 9, 2012
Executives
Jan Hommen – Chairman and CEO Mike Smith – CEO, U.S. Annuity Business Patrick Flynn – CFO Matt Rider – CFO, Insurance EurAsia Business
Analysts
Andrew Coombs – Citigroup Farquhar Murray – Autonomous Research Farooq Hanif – Morgan Stanley Richard Burden – Credit Suisse Lemer Salah – SNS Securities William Hawkins – KBW Francois Boissin – Exane BNP Paribas Marcus Rivaldi – Morgan Stanley Hans Pluijgers – CA Cheuvreux Tony Silverman – Standard and Poor's Equity Research Francesca Tondi [ph] – Morgan Stanley Kiri Vijayarajah – Barclays Capital
Operator
Thank you for holding, ladies and gentlemen. Good morning.
This is Carol welcoming you to the ING’s Q4 2011 conference call. Before handing this conference call over to Jan Hommen, Chief Executive Officer of ING Group, let me first say that today’s comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact.
Actual results may differ materially from those projected in any forward-looking statements. A discussion of factors that may cause actual results to differ from those and any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today.
Furthermore, nothing in today’s comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Jan.
Over to you, sir.
Jan Hommen
Good morning. Thank you.
Welcome, everyone, to the ING 2011 results conference. The first quarter was a challenging period.
We have very volatile markets and we saw a deepening of the crisis in Europe. And in this uncertain environment, our first priorities were to protect our capital and to make sure that we further de-risk the organization.
The impact of hedging and de-risking and further impairments on our Greek government bonds took a toll of the results of Q4. Nonetheless, we were able to end the year with underlying profits of €3.675 billion, which was up 15% compared to 2010.
I planned to talk you through the presentation. At the end we have Mike Smith, our CEO of the US Annuity business here.
He will give you some more detail on the assumption of that, that we pre-announced in December. And the last, Patrick Flynn, our CFO; Wilfred Nagel, our CRO; and Matt Rider, the CFO of the Insurance EurAsia business, are here.
They’re here to visit us, and we are available to answer your questions. So let’s begin this slide number two.
The underlying profits, up 15% from a year earlier, but Q4, they had a loss of €516 million which reflected the lower results of the bank and the loss of insurance. As I said earlier, the uncertain environment that we felt our first priority had to be to put our capital and to further de-risk the – reduce the risk of the organization.
And I think that’s where we have paid our – given our highest priority to. The results of the bank in Q4 underlying pre-tax came in at €793 million and that included impairment charges of €300 million and €109 million losses related to de-risking our positions.
Insurance had a loss of €1.348 billion in Q4 and mainly driven by the charge of €1.1 billion that we took in the US Closed Block VA business. Also, we had losses on hedges; hedges that were there to protect our capital position, in particular, regulatory capital.
Plus we have impairments as well as some gains as a result of de-risking exercises. When I take it altogether, then I see that operating results in insurance increased by 20.4% from a year earlier to €478 million and it was also supported by a higher investment spread and very strong cost control.
On slide number three, you see that the 2011 pre-tax result on the bank was down from last year, but it was entirely due to impairments on Greek government bonds and losses related to de-risking. By the way, 2010 included some gains on the sale of two Asian equity stakes.
Excluding these items, the full-year pre-tax result was slightly higher even than last year. The pre-tax result of insurance improved this year compared to last year and that was despite the impairments we took on Greek government bonds and the charge of the US Closed Block VA assumption changes.
Operating results improved by 41.5% showing the results of the plans that we initiated in 2009 to further improve our performance. As a group, we had an underlying profit, net profit of €3.675 billion and on a net basis, we even had a net basis of €5.766 million, which was double than it was last year.
Slide number four, we have specifically put in to help you issue analysis of the numbers, because a lot of noise in the numbers. This makes it easier for you to compare and you can see quickly here the actions that we have taken to de-risk the balance sheet, the priority we have given to protecting our capital, risk-hedging, and the impairments we have taken on the Greek government bonds.
And there were a number of other one-offs; of course, notably, the VA Block that we were announcing. So, if you compare all this, then you see that the Group underlying results before tax declined by 8% compared with the previous quarter; obviously, the quota [ph] in 2010.
Slide number five, we took the charges of €199 million on impairments of Greek government bonds. So we have written them now down by almost 80%.
You can see that we further reduced our exposure to countries like Greece, Italy, Ireland, Portugal and Spain by €1.8 billion in Q4. Slide number six, capital ratio, the core tier 1 remained stable at 9.6%, even though we had an increase of escalated assets of about €10 billion as a result of the introduction of Basel II in the half.
Solvency I ratio for insurance and RBC ratio for the US remained stable as well in Q4 despite the decline that we saw in interest rates and the market volatility that we witnessed in Q4. So that shows that the capital protection hedges that we put on in order to protect the regulatory capital really were effective.
On page seven, you see the summary of the progress we have made on the restructuring with the EC. We had hoped that we could have known today the result of the decision by the Fed on ING Direct that we understand that they’ll be coming now on Monday, February 13.
And we completed the Latin. We have done a lot of work in legal separation and capital planning.
We paid the State of the €3 billion in 2011. So we have made now the total payment €9 billion, including €2 billion of interest and premium.
We have done additional divestments in the bank, in our real estate investment management and Carly’s [ph]. And as we announced in January, the market conditions for doing IPO at this moment are not that supportive.
So we have decided to explore different options for our Asian business and in our ING investment management businesses in Asia as well. So we will continue to work on preparing for a stand-alone future of a European insurance and IM business, including possibly an IPO, and we continue to prepare a U.S.
insurance business for an IPO. Slide number eight, the divestments that we announced last year together with the liability management transaction that we completed in December have also strengthened our capital position in the bank and help produce the leverage in the insurance organization.
Our next priority is to reduce the leverage in the group and to repay to the State. We want to repay the State as quickly as we can.
And so, we will certainly try to repay at least part of that in May of this year. That depends on market circumstances of course and we need to get approval by the DMB, but I hope that that’s possible.
And ideally, we like to complete the repayment of the State this year. But this ongoing volatility in the Eurozone and this increasing requirements or regulatory capital, I think, we need to be careful that we are not jumping further than we can.
So we will take a cautious approach, as I’ve said earlier, to our capital position. But we remain highly committed to repay them as quickly as possible.
On page number nine, you see that the liability management action along with the closing of the sale of our Latin American insurance business has helped to reduce the debts at both the group and the insurance business. Core debt decreased by €0.5 billion and the majority of the proceeds of liability management had been realized within the group.
The financial debt in ING insurance declines and we implied basically the proceeds of the sale of Latin America to do that, partially offset by some injections predominantly in our Dutch insurance entities of capital to offset some negative impacts of volatility. Now, going to the bank, page 11, return on the bank came in at 10%.
Return on equity submitted at the bottom of the range of our ambition for 2015, but still is in the range and there was despite lower income which was impacted by the impairments we took in Greece and the losses from de-risking our balance sheet positions. But it also included in 2010 for the comparison €275 million of capital gain.
So when you eliminate that, you see that our numbers this quarter were basically aligned with last year. Decline in income has led us to increase our cost income ratio to 59.6.
But if you exclude the market’s impacts, it was down to 55.4. And our ambition, it would be that again is to be at 53% to 50% by 2015.
Loan losses were flat for the year, at 52%, 52 basis points, but elevated compared to the normalized level of 40 to 45 basis points. On page 12, again, you see a comparison to make it easy what happens when you compare Q4 this year versus last year.
The noises were there and there you see that the underlying decline in income was only 5.8% compared to last year. Page number 13, main element here is the addition to loan loss provisions, their increase to €530 million, and it was mainly due to SME and Midcorp portfolio in the Benelux.
Underlying result for the bank came at €793 million for Q4. Page 14, the net interest margin had increased by 5 basis points, basically, as a result of financial markets.
You may remember that in Q3, it was because of financial markets that had declined. And so it came back up by 5 basis points.
We see a bit of pressure in the Benelux, in particular, on the savings margins. Also in ING Direct, we see some pressure.
But we also see that especially the commercial bank was able to make some adjustments in pricing. And I must say in general our pricing discipline, I think, is very, very solid here and that reflects the net interest margin.
Page 15, we collected a lot of funds in Q4, €8.1 billion, a spread in €5.6 billion of retail and €2.6 billion in commercial bank. While that’s very, very positive, net production in residential mortgages was €3.9 billion in Q4, and the net production to SME and Midcorp was about €0.8 billion or €800 million.
I must say that demands for credit have remained subdued in the economic uncertainty that we see in the markets in which we operate. Page 16, expenses.
They were up 1.2% compared to a year ago, which is what we had indicated in our guidance, low single-digit increase. Again, here, I think our cost control is very solid.
Operating expenses declined 2.8% in Q4 compared to the same period a year ago. And compared to the third quarter, there was an increase of 2.4%, but it basically had to do with higher marketing expense and some goodwill impairments we took on some software.
Cost income ratio increased to 58.2 if I eliminate the market impact; also, I think, as a result of the lower income that we noticed. Page 17, here, you’ll see that the weakening economic environment and this requires the shifting to the real economy that is becoming evident as we will have higher risk costs.
In the quarter, there were 530 million that is equal to 65 basis points on the average risk rated assets. If we exclude ING Direct U.S.
then the net addition would have been only 61 basis points in Q4. And we expect that going forward, they will be at an elevated level basically at around these levels in the next quarters.
Page 18, non-performing loans, they remain stable at 2%. We still have an increase in risk costs in the SME and mid-markets in the Benelux.
And we have some specific files in General lending. And so, in the Dutch mortgage portfolio is very minor.
You can see that the bank, in non-performing loans as a percentage were stable at 2% and our Real Estate showing a relative strong decline, but it was offset by slightly higher NPL ratios for SME, Structured Finance and General lending, of which exposure was a little bit elevated compared to the third quarter, but not alarmingly so. And page 19, you see here the de-risking – our balance sheet has really taken holes.
We have reduced our investments to 114 million at the end of the year, that was 126 last year. And you also see the decline was mainly due to the reduction of ABS securities, some financial institution bonds and we were selling the southern European government bonds.
Real estate in the bank decline of 2.9 billion that used to be 4 billion at the end of last year. The quality of the balance sheet, page 20, has improved.
You see that’s which was part of the objectives that we have and it was explained during the investor relations day that we had in January. This will be a gradual evolution, but we saw a slight reduction in the overall balance sheet due to a lower trading assets and the amount due to banks.
The change of the banking external reporting, that’s page 21. A few comments here, we have made some adjustments in our reporting lines.
And going forward we will report separately our Retail business, our Commercial Banking business and the corporate line, we will add Germany as a country in our reporting because that is becoming more important in our strategic thinking. And the Commercial Bank will be more aligned with the management structure that we have today.
And we will make, of course, we stayed with historical numbers available before we will announce the quarterly results. Now let’s go to insurance.
A good progress, I must say, towards the ambition 2013 objectives underlying results clearly impacted by the U.S. VA charts.
But the operating term is quiet positive. Investment margin improved and the administrative expenses were tightly controlled and came in at 39.8% in 2011.
Return on equity is positive but as you can see we still have some work to do in order to get into double-digit levels. Our operating results in page 24, of insurance and proof year-on-year, rising by 20.4% to 478 million.
Higher investment margin, lower interest cost in the corporate line and low expense. It declined from the third quarter mainly reflects that we had lower fees and premium-based revenues and modestly higher administrative expense.
Then look at page 25. You see that the investments margin increased 15.5% to 440 million, compared with Q4 last year.
And the rolling fourth quarter average investments spread is now at 106. You made may remember that the target was 105, so we have beaten the target.
However, stand-alone, you see that there was a declined to 102 basis points and that was the impact of de-risking measures that we do basically in the Benelux. So we continue to expect that the investment spread will gradually decline in 2012.
On page 26, you see the fees and the revenues slightly down compared to the same quarter last year. You’ll see that we have higher hedging and reserve cost in the U.S.
Closed Block and the impact of the pension from regulatory changes in (inaudible) came through. Technical margin was better by 35 million and that mainly had to do with mobility and mortality results in Japan and Korea.
Then page 27, expenses were 4.9% lower than a year earlier. So, again, we have very good cost control compared to the previous quarter, there were up by 2.5% but it was mainly due to foreign exchange rates.
And the ratio came in at 41.8, that’s an improvement versus the fourth quarter of last year that was about 43.4. We expect a little bit of upward pressure in 2012 because we are working on many, many projects.
One of them is (inaudible). And some of the synergies or the separation may go through, but we will be very tight on our cost control as you can expect from us.
Then at slide 28, and some explanation of the results starting with the operating results. You see the charges we have taken for the Closed Block, the losses on the hedges were protecting regulatory capital.
Again, from the de-risking, the change in provision for the guarantees on the separate accounts pensions contracts that was net of hedging. And the – we have some normal operating items, due to market volatility all these – as reason underlying pre-tax result of a negative 1.3 billion.
Now, with that, I would say let me hand it over to Mike Smith, who will have a few comments on the remaining slides and then we will take it back and we will deal with your questions. Mike?
Mike Smith
Thank you, Jan. Given the significant impact of the U.S.
VA assumption changes in 4Q, we wanted to recap the actions that have been taken on the Closed Block. So on slide 30, just a brief recap of what we did in the fourth quarter with the assumption change.
We conducted a comprehensive review of the assumptions, lapse, annuitization, utilization withdraw benefits in mortality. And that resulted in a charge of €1.1 billion, excuse me.
The experience that we used to evaluate our assumptions included both pre and post crisis experience, and we’ve set our assumptions to be reflective of that experience. We think that this puts us in line and there’s largely – and largely reflects the great volatility that we’ve seen over the last four year – four or five years.
Now, going forward policy holder, behavior is influenced by a lot of factors and that makes it very difficult to predict ultimately whether the assumptions will prove accurate. In any event, we think that the changes we’ve made indicate that ING has made a big step forward.
So while this on charged was unfortunately necessary as part of our normal – of assumption review, I’d emphasize and we’ll talk in the next slide about all the actions we have taken to strengthen the Closed Block VA balance sheet. So on slide 31, as you can see on this slide, after we stop writing this business effective with the decision in 2009, we’ve set out and completed a number of measures over the past two years to address this block.
We’ve increase the transparency by reporting this block at a separate line of business. We adopted fair value accounting for the guaranteed minimum withdrawal benefits and we significantly increased the hedging for interest rates.
And most recently here, as I just mentioned on the previous slide, we updated assumptions in the fourth quarter as another large step. Largely as the result of these numerous measures results – have more than tripled since 2009 as you can see on this slide.
And a DAC balance has been fully written down. Overall significantly strengthening the U.S.
VA Closed Block balance sheet. So on slide 32, two things to talk about here on this slide.
The first is the disclosure we’ve added to give you greater detail on the nature of the U.S. VA block.
We split out account value and IFRS reserves by benefit type and we provided the net amount at risk, €4.5 billion for living benefits. The definition of NAR is shown in some detail on the bottom of the slide.
But an easy way to think about this is that it’s the present value of the income streams that would be paid to policy holders if they all immediately utilize their benefits, less the account values. You can think of the account value as the funds that would first be used to offset the payment of those benefits.
In other words, it’s a simplistic way to look at exposure. The second point is to give a little more detail on the goals of our hedging program.
As you can see from the slide, interest rate hedging is aligned with the sensitivity of the base IFRS reserves. We don’t hedge interest risk for GMIB or GMDB as reserves are insensitive to interest rate movements.
We do fully hedge on the GMWB withdrawal benefits and on some of the small block of other living benefits. Equity market risk is hedged for all benefits, although the hedging is not aligned with base IFRS reserves for the IBs and death benefits.
This is because IFRS reserves use SOP 03-1 and they are relatively insensitive to equity market changes. We focus our hedging instead on protecting against changes in the economic value of claims.
We also place an overwriting priority on the protection of regulatory capital which does not use IFRS accounting rules. This means that on occasion and as is the case now, we will put additional hedge positions in place to ensure regulatory capital is protected from changes in markets.
That’s the priority on capital on slide 33 has an impact on our IFRS earning sensitivities. The table illustrates estimated earning sensitivities to market movements during the first quarter of 2012.
Equity head results will cause IFRS earnings volatility as the primary focus is – as I mentioned on protecting capital. In addition, there will be charges – there may be charges to restore reserves to the 50% confident level in down equity market scenarios or if interest rates rise.
Reserve adequacy will improve in rising equity scenarios but this will generally not result in an immediate earnings impact. Earning sensitivities may change significantly in future quarters based on changes in equity markets and interest rate levels overtime.
This will occur to significant reserved adequacy buffers developed in future quarters as a result of increasing equity markets or decreasing interest rates. We will update these sensitivities as market condition evolve.
And now I’ll turn it back to Jan for some closing comments.
Jan Hommen
Thank you, Mike. Okay.
So let’s wrap it up. Q4 was challenging.
We saw very volatile markets and we saw a deepening of the sovereign crisis in Europe. The environment being uncertain, our first priority was to protect our capital and to further reduce our risk positions.
The impact of hedging de-risking and further impairments of Greek bonds typical on Q4 results but nonetheless, the end of the year with an underlying profit of €3.675 billion which was up 15% compared with 2010. And let’s now deal with your questions.
Operator
Thank you. (Operator Instructions).
The first question comes from Mr. (inaudible).
Please go ahead, sir.
Unidentified Participant
Hi. Good morning.
Thank you for the call. I have two questions.
The first one is regarding the – quality weakening. First of all, I would like to understand, where that’s coming from because like you mentioned, SMEs, that’s – these are from the guidance you gave recently in the investor day.
So, if I understand well, midterm, that means 2012 guidance was 60 basis points (inaudible) and goes to 40, 45 later on? Is that correct?
When you say from these quarters, how many quarters of that? And the second question, can you give us please an update on the disposals?
I mean, you iterated that it’s on going and you’re still looking different options. I mean, there were lots of press reports about Asia, I mean, if that’s we’re having about Europe, U.S.
Can you update us a bit on that? And finally on Westland interest as well if there’s any progress on that.
Thank you very much.
Jan Hommen
Those are two things. First one.
Mike Smith
Yes. And on asset quality in the areas where we see weakness, I believe that what we’re seeing is in line with what we said during the investor day which is indeed, in this quarter, the Benelux is one area.
And to give you a bit more flavor of where that’s happening, I mean in terms of product types, we see some weakness in leasing and real estate finance. And if you were to look at check there’s the main ones where we see our transportation and logistics and construction.
And on the other hand we did see some declines in risk cost instructive finance and also for example in ING Direct in Germany. And on your question with regard to where we see this going, well, it’s very early in the year, it’s a very uncertain as Jan said earlier, economic environment so it’s very hard to give any concrete guidance at this point.
I think the best we can say is we expect elevated levels for some time to come.
Operator
Thank you, sir. Your next question comes from the line of...
Jan Hommen
Okay, no, let me deal this question number two and question number three. Disposal program.
Yes, you may have not heard much but we made that announcement only a few weeks ago that we were going to deal our Asian insurance and investment management businesses in a separate way. We were reviewing new options and different options.
We are in the midst of doing that. We have formed teams to look at all the various things that need to be done to do this.
We will make sure that we can separate the business completely. That’s the team working on not very difficult I must say that’s relatively simple.
And in the meantime, we continue to work on redeveloping our plans for Europe, we’re very busy with that one. That is a very important exercise in the next few months.
And we continue to work on our IPO program for U.S. business.
In the meantime, we did sell ING Direct in the U.S. We’re waiting for final approval by the Federal Reserve.
We had expected their – that will come in hopefully sometime next week. The plan is to have a meeting on Monday, February the 13th.
We have sold the left-hand business and we have sold car lease, we have sold real estate investment management. I think we have been quite busy in our disposal program.
So, lots of things going on there this month in fact, we are in discussion with the European Commission, and we expect, we have discussions there, I cannot say what we can expect. But they are ongoing.
We have presented some alternatives but it was impossible to sell it to a third party. So there are discussions going with the commission but I don’t have the final answer yet.
Operator
Your next question comes from Mr. Andrew Coombs from Citigroup.
Please go ahead.
Andrew Coombs – Citigroup
Good morning. I’ve got two questions.
One is just...
[AUDIO GAP]
Mike Smith
...particularly in the Benelux, is going to be reflected in the investment spread in 2012 and that’s in the detail in the quarterly report.
Unidentified Participant
Okay.
Jan Hommen
And by the time that we have, you know, when we come forward with our update on – we are going to do with Europe I think that we’ll include also an update on the investment spread that we anticipated at that time.
Unidentified Participant
All right. Thank you.
Operator
Thank you. Your next question comes from Farquhar Murray.
Please state your company followed by your question.
Farquhar Murray – Autonomous Research
Hi, good morning, Farquhar Murray from Autonomous Research here, just two questions if I may. First, with regards to your court case, I just wondering where you had any implications of what we might see, decision there And then secondly, you have very helpful given us some extra disclosure on the close barrel annuity booking [ph] including the SOP or 301 reserve on the GMIB book of one billion.
So I’ll just ask what the interest rate assumptions are behind that one billion reserve. Thanks.
Jan Hommen
Okay. The first one is pretty easy.
Also we have been notified that the court will decide and make its decision known on March the 2nd. So that we know for a fact.
We don’t know the outcome yet. And Mike, you want to give the second question?
Mike Smith
Sure. The interest rate there we use to calculate the GMIB is consistent with all of the other IFRS reserving and or deck amortization assumptions we make regarding long term interest rates that’s based on a long term expectation that we review on a regular basis.
At this time, we’re not disclosing the actual assumption but we feel very comfortable that it’s a conservative view given the long term overall interest rate expectation.
Farquhar Murray – Autonomous Research
Okay. Thanks very much.
Operator
Thank you. Your next question from Farooq Hanif.
Please state your company followed by your question.
Farooq Hanif – Morgan Stanley
Good morning. This is Farooq Hanif from Morgan Stanley.
I’ve got some questions on the insurance business, if that’s okay and also one request. The request is, I mean, you’ve been very helpful in giving sensitivities on equity markets for the V.A.
business. I was wondering if you could – if you’d be able provide interest rate sensitivities for V.As but also the group and also equities for the group obviously a lot of your hedging loss this quarter was from the Benelux as well.
So I was just interested if we could get that information as a request. But on my questions, firstly, if you sell, if you dispose a bit of the insurance business now let’s say in Asia for example, do you have to use the proceeds of that to de-level at the insurance level or can you actually take the proceeds and pay them up to the holding?
So are there are any covenants that stop you and what would your intentions be anyway in terms of the way you would use leverage, that’s question number one. Question number two is when you look at the slide 32 where you show living benefits IFRS reserve, I guess, living benefits net amount at risk, I mean, is it useful to actually compare those two numbers.
So, for example, if you added another 1.5 billion you’re reserving, would that be the same as saying that you’re receiving – that everybody basically almost immediately takes up that option. Could you please comment on that, please?
And just on the investment margin going back to that, you’ve given the guidance on Benelux, I mean is that what we should be assuming for the time being? Should we be saying look, there’s a 10 to 15 basis point impact and that’s what it is.
I mean what’s the overall guidance that you would get from all that? Thank you very much.
Jan Hommen
Okay. The first question, we have no governance and the plan at these moment to use the proceeds to reduce the double leverage of the group but we cannot use full [ph] because once you sell the asset in Asia, you’ll also lose some diversification benefits so you will have to also use some of that to reduce the leverage and the holding company and insurance.
But the main part of that will be used for reducing the double leverage of the group. Mike, you do the second one.
Mike Smith
Sure. The question was, how do you compare net amount of risk and reserves.
And I think it’s a reasonable approach to look at the comparison of the two to try to get an estimate of additional exposure. However, there’s a number of important caveats.
First, the income benefit as a present value, they are not available as a lump sum to policy holders. Second, utilization is assumed to be instantaneous.
There are reasons for both contractual and otherwise to think that that will actually be delayed. But I think you can look at net amount of risk versus reserves as one measure.
I think you do want to be careful in comparing us to other companies because the methodologies for income benefit net amount of risks are unclear and they’re certainly not specifically laid out in accounting literature. So you need to look carefully at what disclosure other companies make as to how they do calculate that.
Farooq Hanif – Morgan Stanley
Just to be clear, you’re assuming amount of reserves, you’re assuming that when people can utilize if there’s money, they will. So you’re assuming that, you know, what’s actually possible that’s going to be a better outcome for you?
Mike Smith
Actually, that’s a good question, let me clarify. We’re actually even a little bit more conservative than that.
Even if a policy holder can’t utilize it right now, we’re assuming that they do. For instance, on the income benefit that we sold over the early part of the last decade, there’s a 10-year waiting period and there’s been a significant amount of those policy holders that are not eligible to elect at this time.
However, we assume that they could right now today in order to give a sense of exposure, simplifying assumption to give a reasonable view really in terms of what the exposure is, the reserves are what we focus on as a management tool. Okay.
And then perhaps the last one on the investment margin, I think that the guides that we’ve given, the 10 to 15 basis points spread reduction in the Benelux is a reflection of the actions that we’ve taken up through the fourth quarter. Obviously, if there’s any other actions that we take these are going to have an impact on the results going forward including dividends that we might receive on public equity, real estate returns, and many other things, but we thought that it was very important that we telegraph that there would be a decline in the margin just as a consequence of the de-risking that we’ve done.
Farooq Hanif – Morgan Stanley
So, just to clarify that again. So, assuming you give no other update, what you’re not saying is that because you will allow your environment generally that there will be a kind of gradual decline in that margin, what you’re saying is the specific steps that you’ve taken to have 10 to 15 impact but apart from that there’s no sort of ongoing impact forever (inaudible) remains low.
Is that right?
Mike Smith
It would be better with the small impacts over a very long...
Farooq Hanif – Morgan Stanley
Okay. Thank you.
That’s right. Thank you.
Unidentified Participant
And in response to your question about interest sensitivities for the overall group. What we’re trying to do is give sensitivities where we think it’s meaningful.
We’ve given more granular ones on the V.A. and as Mike said, these will change and you have to watch it very closely.
In addition, the insurance business in the financial review, we do give an overall market sensitivity which is there. On the bank side, we don’t because it depends a bit on how customers react and how markets react as oppose to what happens to levels of interest rates.
So like I said, we try to do it where we think it’s meaningful.
Farooq Hanif – Morgan Stanley
Okay. Thank you very much.
Operator
Thank you. Your next question comes from Mr.
Richard Burden. Please state your company followed by question.
Richard Burden – Credit Suisse
Hi. It’s Richard at Credit Suisse.
I just wanted to follow up on the loan loss provision trend, in particular, there’s so much (inaudible) on the developments in the Dutch retail mortgage books, because that was actually quite a bit step up Q-on-Q Q4 versus Q3, and it’s also an area that has come under increased retention of rates in terms of the affordability of Dutch properties et cetera. Can you just let us through your current thoughts on developments in the Dutch residential housing market and where we can possibly expect the loan loss provisions to develop over the next couple of quarters?
Jan Hommen
Yes, and maybe to start off with the facts and numbers as we see them in Q4, slight uptick in NVLs, if you compare to the end of the previous year, you’re looking at 1.1% as opposed to 1.0%. The Euros [ph] again, a slight uptick, slightly above 2% now where they were slightly below before.
So there is a gradual decline, if you like in the quality of the portfolio. And the portfolio obviously is a significant one so we’re watching it closely.
You’re right, there is a lot of attention in the press and the analyst reports on the Dutch mortages. I mean a lot of the attention if you think about this portfolio in terms with PD and LGD, a lot of the attention is focused on the LGD side where you know, the high long term values and the decline in property prices figure prominently.
First of all, we’re not seeing much of an impact of that in our books. You’re right, there was a bit of an uptick in provisioning for the mortgages in Q4, but the absolute levels are still very slow.
And if you think about it, I mean the LGD discussion is influenced by a number of things. It’s true that debt levels are relatively high, it’s also true that net financial assets of the Dutch population are high in relation to GDP as well by European standards.
So there are offsets there. And we that also in our portfolio where quite a number of these mortgages are also linked to secondary collateral which is quite meaningful.
And on top of that of course, the whole LGD discussion really only advance if the PDs go up. And it’s important to keep in mind that first of all, we don’t really see that happening.
It’s closely correlated with unemployment and divorce rates. Now divorce rates are – I guess not very linked to economic developments, so the correlation there is low.
On the unemployment side, if we look at our own house view, then we do see employments slowly going up over the next two years. So we do our sensitivities based on that, but we come to a conclusion that if we follow those projection step, yes, we will see a gradual increase in both provisioning levels as well as RWA increases because of credit migration.
But the numbers are not worrisome.
Richard Burden – Credit Suisse
Okay, thank you.
Operator
Thank you. Your next question comes from Jan Willem Weidema, please state your company followed by your question.
Jan Willem Weidema – ABN AMRO
Good morning, Jan Willem Weidema, ABN AMRO, I have a few questions on real estate finance, could you comment on what you’ve done there to reduce the MPLs? Secondly, you still have 1.8 billion development portfolio, could you indicate how much of that is offices?
And finally, could you give some sort of expected run rate for the loan losses and the other impairments there as you also are looking to (inaudible) which apparently comes at a loss? Those were my questions.
Unidentified Participant
Okay, first of all, looking at the recent trend in loan loss provisions, but will show in NPLs, what was happening there is we had a couple of relatively large files that were restructured, and that’s what brought the NPL levels down. And your second question was the exposure to offices, specifically?
Okay, in terms of – sorry, just – okay, offices and development numbers are around 125 million exposure. The trend there obviously is one that is also covered quite widely in the media and the portfolio as a whole is one that we’re also closely watching.
However, we spent quite a bit of effort and money to de-risk that portfolio, and we’re not expecting major jumps in provisioning there.
Jan Willem Weidema – ABN AMRO
Okay, thank you.
Operator
Thank you, your next question comes from Lemer Salah, please state your company followed by your question.
Lemer Salah – SNS Securities
Good morning, gentlemen, Lemer Salah from SNS Securities, three questions from my side. First, can you rank your priority with respect to reducing double leverage and repaying state aid?
And second, can you perhaps clarify where the double leverage is residing at this moment with respect – if you have the banking and the insurance activity? And my final question is with respect to Benelux Insurance activities.
You have mentioned earlier in January that you are now prepared for standalone basis. Is there any chance that this – bank will be merged with this unit and sold or divested separately?
Thanks.
Jan Hommen
Okay. The priorities for state aid and the reductions of the leverage are going basically at the same – at the same high priority level.
We like to repay to the state but at the same time, we want to make sure that we have the ability to reduce the double leverage. Because if we need to complete the exercise of separating bank and insurance and divesting insurance before the end of 2013, it’s critical that we do that as well.
So, the two go hand in hand all along. And they have the high priority together but at the same time, they have an impact on each other.
With respect to double leverage, at this moment that is about €8 billion. That is the double leverage that we have at the group level.
And then your next question deals with the Benelux standalone, Matt?
Unidentified Participant
Yes, exactly. So, maybe I can rephrase that.
Is there any chance that (inaudible) Bank will be merged with insurance activities in Europe, in particular Benelux and pulled as a bank insurance model?
Jan Hommen
Okay. Well, that’s an interesting idea.
The question is we have an alternative that we have presented to the European commission and we need to wait for the answer that the European commission is coming up with. So that – I cannot give you a firm answer until we hear what they have to say.
Lemer Salah – SNS Securities
Okay. Thank you.
Operator
Your next question comes from Mr. William Hawkins.
Please state your company followed by your question.
William Hawkins – KBW
Hello, this is William Hawkins from KBW. I wanted to – on slide nine when you’ve given us the update of your capital structure.
Could you possibly give us a bit more guidance on how the Asia Pacific €5.8 billion breaks down on a country basis? I’m particularly interested in the capital deployment to Japan and South Korea.
And then secondly, you did make reference to this. But again, can you clarify the increase in the capital in the Benelux region?
I heard you say that this will offset a negative impact on volatility. But again, if you could just expand slightly on – why you are addressing more capital in (inaudible).
Thank you.
Jan Hommen
Okay. In terms of the Asia Pacific and the capital structure.
Clearly, the bulk of the 5.8 will be in the bigger two entities which would be Korea and Japan. But we haven’t given it a granular breakdown of that.
In terms of the capital injection in the fourth quarter – at the end of the fourth quarter, approximately just over €700 million was injected into the Benelux or Dutch insurance company which is the reason why the €1.2 billion decline is slightly lower than the – than the proceeds that we received on the disposal of Latin [ph] which was 2.6
William Hawkins – KBW
Sorry. Yes, I understood that.
I understood – but didn’t understand the why.
Unidentified Participant
Maybe I’ll take this one. I think for people that know the Dutch regulatory capital environment well, we have a test of adequacy here.
So it makes our solvency capital actually quite volatile. This is why you see a lot of PNL impacts through the – or impacts through the PNL of our hedging.
But we have that to inject this – about €680 million in the fourth quarter into NN [ph]. And again, it’s largely a result of credit spreads, interest rate movements and various other things.
I think we stood – we probably injected a little bit too much in retrospect. And in fact, if you – it’s again very volatile number if you look at it and more recently, it’s actually quite better than where it was at year-end.
William Hawkins – KBW
Thank you.
Operator
Thank you. Your next question comes from Francois Boissin.
Please state your company followed by your question.
Francois Boissin – Exane BNP Paribas
Yes, good morning. Francois Boissin from Exane BNP Paribas.
Three questions please. The first one really is on the – your target ROE of 10% in insurance.
Can you give maybe the underlying assumptions in terms of interest rates – long-term interest rates and annual return equity market underlying those assumptions – I mean those targets 10%? And the second question relates to ING Direct.
I just wanted to understand the €80 million impacting Q4, what does it relate to? And in your new reporting basically, I don’t see any ING Direct business.
Does it mean that it will be included in other banking business? And lastly, on the – appeal on 2nd March, do you expect a decision on all topics or is it – is it limited to a number of items?
Thank you.
Unidentified Participant
Yes. On the – on the underlying assumptions, I think we’d have to go back to the – to the April 2010 Investor Day when we actually set these targets.
But the assumptions would have been basically capital markets as they were at that point in time. Obviously, things have changed quite a lot with interest rates having come down, credit spreads having moved, equity markets have become more volatile and the like.
So this is one that I think that we do need to revisit in the – in the not too far away future.
Jan Hommen
Okay. And then we have some questions on ING Direct.
Do you want to do the first one, Patrick?
Unidentified Participant
Yes. The (inaudible) 79 in the fourth quarter in ING Direct was capital loses.
We take quite an active process to manage the investment portfolio and trying to ensure that, you know, where we think credit standing and process can decline in the future. And RWA requirements would go up.
If we see that as a potential outcome, we try to sell ahead of the curve. So, what we’re doing there is active de-risking – active management, active de-risking of the portfolio to protect capital.
Francois Boissin – Exane BNP Paribas
Okay. And what added class was it?
Unidentified Participant
I didn’t – could you repeat the question?
Francois Boissin – Exane BNP Paribas
What asset class was it in terms of de-risking?
Jan Hommen
Investments.
Unidentified Participant
Yes. They were investments – securities.
Francois Boissin – Exane BNP Paribas
Okay.
Jan Hommen
Okay. The other question related to reporting.
We will report ING Direct going forward as part of our retail business. We are one bank and we will report it as part of one but we will make it available in a supplemental disclosure.
If you want to look at it separately, it’s still there. And then the court case – yes, we have no idea what court will decide but it’s up to them.
The only thing we know is that the verdict will be given on March, the 2nd.
Francois Boissin – Exane BNP Paribas
Okay. But does it mean – I mean, is it on the – on the penetrable treatments of the state capital?
Is it on the structural requirements or is the perimeter of the – the entire perimeter that – in your appeal court or…?
Jan Hommen
Yes. We have filed an appeal on these three items and we expect that they will give us the verdict on all three.
Francois Boissin – Exane BNP Paribas
Okay. Thank you very much.
Operator
Thank you. Your next question comes from Marcus Rivaldi.
Please state your company followed by your question.
Marcus Rivaldi – Morgan Stanley
Good morning, everybody. I’ve got a couple of questions please.
First of all, some clarifications on the comment you’ve made already on the Asia sell proceeds when you finally get them. First question there is can I just confirm that – the legal advice you receive is to just that – change of control language in external issue bonds from INGV will not be triggered by that Asia sale?
Secondly, I think you also went on to say that you thought even – you’d be reducing internal leverage but – that you might also look to reduce the leverage at INGV as well by virtue of lower diversification. Can you just give some guidance around that please?
And then just finally, I see that ING America Insurance Holdings, they have a substantial LOC facility outstanding which I believe is in partly supportive of insurance. I don’t see a relief deal supporting the solvency of the U.S.
operations. That’s coming up for renewal shortly.
Could you give us an update on that? And actually, that account I believe has a guarantee from INGV.
Could you maybe give some indications about what you think about that guarantee given the separation process ongoing? Thank you.
Jan Hommen
Okay. The question that was asked whether there were governance in up streaming dividends between INGV and the group and the answer was no.
There are no governance in up streaming dividends from INGV to the group. Your question deals with a different one which is if you sell Asia, are there restrictions and could that result in maybe a call of some of the hybrids outstanding, right?
That’s your question now?
Marcus Rivaldi – Morgan Stanley
Absolutely. And also the senior debt there as well.
Jan Hommen
Yes. Well, we will very carefully evaluate and take our legal advice very carefully to see what needs to be done and what we can do.
So I cannot give you an answer right now. But we will be extremely cautious and careful in making sure that we comply with all the legal obligations that we have.
The diversification benefit in – if you sell Asia, you have then the income producing activities of Asia are no longer supporting the debts at the holding company in INGV. And so, you will have to reduce some of the debts in order to deal with a new diversification that you have at that time.
And the benefits will be lower so the result will be that you will have to reduce some of the debts in that holding company. And then the remainder can be used to repay the debts in the group holding company.
LOC facility?
Unidentified Participant
Yes. The LOCs you’re referring to are standalone and they’re – they will be executed in an arm’s length basis.
Marcus Rivaldi – Morgan Stanley
Thanks. So just to – when you say standalone, does that mean there’ll be no guarantee from INGV or any other parts of the ING Group going forward?
Unidentified Participant
I mean the terms of those would be the same as you apply in the market. There’s a capital support, this would be freely entered into.
These are normal commercial terms.
Marcus Rivaldi – Morgan Stanley
Agreed. But I don’t know, just to clarify, they currently benefit from a guarantee from INGV thinking ahead to the disposal of the insurance operations in the U.S.
Would you look to remove that guarantee?
Patrick Flynn
We were more than likely to set the new ones up with that guarantee.
Marcus Rivaldi – Morgan Stanley
Okay. Thank you very much.
Operator
Thank you. Your next question comes from Hans Pluijgers.
Please state your company followed by your question.
Hans Pluijgers – CA Cheuvreux
Yes. Good morning, gentlemen, Hans Pluijgers.
Two questions if I may. First of all, going back on the real estate book NPL comes out somewhat.
How much current are still – exposure to the Dutch market with respect from your real estate loans – could you give us some feeling on that? And secondly, detailed question on the Asian operation which offers – for sale.
You get €5.8 billion in equity for Asia Pacific but of course you still own some other operations which are to be included. So could you give us the number for the total equity of the operations which are included in the deal?
Unidentified Participant
Yes. On the real estate finance activities, the total globally is about 33 billion and roughly half of that is in the Netherlands.
And then about 5 billion of that is offices.
Matt Rider
I’m sorry. Could you repeat the second question?
Hans Pluijgers – CA Cheuvreux
With respect to the (inaudible) on Asia, of course you get 5.8 billion as your equity but is that – does that include all the operations which will be included in the deal? So, I estimate at about 500 million additional for the part of (inaudible) the Japan – Japanese – is this correct or – a total of 6.3 billion equity for the operations for sale?
Is that correct?
Unidentified Participant
Yes. You’re in the right ballpark with that, yes.
Hans Pluijgers – CA Cheuvreux
Thanks.
Operator
Thank you. Your next question comes from Mr.
Tony Silverman. Please state your company followed by your question.
Tony Silverman – Standard and Poor's Equity Research
S&P Capital [ph] – Tony Silverman here. I just have two questions.
One on the hedging incurred in the insurance and presumably, I think 300 million also loss. And it’s been explained as – to do with – difference between regulatory and IFRS.
And I was just – this is my first chance. I’m just wondering if there’s any sense in which that loss might be back in previous – in subsequent years.
So, if things just remain as they are or is it in fact an economic loss as well? And the second question was just on the financial market part of the – in the bank which was sort of important to the progression of net interest margins on slide 14.
And the profit for – the underlying profit stat division have gone up very substantially and that’s really if you talk a bit more about what is it – what is in that division and whether – what sort of problems you might expect from it going forward. Thank you.
Unidentified Participant
Yes. I’ll take the first one.
The hedging number that you mentioned 300 million, it’s about – I think it’s about 348 million is what we had disclosed. I mean just to give you an example of the 182 million of that is sitting in the Benelux that is hedging an equity portfolio.
So what that represented a true loss on the hedges, but what we see is an increase of the value of the securities that we’re hedging through Equity. So you can’t really say that – say it is an economical loss, but there’s an – there’s a positive offset within equity.
So that’s already kind of back if you will within the – within solvency. For the other business, yes.
Depending on what interest rates do. Those can come back similarly reductions in credits spreads, those can go back as well.
Tony Silverman – Standard and Poor's Equity Research
But the things remain just as they are then eventually the equity would be disposed and you would get that back and the rest you wouldn’t, is that a right comment?
Unidentified Participant
I think if things stayed exactly the way they are, interest rates, equity market and so you’ll see very little volatility in that line. On the Equity comment, let’s say if we disposed of all our equities and we got rid of our hedges, it would be a no.
Tony Silverman – Standard and Poor's Equity Research
Okay. And on the – what’s in the financial market division now?
Unidentified Participant
Yeah, the financial markets results improved significantly in Q4. So the 90 million increase.
What you’re seeing there is – if you recall last quarter, it was then significantly that was impacted by a big chunk of impairments on Greece. And so they’re 150 million lower and also we commented last quarter on reserve adjustments, CVA which we also talked about at the investor day.
And they were a little bit lower and so what you’re seeing is lower provisioning requirements and what happens then is the underlying client revenues, they are coming through and flowing into the bottom line. So the client’s business had a pretty good quarter given that fourth quarter is seasonally low.
So you’re seeing lower impairments in the underlying customer revenue flowing into the bottom line.
Tony Silverman – Standard and Poor's Equity Research
Okay. Thank you.
Operator
Thank you. Your next question comes from Francesca Tondi.
Please state your company followed by your question.
Francesca Tondi – Morgan Stanley
Good morning. Francesca Tondi from Morgan Stanley.
I have a question on my side as well. And again, on the financial market, if you don’t mind.
Can you explain a little bit the volatility we have seen and then I think just seeing some of the recovery in the fourth quarter and what we should consider that line being going forward. In terms of looking forward, do you see then the provisions with the – understandable the ratio of economic in Euro then trending up further from the fourth quarter level.
Do you think – does it go into actually, that it could be going up to the level in 2009 or not as bad? And if they do trend up, what other lines do you have, you can work on to make sure that you are at least keeping the bank with a profitability of a 10% which is the minimum target that you are giving out.
I think that will be quite useful to understand the moving parts. And then lastly, any intention on using the ECBT (inaudible) at the end of February even if there’s just for some opportunistic – money to take in ALM, if you could update us on your thinking there.
Thank you.
Unidentified Participant
Well in terms of financial markets and that’s interesting and – yes, it’s a big part, but not all of the increase was attributed to SME in that line. In financial market, it is volatile and the decline, driven structure there typically involved one like which is (inaudible) and another which is a dealing line which you see in other income.
And they do tend to net out to some extent. So if you look at the two, it’s much less volatile.
It depends on the quarter whether there’s a positive in net interest or negative in other income or vice versa. I mean, the point is when your net the two, you’re seeing that the revenue is held up fairly well in the fourth quarter as I mentioned already.
Albeit, you don’t see the full impact in net interesting income. So we tend to try and do is look at the net interesting income isolating as we have shown in the slide.
The SMOs and then what you see is that the full commercial side is a lot more stable.
Francesca Tondi – Morgan Stanley
Okay. So particularly you see the commercial side still increasing, it’s just a question of market trends on why you book it effectively.
Unidentified Participant
Yes. I think that’s the reason, my representation of it, yes.
Francesca Tondi – Morgan Stanley
Thank you. And on cost of risk and profitability going forward.
Patrick Flynn
Yes, on the risk cost, as we said it’s really in the year. So it’s difficult to predict exactly where it’s going to be looking at the economic trends.
We’re expecting to see elevated levels for some time to come and I think Jan will comment with his own profitability, but what does typically happen if you see elevated risk cost for a longer period of time than spreads tend to react and gradually improve as well which we would expect to see here overtime also.
Francesca Tondi – Morgan Stanley
On that point, you’re – I mean you have this more spread improvement in commercial banking some of the product, do you see more improvement in there also in terms of some of the business lines, trade finance and the global finance which the other banks still retracing back and not being in a strong position you’re in. Do you think you have more opportunity there for re-pricing?
Jan Hommen
That’s exactly, I think a very important point. We have seen that – because of capital becoming more expensive, we have total organization that we have to be extremely careful in our pricing and very disciplined in our pricing.
And what we are seeing is that we have been able to re-price a number of our loans and I think in the future you will see more and when that’s coming up for re-pricing. It’s an important element.
The other thing is that we see that a number of banks – because they have to comply – there’s no capital requirements are giving up some parts of businesses, and those are businesses in which we have very strong position, so there’s an opportunity for us to pick up more of the business that is being abandoned by others. In general, I would say what we are trying to do is be extremely careful on cost.
We have further opportunities to reduce our cost and we have programs to become more efficient. We are investing in technology to make sure that our systems that we need to have are state of the art and at the same time that they are highly efficient and that we can deal with – there’s a low cost provider of services to our customer base.
Further opportunities in purchasing, we have not have a corporate purchasing function. We have solved that just recently.
Opportunities like 300, million 400 million are possible. IT gives us further opportunities.
So I think on the efficiency side, we’re very careful on re-pricing and then of course on making sure that they stay in the markets where we can have value. And that we have a strong market position and a strong brand.
And that all together should give us the ability to, even in an environment where you have more capital that you can still make it return of, about 10% to 13% on your capital yield [ph].
Francesca Tondi – Morgan Stanley
Perfect. Thank you.
And any comment on the LTRO?
Jan Hommen
Yes, we did not participate the first time and we have some reasons for that. We’re now evaluating where we are again.
We need to evaluate that again. There’s some number of factors and we’ll do a very careful analysis again.
I cannot tell you what the decision will be.
Francesca Tondi – Morgan Stanley
That’s fine. Thank you.
Operator
(Operator Instructions). The next question comes from Kirby Georgia.
Please state your company followed by your question.
Kiri Vijayarajah – Barclays Capital
Yes, Kiri Vijayarajah Barclays Capital. Yes, just a question on RWA’s, if I strip out the (inaudible) impact around €6 billion, I wonder why we didn’t see more of a decline in underlying RWAs during the quarter, you say you’ve done a lot de-risking this quarter.
And I wonder is it because you’re seeing RWA inflation in other parts of the book? Your different clarity on that please, thanks.
Unidentified Participant
Well, first of all the Basel II impact all in all is around 9 billion and secondly, there’s quite a big impacts from currencies effects as well off the government, that was 4 billion. And then when it comes to migration of course as we’ve mentioned before, we do try and actively manage the book and present credit migration particularly on bonds to impact the numbers too much.
Kiri Vijayarajah – Barclays Capital
Okay.
Operator
Thank you. Your next – your final question comes from Mr.
Hensley [ph]. Please go ahead sir.
Unidentified Participant
Yes. Going back on the injection of capital into the Dutch in terms of operations.
Please give any idea on the solvency – regulatory solvency level of the Dutch insurance operation and to what kind of level you are looking at seeing logical in this kind of market circumstance for that kind of operation.
Mike Smith
Yes, we don’t really disclose regulatory capital levels of any of our subsidiaries. What we try to do is to keep them commercially where they need to be.
And we feel that national – of the Dutch company is capitalized well for its position in the country.
Unidentified Participant
Okay, thank you.
Operator
Thank you. Thank you, that was your final question sir.
Please continue with any further comments.
Jan Hommen
Okay. I really appreciate you being on the call.
Thanks for your questions. I hope that we answered your questions.
If you still need anything else then, you know how to find Dorothy [ph] and our staff. And in the mean time we would say have a good day and again, thanks for being on the call.
Operator
That concludes the ING Analyst Call, Q4 Results 2011. Thank you for participating.
You may now disconnect.