Aug 8, 2012
Executives
Jan H. M.
Hommen - Chairman of The Executive Board, Chief Executive Officer, Chief Executive Officer of Ing Bank, Chief Executive Officer of Ing Insurance, Member Management Board Insurance and Member of Management Board Banking Patrick G. Flynn - Chief Financial Officer, Member of Executive Board, Chief Financial Officer of Ing Bank, Chief Financial Officer of Ing Insurance and Member Management Board Insurance Matthew J.
Rider - Chief Administrative Officer Wilfred F. Nagel - Chief Risk Officer, Member of Management Board of Banking and Member of The Management Board of Insurance
Analysts
Spencer Horgan - Deutsche Bank AG, Research Division Farooq Hanif - Morgan Stanley, Research Division Farquhar Murray - Autonomous Research LLP Michael Huttner - JP Morgan Chase & Co, Research Division Michael van Wegen - BofA Merrill Lynch, Research Division Francesca Tondi - Morgan Stanley, Research Division Francois Boissin - Exane BNP Paribas, Research Division Hans Pluijgers - CA Cheuvreux, Research Division Federico Salerno - MainFirst Bank AG, Research Division Anke Reingen - RBC Capital Markets, LLC, Research Division Lemer Salah - SNS Securities N.V., Research Division William Hawkins - Keefe, Bruyette & Woods Limited, Research Division Tarik El Mejjad - Nomura Securities Co. Ltd., Research Division
Operator
Good morning, ladies and gentlemen. Thank you for holding.
This is Yvonne welcoming you to ING's Q2 2012 Conference Call. Before handing this conference 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 statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with 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 any offer to buy any securities. So good morning, Jan, and over to you.
Jan H. M. Hommen
Okay. Thank you, and welcome, everyone to ING's Second Quarter 2012 Results Conference Call.
ING posted a solid second quarter results, particularly when we look at the weakening economic environment we are currently in. And I will talk you through the presentation, and then Patrick Flynn and Wilfred Nagel and Matt Rider are with me, and we are all available to answer your questions.
Page 2. ING is maintaining strong momentum on restructuring, including the sales process we have for Asia and the preparations we are having for our U.S.
and European insurance and IM organization. The bank is making good progress on balance sheet integration, and we accelerated derisking efforts given the deterioration we were seeing in the Eurozone in Q2.
We posted -- the group posted an underlying net profit of EUR 1,045,000,000 in Q2, that excludes the results from Insurance Asia, which is now reflected in results from discontinued operations. The bank posted a robust results despite losses from proactive derisking.
We saw pressure on the net interest margin, and we also saw the risk costs were elevated. But we had an underlying profit in the bank before tax of EUR 995 million.
And in Insurance operating results, compared to Q1, went up to EUR 304 million. Underlying results before tax were EUR 229 million, and that include the hedging gains we made in the U.S.
for hedging exposure, interest and equity exposure on our VA block, also including the negative change that we saw in the provision for our separate account pension contract that we have in the Benelux. Now going to Page 3, and you see that we have made good progress and continued to make good progress on our restructuring program as required by the European Commission.
The sales process for Insurance and Investment Management in Asia is on track. In the U.S., as I said earlier, good progress on the preparations for our IPO.
And for Insurance Europe, we have stepped up our efforts to now prepare for the best case of an IPO. We have discussions with the European Commission on adjustments to the restructuring plan.
We held them together with the Dutch State, and we will resume these discussions after the summer recess. In the meantime, in order to safeguard the legal rights, ING has filed an appeal with the European General Court against the European decision of May 11 which reinstated the 2009 restructuring plan.
As I said earlier, many, many times, we remain committed to repay that Dutch State as soon as possible, including paying another charge this year. but at the same time, we need to maintain strong capital ratios given the uncertain economic outlook that we are facing.
Page 4, you see the divestments process of insurance in Asia, that is really on track. The businesses are now classified as held for sale and discontinued operations in our accounts.
Insurance Asia had another good quarter, performance was driven by strong sales in Japan and better mortality results in Korea while expenses were kept flat. And that excludes EUR 180 million goodwill writeoff in our investment management activities in Korea.
The increase in the book value compared with December 2011 is mainly due to bonds revaluations, foreign exchange changes and also the net results that were added to the equity value. We have received interest for all units and divestment may take place probably through multiple transactions.
Negotiations are ongoing, and we cannot predict at this moment the outcome with respect to divestments of the operations that we have for sale. Page 5, the U.S.
is making good progress towards the planned IPO. In June, the U.S.
completed a key milestone by publishing consolidated U.S. GAAP financials for the first time.
In addition, through July, U.S. has replaced EUR 1.85 billion of internal funding in commercial paper that was guaranteed by ING-V with external debt.
That way, improving its standalone funding and its liquidity. The ultimate timing of an IPO is yet to be determined and, of course, will depend on market circumstances as well.
As announced on August 2, that is Slide 6, ING is reviewing strategic options for ING Direct Canada and ING Direct U.K. It is important to note that the other ING Direct units are not affected by this.
And we see ING Direct as a key pillar of our strategy. We have strong deposit gathering ability.
There's innovation and distribution, excellent operational performance and customer centricity. So key for our operations going forward.
And ING is integrating its balance sheet of ING Direct with the rest of the ING Bank to improve efficiency and to optimize the returns under Basel III. Slide 7.
ING Bank has made real good progress, further progress, on balance sheet optimization in the second quarter. The size of the balance sheet was reduced to EUR 900 billion, in line with our target for 2015.
We also cut our CD and CP issuance after a strong inflow of short-term funding in the first quarter, and consequently reduced cash and balances with central banks by about EUR 30 billion, which anyway allow returning assets anyway. Retail client deposits were up by EUR 4 billion and customer lending increased without growing the total balance sheet.
Also, our single balance sheet reduction has a favorable impact on future taxes we will have to pay in the Netherlands. Slide 8, you see the balance sheet integration initiatives.
They have delivered EUR 31 billion since the beginning of 2011. Another EUR 3 billion is still in the pipeline for the remainder of this year and further potential now is being investigated.
And you see some examples on the right side of things we have done and moving assets to where the deposits and the funding capabilities were in good shape, and we have excess funding capability. On Slide 9, you see our Spanish exposure.
Given the weakening macroeconomic climate in Europe, we have taken proactive steps to derisk, in particular, reducing its exposure to Spain by about EUR 6.2 billion in the 4 months that ended in July. That includes a reduction of EUR 2.6 billion in the lending book and a decrease of EUR 4.1 billion in debt securities, mainly as a result of sales of covered bonds and RMBS.
The Spanish funding mismatch, defined as having Spanish assets outstanding minus local funding, has been reduced from EUR 27.5 billion at the end of 2010 to EUR 12.3 billion by the end of July 2012. I go to Slide 11.
On Slide 11, you can see that ING Bank reported robust second quarter results despite losses from derisking, pressure we saw on the net interest margin and elevated risk cost, and had an underlying profit before tax of EUR 995 million. Insurance operating results were better and improved to EUR 304 million.
Underlying results before tax were EUR 229 million, and they included a gain, hedging gain, on our U.S. VA block and a negative change in the provision for separate account pension contracts in the Benelux.
And ING Group posted an underlying net profit of EUR 1,045,000,000 in a challenging environment. Now let's go to the bank, Slide 13.
Gross results before risk costs were up by 5.9% compared to a year ago and declined by only 2% from the first quarter, supported by a strong cost control. Underlying result before tax was EUR 995 million, that is down about 13.1% year-on-year and 11% lower than the first quarter of this year.
And that reflects mainly higher risk costs. The risk cost increased mainly in commercial banking, in particular in real estate finance, due to further deterioration in the commercial property markets.
When you look at Page 14, during the second quarter, derisking efforts were accelerated amidst the ongoing euro crisis. Total bond sales amounted to EUR 2.1 billion and a loss of EUR 178 million.
The sales were largely related to Spain. Now if we clean up the numbers for these and other market impacts to make them more comparable, the gross results went down by 7.3% compared to the second quarter and 10.7% from the first quarter.
The latter can largely be attributed to seasonally lower financial market income. Page 15.
Underlying interest result held up well, declining 3.3% from a year ago and almost the same from the previous quarter. Net interest margin had a sharper decline, down 226 basis points but mainly due to balance sheet expansion.
Although the balance sheet was reduced again to EUR 900 billion at quarter end, the average balance sheet, which is the basis for the calculation of NIM, was up slightly compared to Q1 due to higher commercial paper and CD and cash that we maintained with central banks. And margins on lending have been solid despite higher funding costs.
You can see that on the right top of the slide. And margins on savings are under some pressure despite reduction of client rates in many countries.
And they reflect the impact of low interest rates and derisking. Slide 16.
You saw that cost control across the bank has supported the decline in underlying operating expense both sequentially and year-on-year for the second quarter consecutive. Compared to the first quarter 2012, expenses declined by 3.6%.
Decrease was mainly due to lower performance-related personnel expense, also stemming from the new Dutch collective labor agreement that was announced in June of this year, and also, we had a reimbursement in the balance sheet and Deposit Guarantee Scheme. Page 17, risk costs.
Further deterioration in the macroenvironment had a clear impact on the risk costs, which have increased by 22% from the first quarter and almost 78% from the second quarter last year. The increase was driven by industry lending and commercial banking, primarily within the commercial real estate, and higher addition to Dutch mortgages, reflecting lower house prices in the Netherlands.
We expect, going forward, that risk costs will remain elevated, reflecting the weakening of the economic climate. Page 18.
Nonperforming loans expressed as a percentage of total loans and amounts due from banks increased slightly from 2.3 -- to 2.3% from 2.1% at the end of March. The increase was mainly driven, as I mentioned earlier, by Real Estate Finance, also the lease run-off portfolio and the mid-corporate SME segments in the Netherlands.
Page 19. Increase in risk cost largely due to real estate finance, which was up by EUR 75 million mainly in the Netherlands, the U.K.
and Australia. The NPL ratio for real estate finance increased from 5.7% to 7.3%, and NPL ratio in Spain remained flat but at a relatively high level of 18%.
And as we said, we expect, given the deteriorating commercial real estate market, that risk costs will remain elevated. Nevertheless, the overall quality of the REF portfolio remains relatively good.
The real estate financing policy is based on cash flow generating prime real estate. As an example, construction is only 2% of the total portfolio and at least 70% is presold and/or pre-rentals.
The nonperforming loan ratio for Dutch mortgages remains stable at below 1.2% despite decline in house prices of 12% since 2008. The main reason for the low NPL ratio is the relatively low unemployment rate in the Netherlands, which is the second lowest rate in Europe.
Risk costs increased in the second quarter mainly as a result of the low house prices. Given the weak economic environment, we expect unemployment to go up and house prices to continue to decline.
And as a result, we expect some increase in our risk costs on Dutch mortgages this year but no dramatic changes. And on September 12, there will be elections here in the Netherlands.
Most political parties would like to change the tax deductibility for both new and existing mortgages. We are supporting that.
But it's important that it is being done in conjunction with a broader tax reform and liberalization of the rental markets. Page 21.
Overall quality of the loan book in Spain has remained relatively good despite the weak economic environments. Total risk costs on the Spanish lending book declined from EUR 43 million in Q1 to EUR 33 million in Q2.
NPL ratio increased slightly to 6.4%. NPL ratio on Spanish mortgages were stable at a very low 0.7%, and the corporate portfolio of EUR 6.5 billion is very well diversified and relatively well provisioned.
As in the corporate portfolio, the real estate finance portfolio of EUR 2.7 billion has a relatively high NPL ratio of 18%. However, risk costs have been manageable so far.
It's important to note that construction accounts for only EUR 42 million or 1.6% of our REF portfolio. Again, here, we expect that the risk costs will continue to remain elevated.
The core tier 1 ratio of the bank increased to 11.1%. Our risk-weighted assets increased by EUR 3.8 billion, basically driven by foreign exchange.
The impact of credit migration was limited to EUR 1 billion. And especially you see here the effect of the derisking measures that we have taken, that's why the numbers are low.
And market risk-weighted assets rose, reflecting volatility in financial markets. Let's look at the impact of Basel III on the core tier 1 ratio.
We think it's quite manageable, and we are maintaining a pro forma ratio of the core tier 1 of 10%. On a like-for-like basis, the impact on risk-weighted assets has little change from what we have disclosed during our Investor Day in January.
However, when you express it in basis points, the higher impact, which is 115 basis points in 2013, reflects the lower base of risk-weighted assets following the sale of ING Direct in the U.S. And we expect that our actions will reduce Basel III risk-weighted assets by about EUR 15 billion, of which EUR 3 billion so far has already been achieved.
The approval of IRS -- of IAS 19R will change the timing of the Basel III impact that is related to pension assets. Under this accounting provision, the new -- the pension corridor, which has served as a buffer for unrealized actuarial gains and losses, will disappear as of the January 1, 2013, and any difference will be taken through equity as of that date.
And that will bring forward part of the Basel III impact related to pensions, and the remaining pension assets will be deducted from capital gradually from 2014 through 2018. So the fully loaded Basel III impact, there's no change as a result of all this.
Last slide for the bank is the funding position. And we have a favorable funding mix, there's more than 60% coming from retail and corporate deposits.
Retail franchise consistently attracts retail deposits. Inflow again was strong, EUR 4.2 billion this quarter.
Liquidity reserves of EUR 191 billion exceed total wholesale funding, so we can able -- we are able to withstand significant retail stress on top of full wholesale liability runoff. And our Basel III liquidity coverage ratio was above 100%, which is the required minimum.
And so that, altogether, I think shows that paying attention to our balance sheet, our funding, our capital and liquidity and leverage has really paid off. Now let's go to the insurance company, Page 26.
You see that results have improved from Q1 on both underlying and operating basis, reflecting the fact that seasonally, we had higher investment margin and a positive results on regulatory capital hedges in our U.S. Closed Block VA business.
Compared to the second quarter of 2011, the results were lower, in part because of nonrecurring items in the prior year as well as also continuing pressure on our non-life results. The investment spread remained resilient.
The margin was EUR 475 million, that was up 9.5% from Q1. And it is down compared to Q2 by 2.1%, but that included last year EUR 28 million of favorable nonrecurring items.
Increase from the previous quarter was driven by seasonally higher dividends in the Benelux. We saw a growth in the general account assets and also lower average crediting rates in United States.
Investment spread improved to 133 basis points from 119 in the second quarter last year and declined slightly from the 134 basis points in Q1 this year. Investments spread is expected to decline gradually in 2012, and this will mainly reflect the ongoing derisking of our investment portfolio in the Benelux.
Fees and premium-based revenues fell slightly compared to last year, reflecting lower results in our U.S. Closed Block VA business and on higher hedging and reserve cost and lower assets under management.
Technical margin declined from the second quarter, as the prior year included a EUR 70 million nonrecurring gain. While this quarter, we had some problems in the U.S., with poor mortality results.
Page 29. The administrative expense were flat compared to prior year if we exclude the foreign exchange effects.
And that reflects again also here in insurance strong cost control throughout the organization. The ratio of administrative expense to operating income compared to last year has deteriorated, but that reflected strong operating income.
If we take a closer look at our business areas, we see that the operating results in life in Europe improved from the first quarter. It was mainly due to seasonally higher investment income in the Benelux.
Operating results declined from the second quarter last year but that included a very large EUR 98 million gain on nonrecurring items, while this quarter, we continued to see lower non-life results in the Benelux. Underlying results reflect a EUR 241 million change in the provision, a negative change in the provision, for separate account pension contracts in the Benelux, and also includes losses from further derisking and equity impairments.
Despite the macroeconomic challenges and regulatory changes in Hungary and Poland, our insurance business in Central and Eastern Europe showed an increase in new sales compared to the second quarter, mainly in the Czech Republic and in Turkey. In the U.S., we benefited from positive net flows and a strong investment margin in retirement, while insurance results reflected lower technical margin and individual life.
Underlying result was dampened by a EUR 73 million loss on the sale of alternative assets, which was done to reduce capital requirements and to lower the volatility in our earnings. Sales were up 1.1%, as higher sales of full service retirements, individual life and employee benefits were offset by intentionally lower sales in the fixed annuities and stable value, reflecting disciplined pricing in the current low rate environment.
The last slide on the insurance is the closed block. The U.S.
Closed Block VA hedge program is designed to make sure that we protect our regulatory capital across a broad range of equity market scenarios. And the top table shows that the hedges are quite effective.
Unfortunately, there's a difference between accounting, and the accounting for IFRS and regulatory accounting that leads to IFRS P&L volatility. Earnings sensitivities have changed so much over the quarter, primarily reflecting a slight decrease in the reserve adequacy.
That is now at the 59% confidence level, so we have updated sensitivities for Q3 as you can see in the slides. So let me wrap up.
We are maintaining strong momentum on restructuring including our sales process in Asia that is on track, a good preparation for IPO in the U.S. and in Europe.
The bank is making good progress on balance sheet integration, and we have accelerated our derisking efforts. The group has posted an underlying profit of EUR 1,045,000,000, excluding the results from insurance Asia, which is reflected in results from discontinued operations.
The bank have pretax results of EUR 995 million, and insurance had pretax operating results of EUR 304 million. With that, we are ready for taking your questions.
Operator
[Operator Instructions] The first question is from Spencer Horgan from Deutsche Bank.
Spencer Horgan - Deutsche Bank AG, Research Division
Two questions on the insurance side, please. The first one is you've sort of suggested quite strongly early on that Asia could come in multiple transactions.
And often, obviously nothing certain at this point, but I was wondering if you could give us your feeling at least to how confident you'd be that you can achieve a 100% ex of Asia on that basis? And then the second question is, on Slide 5, you talked about this transfer of $500 million into SLDI.
Could you firstly just expand a little bit on why that's happen and what's going on there? And secondly, more broadly, is there a risk that further transfers may be needed as the medium heads towards equivalents under the Solvency II regime?
Jan H. M. Hommen
Okay. The first question, Spencer, good morning -- Asia, yes, I think we are tracking our process quite well.
We're very pleased so far with what we have seen also on bps. As I said, we -- it's most likely that we will have to do multiple transactions to complete the sale, and then we'll have timing consequences so not all the transactions will have, let's say, will take place at the same time.
But I believe ultimately, we will have the -- we will sell 100% of all the assets in Asia. And with respect to the SLDI, Patrick?
Patrick G. Flynn
Yes, the reallocation, it simply follows the update on reserve adequacy we talked last year. So we're basically upstreaming capital from the operating companies to the holding company and pushing some down to SLDI.
This was planned, and I think we even flagged it, following the reserve adequacy update at the end of last year.
Spencer Horgan - Deutsche Bank AG, Research Division
Okay. But do you think there's any possible further need to put more money into SLDI as the medium moves towards the Solvency II basis?
Or do you think it's adequately capitalized?
Patrick G. Flynn
I believe the mid [indiscernible] is doing Solvency II.
Spencer Horgan - Deutsche Bank AG, Research Division
Sorry?
Patrick G. Flynn
Yes, at the moment, we think this is the adequate level of capital in SLDI. We don't envisage any further changes.
Operator
The next question is from Farooq Hanif from Morgan Stanley.
Farooq Hanif - Morgan Stanley, Research Division
I just had a few questions again on the insurance side. Firstly, could you tell us if you're seeing any further deterioration in policy holder behavior in variable annuities?
I mean, one of your peers in the U.S. has seen the additional problems with the GMIB book related to partial withdrawal experience.
So just when will you update us on that and what are you seeing? Related to that, do you have any data on the living benefit reserving to net amount of risk?
I believe that was about 70% last time you updated us. Has that changed?
Because that amount of risk has gone up or down? If could you tell us that.
Next question is the EUR 1 billion of book value that you have in internal reinsurance of the Japanese VA book, what happens to that book value in the sales process? Does that have -- forgive my slightly stupid question, but does that -- is that sort of included in addition to the EUR 6.4 billion tangible equity that somebody will have to pay for?
How will that work in the transaction? And lastly, could you make a quick comment on investment margins elsewhere outside of Benelux, just the pressure from low yields.
Patrick G. Flynn
Okay. In terms of the last assumption update, that's something we do annually.
We typically do that in Q3, and we will conduct that study and communicate on that once it's done. So there's not really much I can say about that at this point or give update before then.
In terms of net amount of risk, we haven't given them this quarter. There were some in the U.S.
filing Q1, but I suggest if you want to dig there on the U.S. GAAP basis, I suggest if you want to look at those, perhaps you might talk to our Investor Relations team who can take you through that.
And in terms of ING-Re, yes, it's difficult to see how this will pan out. It depends on what they have -- what type of -- how the transaction works, what type of transaction.
So it's premature to really comment. But yes, for the total sale, this could be in part of the overall equity involved.
But we can't be specific until we know the details of that transaction.
Farooq Hanif - Morgan Stanley, Research Division
On that point, could that be a situation where you sell Japan, but you continue to reinsure it from ING?
Patrick G. Flynn
No, I can't comment yet on how the transaction -- Jan has already mentioned it could be in a number of blocks, but I really can't comment further as to how that might be structured.
Farooq Hanif - Morgan Stanley, Research Division
Okay. And could you comment on investment margins?
Just I mean, I would have thought we'd expect pressure elsewhere not just in the Benelux given the low yield environment. What are you doing to offset that and what do you see as guidance?
Matthew J. Rider
Well, this is Matt. At least for the Benelux, we saw the investment margin at about 111 basis points.
I think we had given in prior guidance that we would expect to see that come down for the full year, something like 10 to 15 basis points from the 114 that we had for the full year 2011, and we would still expect to see that, in fact, likely at the upper end of that range as we continue to derisk. In the U.S.
businesses, clearly, reinvestment at lower rate is going to put pressure on margins. But what we've seen is more action on the crediting rate side being able to reduce creditor rates, so you see that at about 169 basis points for the quarter.
Farooq Hanif - Morgan Stanley, Research Division
Do you think you'll continue to maintain decent margin in the U.S.? Because you got more ability to reduce crediting rates?
Matthew J. Rider
Sorry, we didn't quite hear your question. But yes, I mean, I think this is going to come down to a certain extent given the low interest rate environment.
But we're doing what we can, again, on the credited rate side to be able to maintain those margins.
Operator
The next question is from Farquhar Murray from Autonomous.
Farquhar Murray - Autonomous Research LLP
Just 2 questions if I may. Firstly on asset quality, and commercial real estate, I just wondered if you could give a breakdown of the EUR 120 million of loan losses there, and also actually a breakdown of the NPL rate of 7.3% by the key geographies if possible.
And also could you just give a bit of color that around in terms of what your expectations are there and what specifically is driving the uptick in loan losses in that business? Is it particularly -- is it coming from refinancing limits or businesses hitting refinancing?
Secondly, in terms of the Spanish funding mismatch, I mean, you've made quite substantial progress there, reducing it by about EUR 7.3 billion since 1Q. Presumably, that included some quick wins.
I just wondered what is the realistic ability to work that down in the coming quarters and what might be an aspirational target there?
Wilfred F. Nagel
Yes, on the asset quality and the breakdown of the risk cost, obviously, if you look at the book and you look at where the biggest chunks are, that sort of is also reflected in the risk cost that we're taking. But just to give you a quick rundown, there's about EUR 50 million in the Netherlands, there's about EUR 27 million in the U.K., there is EUR 36 million in Australia and about EUR 18 million in Spain.
So that gives you pretty much what's there. Yes, the dynamics of these markets are not all the same.
But indeed, you see in quite a few markets that the ability of companies to refinance debt that comes due is limited. And that puts pressure on the asset values as well.
There are also some specific issues in each of these files that are not really market-driven. The mismatch in Spain, well, that is a combination of a number of actions.
One is bringing down the overall asset exposure that we have in Spain. Two is in increasing the local funding that we attract.
And both are actions that we believe we can continue. And certainly, in terms of reducing our asset exposure, there is a natural runoff in the book there that is quite substantial.
For example, if you take the scheduler portfolio, the average maturity there is about 2.8 years. And the lending book also has a natural runoff.
And we have, as you've seen, taken specific opportunities to further derisk by selling securities. As and when opportunities arise, we will continue to do that, but at the right prices, obviously, because we do believe that this book is of good quality.
Farquhar Murray - Autonomous Research LLP
Just as follow-up on that, what was the par mark on the covered bond book and the RMBS book in Spain?
Wilfred F. Nagel
Sorry, I didn't quite catch it?
Farquhar Murray - Autonomous Research LLP
Just as a quick follow-up, if you could. Do you have the par mark, i.e., how much the pricing was on the covered bond book?
I think you'd indicated about 96% of par at 1Q. I just wondered if you have an update around that, please?
Wilfred F. Nagel
I think we sold on average at about 97 or so in the scheduler book and the average market prices that we're seeing at the moment are around 94 or so.
Operator
The next question comes from Michael Huttner from JPMorgan.
Michael Huttner - JP Morgan Chase & Co, Research Division
I had a couple of questions. So the net inflows, the EUR 4.1 billion in deposits, I just wondered where you could say where exactly they came from?
And then as a follow-up to the derisking in Spain. So you've reduced the assets in Spain by EUR 4.7 billion in Q1, that costs EUR 156 million in terms of derisking cost, so that's 3.3%.
In July, you derisked another EUR 1.5 billion, which costs EUR 78 million, so that's 5.2%. So this is accelerating and what sort of -- I mean, it looks -- I mean, obviously you would have done the low-hanging fruit first, and it gets a bit harder and bit more expensive.
Can you get a feel for how much more expensive it could get? We'll going to be looking at like a 7% ratio sort of rest of book or something like that?
And then this is a little bit a funny question. So in Asia, if I remember, 1.5 years ago I guess or something, you're going to sell the whole of Asia -- sorry the whole of insurance I think, and then it becomes the whole of Asia, and now it's country by country or even business by business, I don't know.
And is there a chance in Europe that you could adopt the same approach? The -- or is kind of preparing for an IPO a first step to clearing the books and then essentially inviting everybody to have a look and then you can start the process of piecemeal reform?
Jan H. M. Hommen
Yes, I think the calculation you make on Spain is a calculation that I don't think you can make because this is impacted by what's available at what point in time, and not necessarily, I think, is this reflecting a trend. So I think we need to see going forward what the price levels are.
And as Wilfred indicated earlier, we're not going to do at any price. We will be -- we will do it at the appropriate price.
And when we think that the risk elimination that we get relative to the price we pay is a reasonable one. With respect to Asia, yes, we like to do a full sale, but we were not against doing a partial sale or, let's say, a sale of pieces, because in the end, that can create also attractive value.
And that doesn't mean that we will do exactly that in Europe. In fact, in Asia, we had not considered an IPO.
In Asia, it was either a sale to a strategic partner in full or in parts. In Europe, we are saying we are doing an IPO and that means we have IPO as the best case.
We will have, of course, to work with the company to make sure we have the performance that can stand the IPO. But at the same time, we need to watch how markets will develop.
But that's the work that we are doing. It's certainly not a representation that in Europe we will do what is happening in Asia.
That will -- our plan is to do an IPO.
Operator
The next question is from Michael van Wegen from Bank of America Merrill Lynch.
Michael van Wegen - BofA Merrill Lynch, Research Division
I just wanted to get back to the point that you made earlier about selling ING Direct Canada potentially and the U.K. actually.
Can you talk us through the impact from such a potential deal for the restructuring of your insurance businesses? I mean, strategically, I can understand why you want to get rid of these 2 banking operations, but the proceeds, together with potential proceeds from your Capital One stake, must have an impact on repaying holding company debt, and therefore, the flexibility that you get on the restructuring from your insurance assets, any insight there would be great.
Jan H. M. Hommen
Yes, Michael. We are doing this for, I think, strategic reasons.
But at the same time, we have course, an eye on our balance sheet and the flexibility that we create by doing this. We have not determined exactly what will happen.
First of all, we need to do the sale. That is not done yet.
After that, I think we can discuss what will happen with the proceeds. But clearly, flexibility is an important element in this.
Michael van Wegen - BofA Merrill Lynch, Research Division
Okay. But would you be willing to use those proceeds to reduce the holding company debt?
Because in the past, you've always stated that the bank effectively repays the state and the holding company debt would be funded through insurance disposals. Are you willing to potentially change that mix a little bit?
Jan H. M. Hommen
Well, I think, as you know, money is fungible at the end, so you can use it for multiple purposes, and I think that's still the case. So it creates flexibility in our planning going forward, then I think that's not that important to us.
Operator
The next question is from Francesca Tondi from Morgan Stanley.
Francesca Tondi - Morgan Stanley, Research Division
A few questions on the bank again, if I may. Margins, how would you see margin, net interest margin, developing over the next few quarters, also in light of the further reduction on Euribor, possible rate cuts by the ECB?
And if you could possibly comment, clearly, you are one of the banks with the longest -- with the biggest liquidity pool at the ECB. There've been lot of talks of potentially even looking at excess reserve in a negative rate.
If those were to happen, what impact would they have? How would you react in terms of your liquidity management?
That will be helpful. Back on asset quality and provisions.
Again, I know you've been asked about the commercial real estate, especially in the Netherlands, but if you could just give us a bit more color of what is happening there. And you continued to talk of elevated provisions.
Should we take the natural provisions will likely continue to increase in the following quarters? I think if you could comment on that, it would be helpful.
Patrick G. Flynn
In respect to interest margins, yes, the overall interest margin in euro terms did come down in the second quarter by about 3%. In basis points terms, it looks higher from 132 to 126.
And that's due to, as Jan mentioned, the continued growth in the balance sheet, something we corrected at the end of the quarter, and you'll see the benefit of that lower balance sheet in subsequent quarters. Going more closely to your question, what we've seen in terms of under the hood a bit is that our commercial margin, excluding volatile elements like financial markets and corporate line, was stable, actually slightly up.
And under the hood there a bit, you see that the loan margins improved a bit and deposit margins dropped a little bit. And now we are reducing deposit margins -- sorry, deposit rates paid.
We've reduced them in the Netherlands by 20 basis points. That come down initially in France and continues to come down.
Germany reduced by 25 basis points in Q3. And the dynamic though is that whilst we are reducing the amount paid, which is positive for margin on deposits, you're also seeing a decline in interest rates.
And then element 2 is derisking, which reduces the value of funds with the earnings you have, which contribute to your deposits. So that sort of mutes a bit the impact of the reduced deposit prices.
Going forward, provided interest rates stabilized a bit, we would expect that on the interest margin side, particularly on deposits, there should be some stabilization because the cuts in deposits rates to customers we think can offset the lower market rates and derisking impact. I mean, the positive bit overall for margins though is that on our loan side, we are holding margins, in fact, slightly increasing them against a much higher cost of funding which is a real positive.
It's something that is core to our achieving our longer-term ambition of 140 to 145 basis points we talked about at the Investor Day, the ability to reprice on the loan side, and we're seeing evidence that we're able to do that albeit lower demand is a little bit muted. And so what does that all mean?
I think it means outlook for the core business is stable in euro terms. In basis point terms, it should improve a bit because the balance sheet reduction will reverse the impact, the 4 basis points in Q1 and 1 basis point in Q2 of negative impact on the margin due to balance sheet expansion.
So in basis point terms, it should improve, in the euro terms, stable. It's the best we can judge it for now.
Francesca Tondi - Morgan Stanley, Research Division
And a in lower Euribor from here, would put a little bit more pressure on margins?
Patrick G. Flynn
Yes. As I said, yes, if interest rates lower, that may reduce the earnings we get on over time in terms of [indiscernible], but also it could stimulate further deposits reduction.
But we'll have to see.
Francesca Tondi - Morgan Stanley, Research Division
And if the ECB will move to negative rates on the reserves, how would you think about your excess liquidity?
Patrick G. Flynn
Well, no, as you saw what we did in the balance sheet, we reduced the balance sheet significantly in the quarter and we reduced the amounts placed with the ECB. And we are, as you say, as provider of funding to the ECB.
They've cut the rate to 0 as we get nothing for us, and that's part of the reason we reduced our overall placements. We got our balance sheet now at the EUR 900 billion level, which is where we targeted it at the Investor Day, and we will actively manage it going forward.
Francesca Tondi - Morgan Stanley, Research Division
And if you were to kind of keep rebalancing your liquidity, where would you -- away way from the ECB, where would you rebalance it to and what kind of assets, if I may ask?
Patrick G. Flynn
Obviously, if you're earning nothing on deposits with the ECB, you try to clear might there.
Francesca Tondi - Morgan Stanley, Research Division
Yes, is it other CD papers, other CDs or...
Jan H. M. Hommen
I think we constantly evaluate what we will do. The best thing that we can do is make sure that we keep our balance sheet as healthy as we can.
And if you don't get anything for putting your money someplace, you may as well put it in your own company and use it to your own benefit. So at the same time, as you can see, we haven't significantly improved our own liquidity by having done what we did.
So I think we'll management this quite carefully. If it gets to negative, yes, there's no incentive to put a lot of money with the ECB.
And you see that in our balance sheet today.
Francesca Tondi - Morgan Stanley, Research Division
And I have a last point on the asset quality and provisions.
Wilfred F. Nagel
And going back to your question on commercial real estate in the Netherlands, and your question was what's going on there. Well, in the first quarter, we saw a bit of turmoil effectively caused by what was basically you see in the structure being on bound [indiscernible] and the portfolio being sold without creating a lot of coverage of developments in the real estate market in the Netherlands.
But what we saw subsequently was, frankly, not a lot of activity. And we're seeing vacancies in the Netherlands creeping up.
And we continue to see very difficult refinancings, a lot of banks have withdrawn from that market. But that's not a new development.
We've signaled that before. We also gradually see the weighted average lease expiry terms coming down a bit.
Having said that, our derisking of that portfolio continues. You can see the exposure slowly coming down and we didn't have any write-offs in the second quarter.
So there's other than a number of things that we already have on the books and have identified these problems and that we're working our way through, there are no big new developments there. And your question on provisions and whether what you're seeing now is a trend.
As we have said and as both Jan and Patrick have said, we expect provisions to stay at elevated levels. And they are very closely connected to the macroeconomic trends in the main markets that we're in.
And those are not positives. So we can definitely count on seeing levels like these and we are not expecting any reduction anytime soon.
Operator
The next question is from Francois Boissin from BNP Paribas.
Francois Boissin - Exane BNP Paribas, Research Division
Gentlemen, 2 remaining questions, please. The first one is on ING Direct.
Could you maybe just specify what's the main rationale behind putting the U.K. and Canada for sale.
Is it that you would be able to achieve a high price? Or do you feel that you need more flexibility to deleverage?
And why basically didn't you include Australia within the process? And second Question regards the disposal of Asia in Insurance.
Could you just comment on the evolution of the process for investment management businesses? And is it basically following the same calendar as insurance operations or is this completely separate?
Jan H. M. Hommen
Yes, the reason for selling ING Direct in the U.K. and Canada is these are good businesses, and we always do an evaluation from time to time on our portfolio.
You need to be looking at not just what is nice, but also can you strategically do with your business what needs to be done going forward, not only this year but let's say, 3 to 5 years ahead. And then you need to make choices.
Are you putting your capital here or are you putting it someplace else? And we only have so much capital available, so we need to make choices where we are investing that limited capital that we have.
And I think when you do a rational analysis, this came out. We have also divested our ING Direct business in North America, so fully, I think it's the result [indiscernible] from North America that we are accomplishing now.
And then what we will do with the proceeds, I think, will depend at the time when we get that. We will include that in our overall picture, and then look at it from a corporate perspective where we can best make the proceeds work.
And I think the same applies to our Asian operations, when the proceeds will be used, where we see the best fit on a corporate basis and where we may have to do certain things related to making sure that the business going forward has the capital structure and has the capability to do what it needs to be done.
Francois Boissin - Exane BNP Paribas, Research Division
Okay. And the rationale for keeping Australia in terms of what you see attractive interest of underlying business there?
Jan H. M. Hommen
I think our Australian business is doing well. We like our Australian business.
As I said earlier, we cannot maintain them all, so we have made some choices, some rational choices where we can continue to invest them or not. And we think our exposure to Australia is also a reflection of an indirect exposure to the Asian market.
And that I think is important in evaluating the region to maintain our position in Australia.
Francois Boissin - Exane BNP Paribas, Research Division
Okay. And regarding the Asian disposal processes?
Jan H. M. Hommen
Yes. The timing for Asia's sale is quite -- I think what you will see is that some units will go quicker than others because they are more complex and they will need more time.
Joint ventures take more time. So there will be a number of announcements being made if we go the route of multiple sales.
But I would expect that some of those things will go relatively quick.
Francois Boissin - Exane BNP Paribas, Research Division
Okay. And may I just ask in terms of investment management, I mean, do you plan to sell the Investment Management business as a whole or do you plan to sell it by geography as well?
Jan H. M. Hommen
We're looking at both options. I cannot say which way it will go.
It depends on the appetite of the bidders will have.
Operator
The next question is from Hans Pluijgers from Cheuvreux.
Hans Pluijgers - CA Cheuvreux, Research Division
Three questions for me. First of all, you talked about your real estate loan loss provision going forward.
But could you also, let's say, discuss more on the corporate loan book? There you saw that the nonperforming loans increased from 2.6% to 3.6% quarter-over-quarter, so what do you see there?
I understand that the increase in loan loss provisions mainly has to do with one bigger file, but what's your, see let's say, underlying trend there? Could you give some color there?
Secondly, on the Korean goodwill write-down, could you give us some feeling why you did that write-down? And yes, can you give us some color there?
And secondly, with respect to the impact from reduction of balance sheet on a tax position, in an announced tax -- positive for tax in the long run, could you give some feeling what you're meaning there and what you see, let's say, more in numbers going forward?
Patrick G. Flynn
I'll answer the technical one. In respect of the IM Korea impairment, this is somewhat -- this is technical.
It's a consequence of the IFRS 5 requirements. It is quite clear, we are quite in advanced stage in the process, and as a consequence of that, we are required to report these businesses as discontinued operations under IFRS, so they don't appear underlying separate line in the balance sheet and P&L.
A follow-on consequence for that is that you have to ensure where the estimated proceeds are less than book, then you are required to review an impaired goodwill. So this occurred in IM Korea only.
And as a consequence, as I say, the goodwill in IM Korea only was impaired, so technical IFRS requirement.
Wilfred F. Nagel
I think your question was we've talked about the real estate risk cost that you wanted to know a bit more about the general corporate portfolio. If you look at commercial lending overall, the NPLs were up from 3.9% to 4.3%.
And that, again, reflects just the macroeconomic situation. If you look at the various components, the corporate lending book indeed was up from 2.6% to 3.6%.
That includes, SME and mid-corporates, which indeed is a segment that is having a tough time also in our core market here in the Netherlands. You may have seen from the press that bankruptcies in the Netherlands went up quite sharply in the first half, and of course, we're seeing that reflected in our loan books as well.
And the other part of commercial lending where we see upticks apart from real estate finance is mainly in leasing, where also the NPLs are up from about 6.3% to 6.8%. And on the other hand, in structured finance and our industry lending businesses, the NPL levels are relatively stable.
And generally speaking, what we see the larger corporate performance is doing well and it is really in the mid-corp and SME books where we see the pressure.
Jan H. M. Hommen
The question on tax, it had to do with the -- there will be a new bank tax in the Netherlands, and it will be levied on your total lending -- I'm sorry, on the borrowing that you have done. So there is an incentive to make sure that where you can, that you reduce your borrowings.
Operator
The next question is from Federico Salerno from MainFirst.
Federico Salerno - MainFirst Bank AG, Research Division
Capital question on my side. The first one on ING Direct U.K., do you expect a positive contribution to operating earnings for 2012?
And if you can give out the number for the first half. That's the first question.
Then on your tier 1, it's already 10%, which I think is a bit higher than what you're expecting at the Investor Day. I mean, is it conceivable that you might repay the state sooner rather than later based on this?
What's going to be the trigger here?
Jan H. M. Hommen
Okay. On ING Direct U.K., I don't think we can forecast what will happen in the quarters to come.
On core tier 1, yes, I think we have a good core tier 1, 11.1%. But as you can see, when you comply with Basel III, you need to have a good core tier 1 because the requirement if you want to maintain a 10% core tier 1, there will be some additional requirements related to pension adjustments that are being made effective January 1.
A good Core Tier 1 is also important for us to be able to repay the Dutch State. And as I said, we like to do that as quickly as possible.
We are discussing with the Dutch State and with the European Commission on a program that will be resumed after the vacation time, and then if possible, we'd like to repay at least a portion certainly this year.
Operator
The next question is from Anke Reingen from Royal Bank of Canada.
Anke Reingen - RBC Capital Markets, LLC, Research Division
It's Anke from RBC. I had 2 questions on the bank, please.
Firstly, on asset quality, I was wondering on the commercial real estate, if you can give us some data on the coverage of NPLs and how this has changed versus Q1? And then you keep on saying you expect loan loss charges to remain at elevated levels, but given the trends in NPLs, should they not actually increase in the coming quarters?
Then on the capital slide, thanks for the update, I just wondered what would the 9.4% be if you take the DTA and the pension into account as well?
Jan H. M. Hommen
Can you repeat the last question because we didn't get it?
Anke Reingen - RBC Capital Markets, LLC, Research Division
On your capital slide, the 9.4% core tier 1 ratio pro forma, is that ex the -- or you would -- this basically assumes the DTA will be assumed? And also I would assume it's pre the pension coming in from January 1, 2013, while a number of other banks have basically included this in their pro forma guidance as well.
So I just wonder would the 9.4% would be pro forma for the DTA and the pension?
Wilfred F. Nagel
Yes. On the real estate finance book, well, we talked about the asset quality and the NPL levels, and maybe just a quick rundown on those.
In the Netherlands, we're looking at 5.9%; in U.S., we're looking at 8%; Spain, as we've discussed, is around 18%; U.K. is also at that level; and Australia is slightly above 20%.
You asked about coverage levels. Overall, they're stable quarter-on-quarter at 27%.
We have a slight increase in cover rate in the Netherlands, 26% to 27%. We have an increase in Spain from 33% to 36%, and an increase in Australia to 41% from 25%.
So a gradual increase in coverage levels, and then an uptick overall in the NPL levels from the portfolio, as we said, from 5.7% to 7.3%. And, well, I think the provisioning levels, we talked about that.
Projecting provisions is, of course, always difficult. It's a bit of a lumpy thing.
But overall, in the medium term, this is very much linked to the macroeconomic development which, as we said, is not positive and we're, therefore, expecting to continue to see elevated levels.
Patrick G. Flynn
In respect to the DTAs, we don't include them because we believe we've used them up with profits. At the IR Day, I think it was 25, now it has come down, as we're using -- the profits will return to approximately 18 to 20 basis points.
In terms of pension, I mean, it is included, the impact in the phasing to 14 to 18. I think the point we're making is this can be volatile going forward depending on how market interest rates perform.
And it could be that in the future you have some of it more being accelerated into as part of impact. But we don't -- we can't predict the future so we don't know.
The last time we had formal results published in the pension, this would be the number. We will update it at the end of the year when we know more.
Operator
The next question is from Lemer Salah from SNS Securities.
Lemer Salah - SNS Securities N.V., Research Division
Three questions from my side. First of all, could you elaborate on the NPL definitions in Spain, whether that has changed?
Secondly, on the liquidity of covered bonds in Spain, can you say whether the liquidity has improved or deteriorated in the course of second quarter? And my final question is with regard to the pension scheme.
You have shifted from a DB to DC, and I presume that the IAS 19 impact will be not significant going forward since it's only applicable for DB pension schemes. Am I right?
Wilfred F. Nagel
Yes, on the NPL definitions, there's no change. And you asked about liquidity of the covered bonds in Spain.
A lot of that has come from buybacks by the issuers which has helped us quite a bit in the second quarter. And there are no programs or restructurings or anything going on at this moment in the mortgage portfolios underlying them.
And of course, liquidity of this paper comes and goes a bit with the macroeconomic developments and the developments politically also around the support for Spain. So it's moving, but then we have taken advantage of quite a bit of liquidity in the second quarter, and we're pleased with that.
Patrick G. Flynn
Yes. In respect to the pensions, we announced that for new contributions after January 14, we'll move to DC.
However, the existing block will remain as a DB. And that is why we're including it in the impact for Basel III.
Lemer Salah - SNS Securities N.V., Research Division
Just 2 follow-up questions. First of all, on the covered bonds, so if Spain is downgraded by Moody's, I presume that the liquidity will further deteriorate.
How would you react on that? And secondly, on the pensions, can you quantify what the total size of the book is, which is still on a DB scheme?
Wilfred F. Nagel
On the first question, I don't think necessarily that a downgrade will have a big impact on liquidity. That's also not what we have really seen in the first 2 quarters of the year.
Patrick G. Flynn
Yes, I think the size of the DBS is about EUR 18 billion.
Operator
The next question is from William Hawkins from KBW.
William Hawkins - Keefe, Bruyette & Woods Limited, Research Division
Back on bank asset quality, can you help me understand why the total coverage ratio has fallen very slightly in the second quarter from 39% to 38%? Everything I've heard from you guys has been about coverage ratios going up, so I don't know if there's a mix affect or if there's something else going on.
And then can you tell specifically what's happened to the coverage ratio for Dutch mortgages? And again, apologies if this is disclosed somewhere and I've missed it.
Wilfred F. Nagel
Okay. On the first question, indeed, it's mainly a mix matter.
There is not a general reduction or change in our provisioning policy. And the coverage ratio of Dutch mortgages, off the top of my head, that is about 11%.
And we're digging up the exact number. Yes, it's 11% I'm getting here.
William Hawkins - Keefe, Bruyette & Woods Limited, Research Division
Mix effect. Because again, it sounds to me like the areas that are going up in terms of the contribution to NPLs are the areas where the coverage should be higher, so I would have thought the mix effect will be driving up for the coverage ratio.
Wilfred F. Nagel
Well, I think in the NP, the coverage ratios that you're seeing are heavily influenced by the fact, particularly on the retail books, that there is a lot of IBNR there, which is influenced by model LGDs. And if you look at the write-offs, that's ultimately what counts, then we're still seeing levels below what we reserved.
So we have an experience of a very long period where in the end, our write-offs are always less than what we reserved in terms of provisions. And I think the mix of model-based IBNR reserves and the underlying realities makes it very difficult to compare it to.
Operator
Today's final question is from Tarik El Mejjad from Nomura.
Tarik El Mejjad - Nomura Securities Co. Ltd., Research Division
I have 2 quick questions. First one in terms of the divestments of the noncore business, if I can call that like that.
I mean, you mentioned that the Asian banking entities and also just take on Capital One, so what is your strategy on that? Are you thinking to divest that in case your short in terms of capital?
Secondly, in terms of repayment of states aid, I just wanted to know, I mean, do you -- I mean, are you needing to do this as your conversion option? You still can do it?
Is it one of the topics that you are discussing now with the EC and the Dutch State?
Jan H. M. Hommen
Okay. Selling stakes in Asia and our position in Cap One, I don't think we are at liberty to discuss that.
We'll look at them from time to time. We will evaluate our position.
I must say, certainly, with Capital One, we're very happy with the position we have taken. And when the time is right and things fall into place, then I think we'll make a decision on that.
State aid, we are looking at all the options that we have as we are paying the Dutch State. And that's why we have discussions with the state itself and as well with the European Commission.
All that hangs together, and we'll know more after the holidays, after the vacation time when we hopefully will resume our discussions again.
Tarik El Mejjad - Nomura Securities Co. Ltd., Research Division
How these discussions advance? Obviously, I'm looking for details here.
But is it something advanced or are you still just at the beginning?
Jan H. M. Hommen
No, I cannot give you any details because we are still in negotiation and discussions, so I think it's better to hold off until we -- I can give you the details. But not at this point in time.
Operator
Sir, there are no further questions.
Jan H. M. Hommen
Okay. Then I would like to thank you, all, for participating in the call and wishing you a great day.
Thanks. 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.