Feb 13, 2013
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 Wilfred F.
Nagel - Chief Risk Officer, Member of Executive Board, Member of the Management Board Banking and Member of the Management Board -Insurance Doug Caldwell - Chief Risk of Insurance/IM Eurasia and Member of The Management Board of Insurance Eurasia (MBE)
Analysts
Michael van Wegen - BofA Merrill Lynch, Research Division Farooq Hanif - Citigroup Inc, Research Division Farquhar Murray - Autonomous Research LLP Francesca Tondi - Morgan Stanley, Research Division William Hawkins - Keefe, Bruyette & Woods Limited, Research Division Michael Igor Huttner - JP Morgan Chase & Co, Research Division Andrew P. Coombs - Citigroup Inc, Research Division Francois Boissin - Exane BNP Paribas, Research Division David T.
Andrich - Morgan Stanley, Research Division Jan Willem Weidema - ABN AMRO Bank N.V., Research Division Benoit Petrarque - Kepler Capital Markets, Research Division Steven Haywood - HSBC, Research Division Matthias De Wit - Petercam S.A., Research Division Anke Reingen - RBC Capital Markets, LLC, Research Division Lemer Salah - SNS Securities N.V., Research Division Benoit Feliho
Operator
Good morning. This is Camilla welcoming you to the ING's Q4 2012 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 future financial performances and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement.
A discussion of factors that may cause actual results to differ from those in any forward-looking statements is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitute an offer to sell or a solicitation of an offer to buy any securities.
Good morning, Jan, over to you.
Jan H. M. Hommen
Okay, thank you. Welcome, everyone, to the ING Fourth Quarter 2012 Results Conference Call.
2012 was a transformational year. We worked hard to restructure the group further and preparing Bank and Insurance for independent futures.
Results held up well for the year despite the sovereign debt crisis in Europe and a weak economy, which we endured during all of 2012. I will now talk you through the presentation.
Patrick Flynn and Wilfred Nagel are here with me from the Executive Board. Also, Delfin Rueda and Doug Caldwell, respectively, CFO and CRO of Insurance EurAsia are here with us.
And Ewout Steenbergen, CFO of the Insurance Company U.S., is on the call. So all are available to answer your questions.
Slide #2. Results held up well, came in at EUR 2.6 billion underlying net profits, which is down 5.2% from 2011.
Fourth quarter results were impacted by the Dutch bank tax and various market-related items, leading to an underlying profit for the group of EUR 373 million. The Bank underlying result was EUR 184 million.
And it had to deal with EUR 188 million negative credit adjustments, EUR 151 million of derisking losses and EUR 175 million of Dutch bank tax. The Insurance operating results improved compared to the third quarter, and they came in at a little less than EUR 300 million as the investment spreads strengthened, and the underlying result before tax rose to EUR 272 million.
You see the full year results on Slide 3. Net profit for the group was almost EUR 3.9 billion, including the gains that we had on the sale of ING Direct USA, ING Canada and Insurance Malaysia.
Net results also included a EUR 452 million restructuring charge, which will help to drive the future performance. We announced today an expansion of an exchange program in the retail Netherlands, as well as the new program in Belgium.
These come on top of the initiatives that we announced last quarter in Commercial Banking and in Insurance Europe as we invest in operational excellence, and we make sure that we have process improvements so that we can serve our customers better. At the same time, we are adjusting our cost base as necessary by the tough economic environment.
On Slide 4, you see that combined measures will reduce expenses by about EUR 1 billion by 2015. Cost initiatives that we announced at the end of 2011 are ahead of schedule for retail Netherlands.
We have already scored EUR 162 million in cost savings so far out of the EUR 330 million that we expect to gain. Today, we announced an expansion on the program, basically because we need to meet the rapidly changing needs that our customers are showing in the way that they used quickly to mobile banking.
In The Netherlands, we aim to realize cost savings of an additional EUR 100 million by 2014 and EUR 120 million in total, including a further headcount reduction of 1,400 FTEs. In Belgium, we are trying to achieve EUR 150 million savings by 2015, reducing headcount by roughly 1,000 full-time equivalents through natural attrition.
I will come back on these programs little bit later in the presentation. Good progress was made on the restructuring program that we have agreed with the EC.
We divested to U.S., ING Direct U.S. We sold our stake in Capital One.
We announced the sale of Insurance Malaysia, Hong Kong and Thailand through joint ventures and the Investment Management units in Thailand and Malaysia. We -- the U.S.
Insurance, U.S. filed a registration with the SEC.
And it's making good progress for later this year for preparation for an IPO. We reached an agreement with the European Commission last year, including an extended deadline on a solution for WestlandUtrecht Bank.
We have repaid another tranche to the Dutch State, making now the total payment already to a total of more than EUR 10 billion and the upswing [ph] to an additional EUR 1 billion from the bank to the group in order to reduce the core debt. And at the same time, we continue to work on the process in Korea and Japan and continue to work hard on making sure we do the IPO in the U.S.
and getting ready in Europe for one as well. You can see on Slide 6 what this all means for our balance sheet.
And we reduced the core Tier 1 to EUR 2.25 billion. The core debt of the group is now down to EUR 7 billion.
Proceeds from Malaysia were used to redeem bonds, hybrids of EUR 1.25 billion in Insurance that we closed in December. We had to do that to make sure that we can divest the Insurance company going forward later.
Hong Kong and Thailand is expected to close in the first quarter this year. We'll bring in EUR 1.6 billion in proceeds, but we will wait until we have a complete picture, including the sale of the remaining Asian businesses and until we have a solution for the Japanese VA business before we will decide how much we can upstream to the group to further reduce the double leverage here.
And of course, we want to make sure that Europe and the U.S. are well capitalized on a standalone basis before we do an IPO.
Ultimately, the proceeds for selling Insurance was EUR 27 billion of equity, should be more than sufficient to cover the EUR 7 billion we made in leverage in the group. But everything requires time, and I think it's important that we take the time to execute as well.
On Slide 7, you see that the Bank is already meeting most of Basel III. And as we had agreed last year on the Investor Day, the priorities were that we would transition quickly to Basel III, that we would limit our balance sheet growth and RWA growth, that we would execute a balance sheet optimization program, further simplify our business and take a prudent approach to capital and funding given the unstable market conditions.
I think we have delivered on all these objectives and priorities, and we are basically meeting Basel III requirements today. The core Tier 1 ratio is at 10.4% on a fully loaded basis, exceeding the target that we have set for ourselves of 10%.
The LCR is above 100 and the Basel leverage ratio has reached a maximum here of 25%. The balance sheet optimization is on track.
We have reduced our balance sheet by EUR 137 billion since September 2011. And it's already below the target we have set for 2015, which was EUR 900 billion, of course, mainly because we are selling and have sold assets in ING Direct U.S.
and ING Direct in Canada, which accounted for EUR 85 billion of the decline. Customer deposits have increased by EUR 30 billion.
Our customer lending increased primarily in Retail Banking, although the growth has been quite moderate given the weak economic environment and the reluctance of businesses to invest. On Slide 9, you see that we have actively reduced our short-term funding, while at the same time, growing our customer deposits and long-term debt.
The professional funding was reduced by EUR 62 billion, and customer deposits grew by EUR 30 billion. Long-term funding was increased by EUR 14 billion, and that all, I think, has added to strengthening the credit profile of ING Bank.
In 2012, we issued EUR 33 billion of debt with a tenure of more than 1 year compared with EUR 18 billion of long-term debt that matured in 2012. Slide 10.
We have been transforming the Bank's securities portfolio into a liquidity book, and that's part of our overall strategy to optimize the balance sheet. We sold EUR 6 billion of debt securities as part of our planned derisking program that resulted in EUR 600 million of losses, but it also reduced the risk-weighted assets by EUR 7 billion.
In addition, we sold EUR 3.5 billion of bonds to facilitate the sale of ING Direct U.K. The quality of the portfolio improved substantially and has now a positive revaluation reserve of EUR 1.3 billion.
It is more liquid, and it is Basel III compliant. So we have basically completed our derisking of the investment portfolio, and of course, we will continue to monitor that very closely.
And should there be a need for action, we will take that. Slide 11, you see that 2012 was heavily impacted by derisking losses, the negative credit adjustments for a total of EUR 1.2 billion.
That includes EUR 600 million of losses in derisking from the bond portfolio as we explained in the previous slides, while credit adjustments moved from a positive EUR 275 million to a negative EUR 587 million in 2012 as spreads were narrowing. On Slide 12, operating expense modestly increased by less than EUR 0.1 billion or 0.9%, despite a EUR 0.2 billion of normal cost inflation, and again, EUR 0.2 billion, so EUR 200 million of higher regulatory cost, including the Dutch bank tax.
So we're able to offset these impacts mainly through the savings program in The Netherlands, which has delivered EUR 162 million in cost savings so far. Market impacts were also lower, reflecting impairments of real estate developments.
Going forward, the plan is to keep the expense levels stable. Between now and 2015, we aim to offset the impact of inflation and higher regulatory costs, our structural cost savings of about EUR 900 million.
Benelux Retail Banking has already pushed forward on operational excellence and mobile banking that will result in EUR 400 million of additional cost savings in 2015. Commercial Bank review is expected to result an additional EUR 300 million of cost savings.
Procurement initiatives that are underway, we expect that we can give another EUR 200 million per year. And it's important to note that the Dutch government has decided to impose a onetime levy of EUR 1 billion to all the banks that helped to cover the cost of the recent nationalization of SNS, of which the share of ING will be between EUR 300 million and EUR 350 million.
We talked about cost-saving initiatives where we are striving mainly to simplify the way we work, to streamline the IT and the processes we operate to adapt the business model to the way our customers want to do business with us. That means we are embracing new technologies by customers even faster than we anticipated.
We saw in The Netherlands that the Internet is already the leading channel, representing more than 60% of sales. Mobile traffic increased from 9 million visits per month to 25 million per month over the course of only one year.
And that means that we have to make significant investments in IT to handle the increased traffic and to continue to improve the functionality and the experience that the customer is getting. That also means that we need fewer employees that are needed in call centers and in back-office functions to process these transactions.
I'll give an example on IT. And ING Bank has decommissioned already 568 applications out of 1,800 since 2007.
And we expect the total IT applications will be cut in half by the end of this year. These are far-reaching improvements in the way that we work, and it also means more convenient service to our customers.
In retail Netherlands, we have shown a strong reduction in operating expense over the past 5 years, starting with the merger of ING Bank and Polish Bank. And as I mentioned earlier, the cost savings program announced in 2011, which is expected to deliver EUR 330 million in cost reductions in 2014, is ahead of schedule.
Already realized EUR 162 million and the headcount has been reduced by more than 1,800 out of the 2,700 we had planned. Retail Netherlands is now expanding their program, including further streamlining IT and integrating a mobile banking offering, and it's backed by another EUR 100 million of investments in IT.
The second phase is now expected to result in additional cost savings of EUR 100 million per year by 2015; that's bringing the total to EUR 430 million. Additional headcount reduction is 1,400 FTEs, of which 400 are external.
And we will create 250 new front-office jobs in order to better serve our customers. Then in Belgium, Slide 16.
ING Belgium is accelerating its strategic projects, further aligning products and services with the new mobile banking reality there as well, because customers have embraced the new technologies much quicker than we had anticipated. The change will result in a reduction of FTEs by 1,000 by the end of 2015, and we expect that we can do that fully by natural attrition.
And at work [ph] we had cost savings of about EUR 150 million at the same time. Let's go to Q4 results.
Well, you see on Slide 18 that the group was EUR 373 million; the Bank was EUR 184 million; and Insurance came in at EUR 296 million; and an underlying result before tax of EUR 272 million. On Slide 20, you see the adjusted gross results.
And if you make all the adjustment of special items that happened in Q4 this year with Q4 last year, then you see that gross adjusted results were down by 2.2% year-over-year. On Slide 21, you see what happened to credit adjustments at the Commercial Bank.
These are relatively sizable numbers. In Q4, the results were impacted by EUR 50 million from negative debt valuations, so DVA.
And that has the result of tightening the spreads through our own structured notes. That was coupled with EUR 81 million of credit value adjustments on derivatives that we sell to clients.
And normally, they move in opposite direction, and then they loosely offset each other. But this time, they did not.
Slide 22, you see our net interest margin held up well at 133 basis points. Margins on lending were better, and we are very strict and formal on our pricing and repricing in the Commercial Bank.
Savings margins continue to be under pressure that reflect the impact of low interest rates and also the fact that we had derisked our portfolio of securities. Total interest result declined by almost 6% from a year ago and almost 4% sequentially, mainly as a result of financial markets.
Effectively, we have higher liquidity costs, and we have lengthened our lending profile that we have lower returns on the bond portfolio because of derisking and lower interest rates. Expenses.
They looked like a significant increase in expenses if you look at the cost income ratio. But expenses were kept flat compared with 1 year ago, except for the EUR 175 million charge in bank tax.
Cost income at EUR 63.4 million, if you exclude the market impact and the Dutch bank tax and CVA adjustments. And I mentioned already that we have a number of programs that will bring EUR 840 million of cost savings for the bank by 2015, of which we have already secured EUR 162 million so far.
Risk costs were up by EUR 34 million compared to Q3, and they reflect the fact that we still see a very weak macroeconomic environment. The increase of EUR 34 million was mainly in Structured Finance and concentrated in a relatively small unit, the acquisition finance book.
Risk costs of Real Estate Finance were stable, and we expect that we will see elevated risk given the economic climate we are in. NPL increased slightly to 2.5% from 2.3% in the previous quarter, again here mainly driven by MidCorp, by SMEs, by Real Estate Finance and by leasing, so the same people as before.
Loan book is well collateralized, and provisions have historically exceeded our write-offs. The proportion of releases for the write-offs over the past 12 years has been about 40% releases, demonstrating a prudent level of provisioning on a significant cure rate.
Coverage ratio, as defined as the stock of revisions divided by nonperforming loans, was 37%. Please note that these ratios are difficult to compare between banks because you see differences in business model and the way that we provision the write-off policies and definitions.
Our coverage ratio reflects the fact that our loan book is well collateralized. Approximately 80% of the total loan portfolio is asset-based lending, such as mortgages, real estate, finance, lease and Structured Finance.
The risk cost of real estate remain stable compared to the previous quarter at EUR 103 million. Actual losses in the portfolio remain low and the nonperforming loan ratio decreased to 7.6% in the third quarter.
The Dutch real estate portfolio is well diversified. 50% of the total is in The Netherlands.
The overall quality of the portfolio is holding up well, relatively well, despite the challenging conditions of the commercial real estate market. The -- as you can see from the top, the book is well diversified.
We have almost no exposure to construction finance. The average loan to value has increased modestly to 73%, and we calculate it quite conservatively.
And all values were updated with the second quarter 2012 by ING indexation and based on external indexes and internal observations. We also do back tests compared with actual sale prices on recent customer transactions.
And I think we feel comfortable that we have here a conservative approach to our risk in the portfolio. Looking at the Dutch mortgages.
The risk costs have increased in recent years, and it's mainly driven by decline in home prices. Write-offs have increased modestly.
It's a bit higher foreclosures, but the number of foreclosures are still quite low. And the more the NPL and the mortgage portfolio is now at 1.4%, but that's supported still by relatively low unemployment rate in The Netherlands.
I think I mentioned already the core Tier 1, 11.9% at the end of Q4, including the repayment that we made to the Dutch State in the upstreaming to the holding company of EUR 1 billion. There was an accounting change for pensions effective January 1.
That is 60 basis points that will reduce the rate to -- the ratio to 11.3%. But then on the next page, you see if we fully comply immediately Basel III, that will decline to 10.4%, still ahead of the target we have, which is the 10%.
In addition, we have a number of management actions going that we expect to reduce the risk-weighted assets by at least another EUR 18 billion, of which EUR 11 billion was achieved so far, so bringing the pro forma level to EUR 10.6 billion. When you look at Insurance on Page 33, operating results up by 25%, almost EUR 300 million, a much better investment margin.
Compared year-on-year on operating results, they were down by 15%. But the U.S.
at last year, a significant onetime gain by a release of a pension provision. And then the fourth quarter result improved before tax to EUR 272 million, reflecting lower market-related type of impacts.
Investment margin was better. The rolling average 4 months -- 4 quarter average was at EUR 135 million.
Investment performance increased to EUR 447 million. It is also included in here a release of provision for discretionary profit sharing to policyholders in The Netherlands.
And we saw that our assets under management, in particular, in the Retirement Services were growing, resulting in higher fees. Slide 35.
You see that fees on premium-based revenues were up as to EUR 786 million, up almost 6% compared with a year ago, mainly due to the U.S., driven by improvements in the equity markets, better inflow in retirement and higher fees in investment management. Technical margin was EUR 118 million, and that was equal to last year.
We saw a decline in the Benelux, but it was offset by improvements in the U.S. Administrative expense I'm seeing well under control.
Except when you compare with last year, there was this onetime EUR 45 million nonrecurring pension release in the U.S. Eliminating debt, expenses were down by 2%, so reflecting that we continue to pay good attention to cost control.
Looking at Europe, results were better. Operating results, better investment margin here as well and also lower expense.
Underlying results continue to be impacted by negative nonoperating expense, which reflect the volatile markets, also reflecting derisking and the factors we are hedging to protect our regulatory capital here. The Benelux had lower sales compared to the fourth quarter of last year, but they were offset by higher sales in our Central and Eastern European units.
The good results in the U.S., Slide 38, operating results a little bit down, but we explained it already as the onetime charge. Otherwise, they would have been up by 15%.
A good performance, strong CMO revaluations. Private equity returns were a little bit negative last year.
The previous quarter also includes EUR 173 million of net favorable DAC unlocking. Sales were up almost 19% and 21% compared to Q3, and that was mainly because of Retirement sales, a little bit offset by lower sales in our Life business.
The VA block also had improved results. Underlying results came in at EUR 136 million.
It reflects gains we made on the hedges as equity markets declined in this quarter that creates a gain on the portfolio of hedges. Reserve adequacy improved to the 72% confidence level.
And that means that even if we have a 25% downward shock, that we still have reserves that are adequate. Our focus continues to be on capital protection to make sure that we have positive IFRS P&L.
And the positive variance that we expected in the sensitivities in the quarter was driven by market outperformance of the underlying funds. And then the final slide on the U.S., progressing on their capital position.
Capitalization improved again this quarter. RBC ratio at 531%.
The U.S. would like to have a debt-to-capital ratio of 25% and also like to redeem the special contingent capital letter of credit that it has from the ING Bank before it goes into an IPO.
Last week, we did a very successful capital market transaction, issued EUR 1 billion of debt at very attractive spreads, so we're quite pleased with the performance of the U.S. and the improved capital structure that they have been able to accomplish.
So as a summary, results held up well. Underlying net profit for the group at EUR 2.6 billion.
And at the same time, we took significant action to derisk and restructure, derisk our balance sheet and to make sure that our businesses are prepared for the new future. And with that, I would like to open it up for questions.
Operator
[Operator Instructions] First question comes from Michael van Wegen from BAM.
Michael van Wegen - BofA Merrill Lynch, Research Division
Michael van Wegen from Bank of America Merrill Lynch. First question would be on the earnings outlook for the Benelux retail bank.
Can you [indiscernible] how you see net interest income developing there for [indiscernible] in place in Q1 and also [indiscernible] Q1. That's question 1.
The second question, on the disposal program, can you talk us through -- first of all, Japan, what alternatives you are considering; and b, you're talking with the U.S. IPO now about timing wise later this year.
I think previously, you said that you potentially should be ready from Q2 onwards. Is there a change there in language, or how should we look at that?
Jan H. M. Hommen
Okay, the latter one is pretty simple. We have not changed our timing for the U.S.
IPO. We are preparing them as quickly as we can.
And you can see that in the way that they are progressing on the capital structure, but also on the filings they have done on the S-1. So there's language that -- actually, later this year, so later than today.
So -- but we will do it. Our markets are already basically for us.
Japan, we're working diligently on alternatives in Japan. We have a number, but I don't think we are at this moment at liberty to discuss them.
Only can say that it requires a lot of discussion with local regulators in Japan. And we've been working on 2 or 3 different alternatives, but we are not ready yet to come forward with it.
On the Benelux retail, Patrick, you want to do net income?
Patrick G. Flynn
Yes, I think you asked about interest margin in the Benelux. If you look at the interest margin overall, as Jan mentioned, it's held up pretty well at 133 basis points, a decline in aggregate by 115 and partly in financial markets and also due to the lengthening of the funding profile, which comes at an additional cost.
That was offset by reducing production [ph] in the balance sheet. The themes we've seen before pertained again in Q4.
We've seen a mild strengthening in Commercial Banking margins where we continue to apply discipline. I mean that applies -- that discipline applies across the total bank and Netherlands as well, Benelux as well.
And the weakness has been on the deposit side, where the declining interest rates have hurt margins and deposits. That said, in January and February of this year, we've cut deposit rates in The Netherlands by twice by 10 basis points; and in Germany by 25.
So the outlook for the net interest margin overall, also applying in Benelux, is to stabilize by virtue of the reduction in pressure we see on deposits and the ability to reduce them. Longer term, we remain committed to the longer-term targets of 140, 145, which we will aim to achieve by continued focus on discipline and loan pricing.
But we also need a little bit of help from growth in the economy to add some volume on the lending side to interest margin.
Wilfred F. Nagel
We've been saying for a while that we expected risk costs to remain at elevated levels, and indeed, Q4 showed that as well. And looking forward in your question being specifically about the Benelux business, if you look at what went on in Q4, developments that we expect to continue with softness in the business lending, the SME MidCorp book, the Real Estate Finance book, and also, we expect that the mortgage portfolio in The Netherlands.
As you've seen, the NPLs showed another mild uptick, but it does keep going up. So we also see potential for, indeed, continued elevated risk cost there, so that's the outlook.
Operator
The next question comes from Farooq Hanif from Citi.
Farooq Hanif - Citigroup Inc, Research Division
Just 2 questions on the Insurance businesses, if I can please. Firstly, just want to understand the improvements in investment margin that you had because of the release of the discretionary profit sharing with -- in Q4.
I mean, is this something that could happen every fourth quarter, or should we just assume that your underlying guidance of investment margin declining at Benelux will continue from here? Could you please explain that?
Second question is just on the RBC ratio in the U.S. Apologies if you've already answered this in your literature, but what would happen to the 531% ratio if you didn't have that sort of credit?
Does it affect it? And also presumably, the debt that you've been able to raise recently in the U.S., presumably, that doesn't count towards the RBC ratio, if you could confirm that.
Patrick G. Flynn
Well, I will just stay with the U.S. one first.
The difference between the 531% and the 425% is about USD 1.5 billion, which's conveniently is somewhat similar to the CCL OC [ph] is. It's a little bit more complex than that because the CCL OC [ph] supports the offshore entity, which is measured on a CTE 95 overall aggregate basis.
But what we've been saying is that our target is a minimum 425% RBC, and we want upstream capital to the holding company with a view to distributing it. And ideally, we would like to redeem the CCL OC [ph] , which, if we did, were going to be replaced cash.
And the final part of the question?
Farooq Hanif - Citigroup Inc, Research Division
The debt level?
Patrick G. Flynn
Yes, the debt issuance is debt. It's not capital.
So it's part of the funding profile and will contribute to the overall funding and sits within the maximum 25% leverage ratio that applies in the U.S.
Farooq Hanif - Citigroup Inc, Research Division
Basically, what you're saying is, you don't really need a lot more capital in the U.S. because you'll still be above target if you repay today.
But you're just waiting for the right time. Is that what you're saying?
Patrick G. Flynn
Yes, I mean you talk about and I -- Jan mentioned, when your IPO companies are in need of adequate capital. So you might need a buffer as well, so like we said last time, around -- it's maybe -- it's nearly there, but maybe not quite there.
Jan H. M. Hommen
Yes, that's a discussion we will have to have with the investment banks by the time we go to market. So I think it's a little premature now, but we'll see what comes out of that one.
Your question on the discretionary release is the following: We make accruals for that during the year. But at the end of the year, the management has the ability to decide whether to pay that, yes or no.
And this time, the discretionary decision was that we don't pay that, given the overall results of the Benelux organization.
Farooq Hanif - Citigroup Inc, Research Division
So it could happen again?
Jan H. M. Hommen
It could happen, and it could not happen, yes. I cannot give you a better answer.
But that's why it is discretionary.
Operator
The next question comes from Farquhar Murray from Autonomous.
Farquhar Murray - Autonomous Research LLP
Just one question for me. With regards to the U.S.
IPO, more recently we've seen some variable annuity block transactions with suggestions there's possibly more to come. Could such a transaction be an option for ING U.S., or realistically, given the IPO timetable, would have to go with the VA book in the first tranche presumably?
In particular actually, could I also ask how separable is the legacy business in terms of legal entities?
Jan H. M. Hommen
I would say, in principle, we are looking at all the options that are there, including selling the VA block separately, but also including it in the IPO. So this thing will be excluded, but our base case used to be the IPO.
And I did not get the question on the legacy.
Farquhar Murray - Autonomous Research LLP
The legacy question was actually just with regards to legal entities, i.e. is the variable annuity book within a separate legal entity, and therefore, immediately separable?
Jan H. M. Hommen
Yes, I mean, it's in the offshore Cayman business. I think it'd be premature to talk about it because we wouldn't know what or if any buyback structure might entail if there was to be one.
Operator
The next question comes from Francesca Tondi from Morgan Stanley.
Francesca Tondi - Morgan Stanley, Research Division
A couple of questions going back to The Netherlands and the asset quality. I know you've given your guidance of still mild deterioration going into 2013.
Can you just give us -- you provided very helpfully a stress test last year. Do you have an update on the mortgages, for example, in an increase in unemployment, decline in house prices, which seems to be faster right now?
What your losses per session would be in that scenario? And then if you can give us just a couple of data, what is now your LTV for your mortgage book in The Netherlands on the mortgage -- on the retail side, if you could give us an update?
And also, overall, what is your updates of coverage? You said 37% on a comparable basis.
How was that the last quarter, and how you're expecting that to trend?
Jan H. M. Hommen
To start with your question on the stress test, I mean, the portfolio is fairly stable. It hasn't really changed in either composition or size since we did this last.
So there is not really any significant development there. And we're still very comfortable that we're adequately provisioned for the book as it stands.
Your question with regard to the cover ratio, it's hovering around 38%, between 37% and 38% already for a while. And that is a reflection of a very prudent provisioning process where we make the best estimate of expected losses on the NPLs.
I don't see a particular trend there. We do this assessment every quarter for the larger chunks in the portfolio on a case-by-case basis.
And this is the outcome of our best assessment.
Francesca Tondi - Morgan Stanley, Research Division
And then with the LTV of your retail mortgage book in The Netherlands, if you could give us an update?
Patrick G. Flynn
Yes, sorry, I missed that one. The last quarter number was 89% for the Dutch mortgages.
And that was up 1% from the 88% it was in Q3.
Francesca Tondi - Morgan Stanley, Research Division
And do you have the percentage of your mortgage book that has an LTV already above 100%, if you could disclose that?
Patrick G. Flynn
That's not a number we track or disclose.
Francesca Tondi - Morgan Stanley, Research Division
Okay. And just going back for a second to your stress test.
If I remember correctly, and I've got a slide here, and please correct me if I'm not, if I'm not right. U.S.
stress testing was effectively a 15% reduction house prices and then -- which -- sorry, 25% reduction in house pricing and 10% unemployment as a peak. The unemployment probably still seems quite high.
Using the 25% reduction in-house pricing, given what we have seen already in the last few quarters of 2012, is still sufficiently conservative?
Patrick G. Flynn
Yes, we think it is. I mean if you look at it from the peak, we're already down 16%.
And certainly, our house view is that we will continue to see some declines in the next 2 years, but not to the level that the stress test suggests. And looking at employment again, it is trending up, but nowhere near the levels that were taken into account in that stress test.
So we think, overall, we're well within the range that that test was considering.
Operator
Next question comes from William Hawkins from KBW.
William Hawkins - Keefe, Bruyette & Woods Limited, Research Division
First of all, just following on again your comments about the strong standalone balance sheets for the U.S. and Europe that you made on Slide 6.
Thanks for what you said on the U.S., but I wondered if you're thinking that there's any further action that may need to be taken in Europe with regards to total capital or the mix between capital and debt? And then secondly, to the extent that the strategic review of Commercial Banking is ongoing, is there anything that you're sort of thinking additionally to what you told us back in the third quarter?
Again, you're referring to sort of future potential changes in the future. Or is the basic picture you gave us at the end of September still what stands there?
Jan H. M. Hommen
Yes, the Commercial Banking review, I think, is ongoing. But I don't anticipate, let's say, a significant adjustments here.
We have basically done what we wanted to do already and announced that last time. With respect to the balance sheet, yes, by the time you go to market and by the time you split up your business, you need more capital.
Now if you have capital at one level, it's more efficient to have it at 1 place than if you have it in 3, 4 different places. So you always will have regulatory questions related to capital.
And the only thing we wanted to make sure is that we say, "Keep that into your minds when you look at our numbers." Plus, in particular, in Europe, we have no idea which way solvency will go.
We had the Solvency II regime that was worked on for some time, and that's off the table today. So there is an uncertainty of what the capital requirements will be and the capital frame will be that companies will have to live by.
Operator
The next question comes from Michael Huttner from JPMorgan.
Michael Igor Huttner - JP Morgan Chase & Co, Research Division
On the -- you said there was a EUR 7 billion more risk-weighted asset reduction to come. Can you say how much revenue will decline as a result of that?
Because presumably, the revenue decline we're seeing is coming because you're reducing your balance sheet, so EUR 11 billion seems to equate at about EUR 200 million. And I wonder if EUR 7 billion would then equate to EUR 150 million, and does that make sense?
And then asking Will Hawkin's question again, so the shareholders' equity in Insurance is EUR 27.3 billion. It was EUR 25 billion in September.
What's the actual requirement to run this business? Is it EUR 27 billion, is it EUR 30 billion, is it EUR 20 billion?
And I know you've kind of hedged it, you didn't really -- you said you don't know. But you certainly have a better idea than I do.
Is there a number we can have here?
Patrick G. Flynn
In respect of the RWA reductions, part of that can be simply non-P&L sensitive, such as netting and bank balance sheet optimization. And some of it could be run off.
We've already said we were going to prioritize our leasing business, and some of those will also be run off. But I think that's already wrapped into the guidance we've already given you.
Within that framework, we still fundamentally believe we will achieve our 10% to 15% ROE in 2015, so it has no bearing on achieving those targets.
Jan H. M. Hommen
Yes, capital requirements in Europe is -- Solvency II, we don't know what it is, but clearly, there's a Solvency I ratio there. And yes, we currently meet, obviously meet the requirements of Solvency I and to the entities we're in.
Michael Igor Huttner - JP Morgan Chase & Co, Research Division
But a number would be really helpful if you have one.
Patrick G. Flynn
I think the [indiscernible] solvency ratio gets published later in the year. All the markets publish at the same time, so we'll give it to you at that point.
Operator
Next question comes from Andrew Coombs from Citigroup.
Andrew P. Coombs - Citigroup Inc, Research Division
I have 2 questions relating to the Bank, please. Firstly, I wanted to refer to Slide 13 in your revised cost target 2015 of EUR 8.8 billion.
That's broadly in line with the EUR 8.9 billion target that you outlined at the January 2012 Investor Day, and that's despite an extra EUR 0.4 billion of cost savings. So I'm just interested to know, I mean, part of that seems to be a higher starting point.
Those are the procurement initiatives that declined from EUR 0.5 billion to EUR 0.2 billion. So just interested to know what the moving parts are there on the cost side?
Second question, just pertaining to asset quality. It would be very useful if you could please provide the coverage ratios for the 8 bucket that you identify on Slide 25?
And if you could also just highlight any significant moves that there were during the quarter? I know you said a group level had been broadly stable.
Jan H. M. Hommen
In respect to the costs, first of all, the EUR 500 million we announced previously was procurement and other. And part of the other is probably -- we've announced both in Q3 and Q4.
We will continue to manage costs diligently. In terms of the starting point, I think what we said at the Investor Day that we would try to absorb the impact of regulatory changes in inflation.
What we've got now with the EUR 880 million additional cost saves that Jan referred to in the slide to 2015 is to actually bring it slightly below that. And we're aiming to reduce costs a little more in light of the weakness in revenues that we've seen, so we -- in the smaller business as well due to the divestments.
So we still believe that we can achieve the 10% to 15% ROE. You also need to remember that the income is depressed, yes, it's depressed.
But in the Bank, look at some of the reasons. In 2012, we had EUR 600 million costs due to derisking exercise.
That program is finished, so that cost program will not recur. It's not to say we will not be diligent in derisking.
CVA/DVA was a whopping EUR 600 million for 2012, so there's been some big one-off impacts there that have broadcast our revenues artificially lower. Nonrecurringly low is -- would be a better way to put it.
Interest margins, as I said before, we still believe we can get it to 1 40 to 1 45, I won't repeat that. At the end of the balance sheet, we said we'd keep it around EUR 900 million.
It's actually below that. And Jan mentioned we're ticking the box on Basel III fully loaded.
We're ticking the box on LCR, and we're ticking the box on leverage ratio. So we don't have to do extra to achieve those.
The cost/income ratio is high, 63, as we mentioned. But partly because of that, we are tackling that with these initiatives that have been announced of EUR 880 million by 2015.
And then finally, the risk costs, which were another part of the program, they're elevated today. Average for the year is 73.
The target for the -- in the normalized basis is 40, 45. So when you add all that up, we still believe that the 10% to 15% ROE by '15 is achievable.
Andrew P. Coombs - Citigroup Inc, Research Division
And on the coverage ratios?
Patrick G. Flynn
Yes, taking the main buckets from Slide 25, if you refer to residential mortgages, is about 20% stable from last quarter. Corporate loans, 51%, slightly, slightly down from previous quarter; leasing, 31%; the run-off at 24%; Real Estate Finance, 35%; SME and MidCorp, 42%; and Structured Finance, 38%.
Andrew P. Coombs - Citigroup Inc, Research Division
And they were broadly unchanged quarter-on-quarter, is that correct?
Patrick G. Flynn
There's small variations in most of them. There is an uptick in Real Estate Finance.
That's the biggest move from 28% to the 35% I mentioned.
Operator
The next question comes from Francois Boissin from Exane BNP Paribas.
Francois Boissin - Exane BNP Paribas, Research Division
The first one on the Insurance. I just wondered whether the 132 basis points investment spreads on a 4-quarter rolling average was sustainable?
And basically, just wanted to understand what drove the improvement there, and what the outlook would be for the coming quarters? And then the second question is on the Bank, if you look at, basically, the pretax underlying profits adjusted for one-offs, you get to about EUR 700 million this quarter.
I just wanted to know if you see this as a kind of representative level for what we can expect in 2013.
Jan H. M. Hommen
A couple of things. On the 132 basis points that included the benefit we had the one time in the discretionary release in The Netherlands, so you should eliminate that.
I think in general we have seen positive development in the U.S., where we saw more assets under management, equity markets being up that had an impact on the fees, so that was a plus. On the other hand, I think you will see a bit of a decline in The Netherlands, and that will certainly offset that.
So I would think that this might go a little bit lower going forward. And then on the bank side, Patrick?
Patrick G. Flynn
Yes, I mean, I think you also, you're right. We kind of added up the impact of the derisking, the impact of the CVA/DVA and the bank tax, which are in the fourth quarter.
But that's not the only thing. You also got to remember that this is seasonally a very low quarter.
You look back over our results for a number of years, you'll see fourth quarter's the lowest. Typically, financial markets starts low -- starts high and then the cadence throughout the year.
And we expect that passion to sustain. So Q4 is typically a low quarter.
And so I would not say that's representative of the full year.
Francois Boissin - Exane BNP Paribas, Research Division
Okay. And basically, the pace of loan loss provisioning is something that you could see going on in 2013?
Patrick G. Flynn
Loan loss provisioning, yes, I think Wilfred mentioned already that this could stay elevated.
Operator
Next question comes from David Andrich from Morgan Stanley.
David T. Andrich - Morgan Stanley, Research Division
I just had a question on the mortality tables in The Netherlands. I was wondering, in terms of the provision that you guys made 15 years ago, how much of that is left, and how does that compare against what you expect to impact of this new mortality table?
And then just in addition to that, do you have any large contracts coming up for a renewal?
Jan H. M. Hommen
We have Doug Caldwell, our CRO, in the room. Doug, can you take that question?
Doug Caldwell
Yes, I think starting at the end in terms of how this develops, I think it's something that we have a portion of the business that comes up every year. I think there's been a trend continuing toward defined contribution plans, which impacts exactly how this will play.
There's also been an impact of how these decisions are being made by clients. So in terms of exactly how this would develop, we're not really -- cannot make projections exactly, because there's still a lot of pieces that are moving and the way this can play out.
The -- in terms of a figure, the best I can do is point you to the NN Life report from a year ago, which showed the reserve at EUR 385 million.
Operator
The next question comes from Jan Weidema from ABN AMRO.
Jan Willem Weidema - ABN AMRO Bank N.V., Research Division
Jan Weidema, ABN AMRO. Have your own thoughts of those at the Supervisory Board or the Dutch Central Bank changed following the news surrounding SNS REAAL, and that's one.
Secondly, are you satisfied with your current maturity profile for funding? Thirdly, are you considering issuing a relatively more secure debt for funding needs in 2013 and '14, given what's happening to your unsecured debt yields?
And finally, the normalized results in Q4 was up quite significantly sequentially. Can you indicate whether that result is sustainable or not?
Jan H. M. Hommen
I did not fully understand the question as my position at SNS. I don't think I work there.
I work at ING. So I don't think that has any bearing.
My position is that I have a contract until the annual meeting, and the Supervisory Board decides on my contract and on my succession. And I think we believe it was that until they have decided, I have nothing to add.
They had a question on the funding. Patrick, you want to do that?
Patrick G. Flynn
Yes, I think you asked about funding. Last year, they said in the slide we issued EUR 33 billion of debt with a tenure of more than 1 year as compared to EUR 18 billion, which is maturing.
So we had significantly exceeded the funding requirement last year. We're a regular player in the program in the markets.
We have diversified our funding profiles from public bonds. We tapped the Japanese yen market.
So we have a diversified program, do RMBS as well. We've done some of that recently this year, and I think you can expect us to continue.
Operator
Next question comes from Benoit Petrarque from Kepler.
Benoit Petrarque - Kepler Capital Markets, Research Division
It's on the net interest margin, the first question. Do you think the savings rate decrease you have done in 2013 will be enough to offset the impact of the low interest rate around 19% in 2013?
You have now a large debt equity portfolio, which is rather liquid. So I guess, average yield will come further down in '13?
So that's question number 1. And maybe you could go through the different operations and tell us where you think you can further decrease the savings rate in '13?
And then the question number 2 is on the commercial bank. Yes, volumes were down sharply in the fourth quarter.
I think total loans were actually down 4.5% in just one quarter. Just wondering where it comes from with geographies, and what will be the kind of outlook for 2013 on volumes?
Are you going to further decrease your loan book on the commercial bank? And sorry to come back on the funding profile lengthening, but are you done now with the lengthening?
I mean, are you happy with the current maturity of the debt, or are you going to further work on this issue in 2013?
Patrick G. Flynn
Yes, in terms of the net interest margin, the reductions we've seen in Germany, 25 basis points, 2 sets of 10 in The Netherlands. And there was some in late Q4 as well.
We think that should lead to a more stabilization of the interest margin. If I go back a quarter, I think that's what we guided to and it sort of happened a bit.
It's come out 1 basis point different. So in the near term, we think that's -- in the very near term, it should lead to some stabilization.
Jan H. M. Hommen
Commercial Bank. The Commercial Bank lending was a bit down, but we don't anticipate that that will continue.
In fact, we anticipate that we will step up our lending and one big item. And that lending profile had to do with we were taking deposits away that we have with the Central Bank, European Central Bank.
Funding profile, Patrick, one more time or Wilfred?
Patrick G. Flynn
I mean, in the funding profile, yes, I think as I said, we've done a lot. We've got it into a good position.
And there obviously will be maturities, so you need to replace them in due course.
Operator
Next question comes from Steven Haywood from HSBC.
Steven Haywood - HSBC, Research Division
You mentioned in your report that there's no dividends until all remaining Dutch state is repaid, and you meet your regulatory capital requirements. Can you just remind me what these regulatory capital requirements are to meet?
Jan H. M. Hommen
First of all, as long as we are a group, and we still have Insurance in our portfolio, we also have to look for other requirements in the insurance company. And that's why we have an uncertainty related to what are they exactly?
In particular, in The Netherlands, where we don't know exactly where Solvency II will end up. Regulatory requirements, more and more, you see that before you can pay dividends, regulators will have to give you also approval for that.
And that is basically a caution that we have given to you that even if we expressed what we want to, we also need to make sure that we don't have an issue with our regulators.
Operator
Next question comes from Matthias De Wit from Petercam.
Matthias De Wit - Petercam S.A., Research Division
Two questions, please. First on Alt-A.
There's a -- Bloomberg headlined that a sale of the portfolio could trigger an interesting gains for ING. Could you be a bit more specific here on what the P&L and capital implications could be from any sale at current market prices?
And then second, to come back on the investment margins in Insurance, on the outlook, you mentioned that you would expect a further erosion in spreads. What was this relative to the 130 basis points, including the provision release, or would you expect an underlying deterioration from current Q4 level?
Jan H. M. Hommen
No, I don't know where Bloomberg gets the gain from. We have indicated that if the government would sell their portfolio today based on what we know, the prices are that we think that they would make a gain.
All that we will do is we will reduce some of the risk-weighted assets we have based on the guarantee that are -- and a small portion related to this Alt-A. But we have not commented on ING making a gain.
Any other question?
Unknown Executive
[indiscernible]
Unknown Executive
On that investment spreads, it's, of course, difficult to predict the future. We have indicated that there is some pressure, not only in the Benelux, but also in the rest of the countries in Europe.
I guess, that if you look at the 4-quarter rolling average and you see some decrease from there, that would be a certain indication for you.
Matthias De Wit - Petercam S.A., Research Division
But do you mean a decrease from the current reported level, including the provision reversal or excluding?
Unknown Executive
Excluding, so you should adjust the amount of the profit sharing, the EUR 51 million, and then basically there is a trend there.
Operator
The next question comes from Anke Reingen from Royal Bank of Canada.
Anke Reingen - RBC Capital Markets, LLC, Research Division
I have 2 questions, please. First on the bank capital, I just wondered how often do you going to be reviewing the bank's capital for potential to upstream capital to the group.
Is this going to be like an annual process, or how should we think about it? And then do you think the SNS development will have an impact on the supervisory in terms of how residential and commercial mortgages are risk weighted?
And then just lastly -- sorry, on the cost income ratio target you had, of the 50% to 53%, I mean by 2015, clearly in the current revenue environment, it looks probably more challenging. So will you do more on costs, or is the target of 50% to 53% basically not set at the moment as long as revenues remain depressed?
Jan H. M. Hommen
Capital and upstreaming from the bank, we look at it on a regular basis, but we cannot say that we have a formal process. It's done on a regular -- based on capability.
And of course, we do that in good consultation with our regulator because they will have to take a look at that as well. Cost income, our targets still are that we want to be at 50% to 53% by 2015.
And the steps we are taking to reduce another EUR 1 billion of expense that we have announced today is a big step in that direction. Revenues, yes, I think we also would like to see our revenue increase.
And if the economy begins to improve, it certainly will have an impact on revenues as well at the same time.
Anke Reingen - RBC Capital Markets, LLC, Research Division
Just I had one question, please. On the risk ratings, do you think that this supervisor will take a more conservative approach on risk rating of mortgages or commercial real estate as a result of developments at SNS, or is there no discussions?
Jan H. M. Hommen
Well, if you talk about residential mortgages, that would be unlikely because they were not at all a major factor or even a factor at all in the whole SNS saga. And what was the case was in that comment was made by the Central Bank at the time of the announcement of the nationalization is that the commercial real estate book of SNS was described as one that was uniquely problematic.
And indeed, if you look at public information about that book, it is very different from what most other banks would have on their books at this point. So and again, the problem was more on the provisioning and less credit underwriting standards than a specific risk-rating issue.
So a direct connection between that and adjustment of risk ratings, we do not quite see.
Operator
The next question comes from Lemer Salah from SNS Securities.
Lemer Salah - SNS Securities N.V., Research Division
Two questions from my side. First of all, on Slide 13, can you maybe give us a breakdown of the EUR 800 million, which you have reserved for the inflation investments?
I'm just wondering because I mean, it seems that investments are, for the next upcoming years, will be quite high, also considering that the IT systems will decline by 50% in 2013? And my second question is with regard to the Alt-A portfolio.
Let's presume that the Dutch state wants to sell this item. How much capital will be released, and what will you do with that capital?
Jan H. M. Hommen
Yes, what we have done with the item of inflation is we have looked at, let's say, labor contracts, which are the main reasons for inflation. We have looked at normal cost inflation that you see in energy and all type of cost categories.
And that's how we have come to this increase of EUR 800 million. One of the targets that we have -- yes, that's a 2.5%, 2% to 2.5% increase.
One of the targets and objectives, of course, is can we make that less? And part of that is by smarter purchasing, and you see that we do EUR 200 million reduction in purchasing expense, procurement.
But maybe there are other ways that we can deal with that as well. It certainly is an item that we not put on the agenda and have on the agenda to constantly watch our exposure to inflation.
And then your question on the Dutch State, they sell the Alt-A portfolio, was it a question?
Operator
The last question...
Jan H. M. Hommen
There was a question still on the Alt-A. I think if the state is selling the Alt-A, we will be able to release about EUR 2 billion of risk-weighted assets that we have as a guarantee on the portfolio that the Dutch State still has.
It's a small guarantee, but it's about EUR 2 billion, maybe a little bit more, EUR 2 billion risk-weighted assets.
Operator
Last question comes from Benoit Feliho from Natixis Asset Management.
Benoit Feliho
I have a question regarding asset quality. So basically, could you please tell us what the level of renegotiated loans?
This is an item which -- on which I couldn't see any, any, any figure. And the last time I was able to see a figure on that was in 2010, it was about EUR 10 billion.
So if you could give me some color on that, and how this has evolved and which type of loans are the most concern? That would be great.
Patrick G. Flynn
Yes, this will come in more detail in the annual report. I think if you are talking about our watch list, which I suspect it is, then we are looking at the fourth quarter at an uptick of about EUR 0.5 billion to EUR 14.9 billion.
Benoit Feliho
Excuse me, could you repeat the figure, please?
Patrick G. Flynn
EUR 14.9 billion is the amount on our watch list, which is up about EUR 0.5 billion from a quarter earlier, if that is what you're asking?
Benoit Feliho
What I'm talking about are the loans that have been restructured to avoid borrower to be in default.
Patrick G. Flynn
We used to have that in the U.S., but that book is largely gone. And then there is a small amount of it in Spain, but that's about it.
Jan H. M. Hommen
As mentioned, that we'll come back in the annual report.
Benoit Feliho
Yes, But in 2011, it was ...
Jan H. M. Hommen
I think we lost you. You have to answer your question one more time.
You made a comment that we could not pick up. Any more questions?
Okay, I understand that there are no more questions. I would say thank you very much for being on the call and spending an hour with us.
I wish you a great day, and good luck. Thanks.
Bye-bye.
Operator
That concludes the ING Analyst Q4 Results 2012 Conference Call. Thank you for participating.
You may now disconnect.