Nov 6, 2013
Executives
Ralph Hamers - Chairman of Executive Board, Chief Executive Officer, Chief Executive Officer of Management Board Banking, Chief Executive Officer of Management Board Insurance EurAsia, Member of the Management Board Banking and Member of Management Board Insurance EurAsia Patrick G. Flynn - Chief Financial Officer, Member of the Executive Board, Chief Financial Officer of ING Bank, Chief Financial Officer of ING Insurance, Member of Management Board - Insurance and Member of Management Board - Banking Willem F.
Nagel - Chief Risk Officer, Member of the Executive Board, Chief Risk Officer - ING Bank, Chief Risk Officer - ING Insurance, Member of the Management Board - Banking and Member of the Management Board - Insurance Delfin Rueda - Chief Financial Officer and Member of The Management Board
Analysts
Andrew P. Coombs - Citigroup Inc, Research Division Farquhar Murray - Autonomous Research LLP David T.
Andrich - Morgan Stanley, Research Division Kiri Vijayarajah - Barclays Capital, Research Division Ashik Musaddi - JP Morgan Chase & Co, Research Division William Hawkins - Keefe, Bruyette & Woods Limited, Research Division Omar Fall - Jefferies LLC, Research Division Francesca Tondi - Morgan Stanley, Research Division Michael van Wegen - BofA Merrill Lynch, Research Division Martin Leitgeb - Goldman Sachs Group Inc., Research Division Anton Kryachok - UBS Investment Bank, Research Division Benoit Petrarque - Kepler Cheuvreux, Research Division David Lock - Deutsche Bank AG, Research Division Francois Boissin - Exane BNP Paribas, Research Division Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
Operator
Good morning. This is Yvonne welcoming you to ING's Q3 2013 conference call.
Before handing this conference over to Ralph Hamers, 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 historical fact. Actual results may differ materially from those projected in our 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 the Form 20-F filed with the United States Securities and Exchange Commission, and our earnings press release as posted in our website today. Furthermore, nothing in today's comments constitutes an offer to sell or solicitation of an offer to buy any securities.
Good morning, Ralph, over to you.
Ralph Hamers
Welcome, everyone, to ING's Third Quarter 2013 Results Conference Call. I'm Ralph Hamers, CEO of ING Group.
I'll take you through today's presentation. And here with me are Patrick Flynn, our CFO; and Wilfred Nagel, our CRO; and the Executive Board.
We also have Delfin Rueda, the CFO of the Insurance Company; and Doug Caldwell, the CRO of the Insurance Company, to answer questions about the Insurance side. Let's go to Page 2.
We had a very strong third quarter. ING continue to make strong progress on the restructuring, advancing further into the end phase of our transformation.
At the same time, what is good is that our businesses have delivered a good set of quarterly results. ING Group posted an underlying net profit of EUR 891 million, driven by another solid quarter on the bank side and an improved operating performance on the Insurance side.
If we then go to Slide 3, I'd like to start by giving you an update on the major events that have happened over the last few weeks on the restructuring side because we have greatly advanced in our restructuring story. Mid-October we sold another 15% of ING U.S.
and the remaining stake now is 57%. And with that, we're almost reaching the deadline of 2014, end of 2014, of reaching 50% stake in that.
So we're close to that already, whereas we have more than a year ago. And as you also can see on the graph, the residual double leverage of the group remains effectively covered by the current value of the remaining stakes in both the U.S.
as well as SulAmérica. Also last week we announced the agreement with the Dutch State on unwinding the IABF, and today we will be another EUR 1.1 billion as part of the core Tier 1 security support that we received in the past.
And this means that we have only 2 more payments left in our debt state support program Last but not least, we have taken another big step in the EC restructuring, reaching a new agreement with European Commission, as a result of which ING Life Japan will be divested as part of ING Insurance. I will go a little bit more detail in all of these events.
So first, on the state support arrangements, Page 4, we have recently announced and achieved 2 major milestones with the Dutch State. Last week we reached an agreement on the IABF, basically unwinding the transaction that we have established in 2009, reducing ING's risk on Alt-A.
The unwinding will free up EUR 2 billion of risk-weighted assets related to the counter guarantee that we currently have in place, and that will add -- that release of risk-weighted assets will add another 10 basis points to ING Bank's core Tier 1 ratio. Following the repayment of the core Tier 1 securities today, including premium, we have paid more than EUR 11 billion now to the Dutch State and the remaining EUR 2.2 billion will be paid in 2 tranches, the first one scheduled in March 2014 and the final one in May 2015.
So much of state support. Now we move over to the other milestone that we reached with the European Commission, basically including Japan as part of the IPO, the base case IPO of ING Insurance.
Under that new agreement, the total restructuring of ING Group will now have to be completed 2 years earlier by the end of 2016. However, the agreement to divest more than 50% of ING Insurance by end of 2015 remains unchanged.
So we continue our preparations for a base case IPO and those preparations are on track. With the sale of ING Life Korea, as announced a couple of months ago, these changes mean that we have effectively completed all the restructuring requirements for our Asian Insurance businesses.
To go a little bit deeper into the Japan Life business, basically, ING Life Japan has 2 businesses. And I'm now on Slide 6.
One business is Japan Life and the other one is the Closed Block VA business. On Japan Life, that's a COLI business, a Company Owned Life Insurance business, in which we are market leader with a 20% market share of the Japanese life market.
It's focused on -- it's a focused business model catering to SMEs and affluent customers through independent agencies and bancassurance partners. And as can be seen in this graph, the operating result of ING Life has continued to increase over the last couple of years and this will be a very significant contributor to ING Insurance earnings and cash flows.
So that is a very positive signal. Beyond that, you also see here that our Life businesses Japan is well-capitalized.
If we then dive deeper into the Closed Block characteristics, this is the next slide. This Closed Block is expected to release significant amounts of capital over time.
The vast majority of this portfolio consists of accumulation benefit products, and they will run off quickly and free up capital over the next 4 years. The Japanese VA guarantees are already reinsured to ING Re internally, and we manage them and hedge them on a market-consistent basis.
Then in order to further improve transparency around this VA portfolio, in the new reporting segmentation as announced today, Japan VA will be reported as a separate segment, and that will trigger a P&L charge of approximately EUR 600 million in Q4 of this year. And with that, we will restore the reserve adequacy in the Japanese VA business to the 50% confidence level, and that will be reflected in the full write-down of the deck.
In addition, ING Insurance is considering and studying a move towards fair value accounting on the reserves for the debt benefits. This would be a further improvement in the alignment of the book value of the reserves with their market value and the accounting for the related hedges that we have in place.
If this move towards fair value is implemented, then this would result in a pretax charge through equity of approximately EUR 0.4 billion to be taken in the first quarter next year. What is important to note is that these changes will not impact the regulatory capital of ING Life Japan nor the economic capital of ING Re.
If we then look at the pro forma debt, on the Insurance side, we see that if we adjust the pro forma balance sheet for the announced sales of China Merchants, the ING Bank of Beijing Life business, IIM in Korea and the sale of ING Life in Korea, you see this picture appearing. And this also reflects the negative EUR 1 billion pretax impact of the Japanese VA measures, as I just explained.
So the pro forma IFRS equity on ING Insurance will then be EUR 13.7 billion and the debt, net of the cash, will fall to EUR 3 billion. And as a result of all of this, the pro forma financial leverage of ING Insurance is 22.5%.
If we then take a closer look at the capital ratios, the solvency ratios on the Insurance side, we see that they are impacted by several one-offs. First on solvency, the solvency of NN Life is decreasing from 230% to 183% in the third quarter and this is mainly due to the move to the DNB swap curve, which we decided to following the downgrade of France by Fitch.
NN Life solvency would've been stable in the third quarter of 2013 versus the second quarter if the second quarter of 2013 would also have been based on DNB swap. Then on the IGD ratio, the IGD ratio for ING Insurance is down versus last quarter, and that reflects an impact on the NN Life solvency ratio, as well as the recognized loss on the sale of ING Life Korea.
The pro forma IGD ratio, including the impact of the announced Insurance Asia sales and the EUR 1 billion pretax impact of the VA accounting measures for Japan, would be 216%. And the final targets of ING Insurance will have to be finalized, and we aim to provide you with more clarity on these capital targets in the first quarter of 2014.
So much on the restructuring and all the progress we are making there. Let's take a look at the results.
Now ING Group posted a net result of EUR 891 million. That's up 5% to 6% year-on-year and slightly down on the first quarter -- or from the second quarter this year.
The net profit came in lower at EUR 100 million, EUR 101 million to be exact, and that's the result of the EUR 950 million loss taken on the sale of ING Life Korea. But the important thing is that the underlying net results are holding up and actually improving year-on-year.
If we then take a look of the Bank, the Bank posted another solid quarter. The gross result of the Bank was stable versus last year, but it's down from the last quarter and that is mainly caused by lower results on the bank treasury side and financial markets, partly caused by the decline in CVA/DVA impacts.
Risk costs were down both year-on-year, as well as from the second quarter this year, but they remained elevated amid the weak economic environment in Europe. Then looking at the net interest margin.
The net interest result remained relatively stable despite lower lending volumes. The margin improved to 144 basis points, but that's mainly driven by a lower average balance sheet.
The savings margins increased further in the third quarter of this year, reflecting the lowering of the client savings rates in several countries that we put. The lending margins, however, were also slightly down from last quarter and that is due to increased competition and actually a lower demand in the market.
And the NIM is expected to remain at around these levels in the coming quarters. Then the lending assets, as mentioned already, they were significantly down in the third quarter and that is mainly due to the sales and the transfers of assets, as well as some currency impacts.
We have particularly reduced our Dutch mortgage exposure on the Bank side, but that is mainly due to a transfer of a part of the portfolio of EUR 4.9 billion to NN Bank, which we did as part also of the restructuring. But in addition to that, we placed an RMBS for EUR 2.2 billion.
Also, we reduced our real estate finance exposures through selling certain files in the U.S. and the U.K.
I think what's important to note for you is that we saw an increase in lending assets in the areas where we can realize growth, very much so in Germany, the rest of the world and Structured Finance. And then going to the operating expenses.
They were roughly stable year-on-year, and that basically shows you the impact of the cost savings initiatives, but also the partial transfer of the staff of WestlandUtrecht, which we transferred to ING Insurance and to NN Bank, as we call it, and lower impairments on the real estate development portfolio. So those were decreasing the cost.
The increases in costs were very much related to a higher pension cost, and we took some additional restructuring costs above the line this time. We see in certain of these cost-saving initiatives, we see an acceleration and, therefore, we take some additional restructuring costs there, but above the line.
Versus the second quarter of this year, expenses rose 1.4%, and that is caused mainly by the restructuring costs that I just referred to in those cost savings initiatives. The status of this restructuring program in general are on track.
Actually, they're a little bit ahead of the plan, and the cost savings reached so far are at EUR 352 million and the savings -- with the savings of EUR 488 million still to be achieved by 2015. I don't think it needs mentioning that we follow these programs closely because we ensure to deliver these results.
They're important for a continuing efficient bank going forward. On the risk costs then.
They decreased year-on-year, as well as vis-a-vis last quarter. They decreased EUR 64 million to EUR 552 million, and these reductions are generally in General Lending, Retail International and Real Estate Finance.
I mentioned to you the files that we have sold in that portfolio and some of this was offset by higher additions in Structured Finance, basically one specific file. Then we go over to the NPL ratio.
Also there we see a slight decrease to 2.7%, down from 2.8% last quarter. Basically down to a lower number of nonperforming loans, decreasing by EUR 0.5 billion in total and lower NPLs in real estate, and lower NPLs in Structured Finance.
If we then turn the Netherlands and focus a little bit on the Netherlands because I know you're interested in that as well. The risk costs on Retail Banking Netherlands were up year-on-year and slightly down from last quarter.
But there remained at an elevated level and that basically reflects the weak economic environment that we still see in the Netherlands. The NPL ratio for business lending has increased from 6.4% to 7% in this quarter, and that was primarily due to an increase in the sectors of transportation, business services and the retail nonfood.
On the other side, the NPL ratio for Dutch mortgages rose from 1.6% to 1.8%, but that was mainly due to a decrease in the mortgages outstanding as a result of the transfers I mentioned earlier, the portfolio that we moved from ING to NN Bank, as well as the RMBS that we placed. Risk costs for business lending and mortgage portfolio are expected to remain elevated, basically at this level, certainly not improved for the next couple of quarters given the continued weakness in the broader Dutch economy, although we do see early signs of a bottoming out in the housing market.
We see some positive signals in consumer confidence, but we want to be very cautious on this one. Then on Real Estate Finance specifically.
The risk costs for Real Estate Finance were EUR 83 million. They were down both year-on-year and also on last quarter, and that was driven by higher releases as a result of the asset sales that I already mentioned in the U.S.
and the U.K. The additions, however, remained elevated and were concentrated in the Netherlands and Spain.
The NPL ratio declined to 9.9%, and the risk costs are also in this segment expected to remain elevated. Now we take a look at the capital position of the Bank.
We are now on Slide 21. The Bank's core Tier 1 ratio increased from 11.8% to 12.4% in the last quarter, and that is driven by continued solid profitability and the decrease in risk-weighted assets.
If we correct for the payment of the Dutch State -- to the Dutch State today, as well as the unwinding of the IABF, then you see that the payment that we're making today will decrease the core Tier 1 by 0.4%. However, the unwinding will increase it by 0.1%, so the net effect is a decrease of 0.3%, but that will still get us to a pro forma healthy 12.1% core Tier 1 ratio on a Basel 2.5 basis.
Now if we then correct for the first tranche of the phase-in effect, then we would get to a pro forma CRD IV core Tier 1 of 11%. If we would correct for the full Basel III on a fully loaded basis, the core Tier 1 would get to 10.4%, still higher than our ambition that we have communicated to you to remain at around and above 10%.
So basically we see that the bank's already meeting the CRD IV requirements and that we are delivering on the priorities that we have communicated to you at Investor Day 2 years ago. We're accelerating transition to Basel III.
We're limiting the balance sheet and the risk-weighted assets growth. And we are successfully executing the balance sheet optimization.
We are simplifying our business portfolio, and we take a very prudent approach to capital and funding given the unstable market conditions that we still see. Core Tier 1 as that stands at 10.4%, fully loaded.
LCR is above 100%, and the Basel III leverage ratio is well above the 3% of the CRD IV of the minimum -- which is the minimum CRD IV target. Basically, conclusion is ING is simpler, stronger and well-positioned to service our customers and improve the business going forward.
Then we moved to the Insurance side. The operating result improved strongly year-on-year, supported by higher investment margins, tight cost control and improved Non-life results.
The decrease versus last quarter was mainly due to seasonally high dividend income in the second quarter. We see that every second quarter, we see an increased investment income there.
ING Insurance is considering to refine the market interest rate assumption for the separate account pension business. If this would be implemented, this would result in a one-off P&L charge of EUR 160 million, 1-6-0, pretax in the fourth quarter of 2013.
If we then look more specifically to income and costs on the Insurance side, we see that the income was up year-on-year, slightly down from last quarter, but again that was driven by the investment margin coming in a little bit lower given the high seasonal effect of the dividend income in the second quarter, but you see income stabilizing there. Then on Slide 26, you see that the administrative expenses are down.
And I think this is an important one to note for all of you, is that the impact of the transformation program, as announced last year, is really shown here. So we see the administrative expenses declining by 3.8% year-on-year, and this transformation program is eating up basically the cost increases from the transfer of people from WestlandUtrecht to NN Bank, as well as also on the Insurance side higher pension cost.
Excluding the transfer from WestlandUtrecht to NN Bank and excluding some currency effects, the administrative expenses would be down 6.3% versus last year and 4% versus the second quarter. And basically, that's a clear evidence that the transformation plan is paying off.
I come to basically a wrap-up. I think around this table we are extremely proud of the financial and strategic progress that we are making and that we have achieved this quarter.
We have delivered solid underlying results for both the Bank and the Insurance. And over the last 2, 3 weeks, we have been able to announce a strong progress on our restructuring targets.
And with that conclusion, I would like to open the call for questions.
Operator
[Operator Instructions] The first question is from Andrew Coombs from Citi.
Andrew P. Coombs - Citigroup Inc, Research Division
I'll ask my two questions, please. One on Japan and one on the loan loss provisions.
But firstly on Japan, looking at the EUR 0.6 billion and EUR 0.4 billion charge, that's on an IFRS basis, I just wanted to double check that what the change or whether any impact, if any, would be on the local GAAP account and if you could please provide an update on the latest equity figure under the local GAAP account in Japan? I think it was EUR 500 million, as I recall last time I checked.
Secondly, on the loan loss provisions, I'm just trying to reconcile the points you make on both Page 20 and Page 29. With regards to the NPLs, you continue to see an increase, particularly in business lending in the Netherlands, but at the same time, if I look at your outlook commentary on loan loss provisions, you do talk about signs of stabilization and positive signals in terms of consumer confidence.
You talked about elevated provisions in the near term, but perhaps you could give us a bit more visibility on when you think loan loss provision might start to recover in that segment?
Ralph Hamers
Okay. I will give the question on Japan to Patrick Flynn, the CFO.
Patrick G. Flynn
Yes, the 2 adjustments are in IFRS only. They have no impact on regulatory capital locally or local GAAP results.
And I don't have the local GAAP number, but we can get it for you later.
Ralph Hamers
Then we turn to Wilfred on the risk costs on the loan loss provisionings?
Willem F. Nagel
Yes, I mean, provisioning is always a bit of a lumpy business. If you look at the provisions in this quarter, they are down somewhat, but that is driven by a couple of relatively significant individual releases.
Indeed, in terms of the guidance, what we have said for a while if we expect provisions to stay at these elevated levels, you do see a slight drop in NPLs across the global book. But there are individual portfolios, including, for example, the one that you mentioned in the Netherlands, where we're still seeing upticks, and we think that trend is not about to end.
So in answer to your question, on that particular book, when do we expect loan loss provisions to come down? Well, that's hard to predict, but I would say that won't be until well into 2014.
Operator
The next question is from Farquhar Murray from Autonomous Research.
Farquhar Murray - Autonomous Research LLP
Just two questions, if I may. Firstly, on net interest income, I mean the core retail businesses were very strong this quarter, but there seem to be a step down quarter-on-quarter in retail rest of the world, which went to about EUR 412 million from memory versus the kind of EUR 460 million average over the few previous quarters.
I'm just wondering if you could give us some color on what happened there and how we should think about that going forward. And then secondly, on ING Insurance, you provided the pro forma IGD ratio.
I just wondered whether you'd come around to having a think about what the interest coverage is on that business as yet, obviously that partly depends on how you allocate debt, et cetera, but I just wondered if you may have that number now.
Ralph Hamers
On the net interest margin piece, the piece of that is a number of pieces in there that are some of the nonrecurring. Part of it is due to the volatility we saw in interest rates in Turkey.
And another piece is FX as well. So there's a number -- it's difficult to isolate it to one individual point.
Farquhar Murray - Autonomous Research LLP
In net, should we think that the interest rate move from Turkey was a negative and was probably predominant within that mix or as a one-off?
Ralph Hamers
Repeat that.
Farquhar Murray - Autonomous Research LLP
Should we think that the Turkish interest rate move was a negative and is probably the predominant effect there and probably is nonrecurring? Is that a fair way of looking at it or...
Ralph Hamers
I think the FX is probably the biggest single impact.
Ralph Hamers
Delfin? Delfin Rueda is here with us.
Delfin Rueda
Yes, on the IGD, your question was about the interest cover. The interest cover is around 6x at this point of time.
And with the inclusion of ING Life Japan, that will improve slightly.
Operator
The next question is from David Andrich from Morgan Stanley.
David T. Andrich - Morgan Stanley, Research Division
Two quick questions on my side. First of all, I was just wondering in terms of the Benelux investment portfolio if you've started to take any action in terms of rerisking it?
And second, on the Non-life Insurance business, just wondering, do we see this -- how do you think of the result this quarter? Do we see this as kind of being a fairly stable result, or is there room for a kind of further improvement as further price increases come through on the individual disability side?
Ralph Hamers
Okay, Delfin?
Delfin Rueda
So on the question on reinvestments, as we have indicated in the past that we are gradually but very prudently analyzing the different possibilities of doing some rerisking. That is, of course, linked to our overall total target capital discussions.
And as we have mentioned in the past, the effect of increased interest margin will only be perceived later on in 2014.
Operator
The next question is from Kiri Vijayarajah from Barclays.
Kiri Vijayarajah - Barclays Capital, Research Division
Just a couple of questions on Slide 15. If I exclude the various sales and transfers, I wonder what's the underlying picture in terms of your market share development in the Netherlands.
And I guess, more importantly, looking forward out to 2014, what's your appetite to start regrowing your loan book there, please?
Ralph Hamers
Okay. I think the market share in the Netherlands is relatively stable overall.
So on the mortgage side, we tend to be up from last year and growing into it stable around 15%, 16% currently on the company side. And on the lending side for our 2 companies, it is around 23% in total, 23.5%, up from 22% last year.
And on savings side, if we take the total, both consumers as well as corporates, so basically on the funding side of things, we have a market tier of around 28.6%. And appetite to grow into it, I think that's -- clearly, we have a -- we are a large bank in this country.
We have to service our clients, but we will be very cautious as to the risk that we take on the books vis-à-vis the current economic situation and as well as the outlook there. We do see positive signs of consumer confidence.
We see the house prices basically bottoming. We see more volume coming back into that market, but we will -- we don't expect a -- we expect basically a modest recovery, and so we will play along with that modesty and see where we can initiate and support further growth, but cautiously.
Operator
The next question is from Ashik Musaddi from JP Morgan.
Ashik Musaddi - JP Morgan Chase & Co, Research Division
A couple of questions. One, on your cost savings for the Banking, can you give us some color around how much will be the cost saving on a look-through basis, i.e., net of pensions and restructuring costs?
And is this restructuring cost just a one-off, or are there more restructuring costs to come in the -- your underlying numbers in the future? That's the first one.
Second, there are a lot of things going on on Real Estate Finance and Structured Finance portfolio on loan loss provisions. Can you give us some color on what's one-off and what's recurring, i.e., it looks like on Real Estate Finance, the one-off is some releases, whereas on Structured Finance, there's one-off additions.
So can you give us some color on that, would be great.
Ralph Hamers
Okay, we first move to Patrick.
Patrick G. Flynn
Yes, in terms of costs, the approach is very similar to what we've had in the past. What we're aiming to do is make structural reductions in our cost base.
But unfortunately, there are additional regulatory costs that are coming at us. So we're trying to make sure that, at a minimum, we keep our cost base flat, so absorbing these regulatory changes.
What you see is that we have programs announced, and like we said before, we will do more. There is more we can do and there is an additional charge of EUR 56 million that's shown in the slides for improvements that are above or at least half of which are above and beyond the programs we currently announced.
So we are looking to do more than programs we've previously announced.
Ralph Hamers
Then on the loan loss provision and Real Estate Finance, Wilfred?
Willem F. Nagel
Yes, you're right, there is lumpiness both in the releases that we're seeing in REF, as well as in what we see in additions in Structured Finance. So comparing to earlier quarters, there always have been releases on the REF portfolio as well as growth additions.
Difference is that this quarter we have probably around EUR 30 million more in terms of release than normally. And if you look at Structured Finance, then I'd say we've got between 50 and 60 additional provision that is slightly more than we would normally expect.
So if you correct for that lumpiness, you get an idea of where this is and you'll see that we're roughly trending at the same levels as in the past quarters.
Operator
The next question is from William Hawkins from KBW.
William Hawkins - Keefe, Bruyette & Woods Limited, Research Division
It's William Hawkins still at KBW. Two questions, please.
The Insurance investment margin, the EUR 175 million, that seems quite resilient on a quarterly sequential basis because you were about EUR 190 million in the second quarter and that included well over EUR 50 million of dividends. I appreciate there's the benefit from WesternUtrecht Bank, but to the extent that sequentially that's still a good EUR 20 million or EUR 30 million increase on the second quarter, is all of this just quarterly noise?
Or is it the benefit of rising rates or to what extent, should I say it's something sustainable rather than something just kind of volatile? And then secondly, I'm just interested to understand a little bit on your understanding of the outlook for the operating profit for the Japanese VA business after you've made these VA changes and also the emergence of capital, any kind of guidance you can give on that?
I appreciate the announcement today has only just come, but presumably you've already done a lot of work in the background on that.
Ralph Hamers
Okay, Delfin?
Delfin Rueda
Thank you, William. Two questions on the Insurance investment margin.
Indeed, there is the impact of increase interest margin coming from the net interest margin coming from NN Bank. Following today's announcement, when we present the new segmentation for the next quarter, that's going to be taken out.
In addition to that, there is in comparison to the previous quarter of last year, there was a lower allocation to profit sharing with our policyholders. And in addition to that, of course, there is a gradual, small improvement in terms of the amount of investment rebates to our customers as the guarantees in our pension funds gradually, slowly, as you know, decrease.
So those are the 3 elements that are impacting the interest margin this quarter. In relationship to your second question on operating net profit at the outlook, I will not provide any view in terms of the outlook at this point, but I think that the slide in the presentation showed that Japan Life business is providing a good, sustainable and strong operating result.
And in addition to that, for the closed book VA, this is something that obviously as the book runs off, we may generate some capital releases.
Operator
The next question is from Omar Fall from Jefferies.
Omar Fall - Jefferies LLC, Research Division
You're remaining very cautious on the outlook for Dutch loan losses, which is totally understandable. As again, the macro trends in the last 2 months have shown a fairly sharp improvement across a pretty broad range of measures, like the PMI increasing at a record, lower bankruptcies, more stable house prices, et cetera.
So you're saying that despite that, you haven't seen any of that reflected in the rate of NPL adds or any other asset quality metrics since the end of Q3? That's the first question.
Secondly, just a small one on the net interest margin, please. What is the contribution of financial markets to the NIM?
And would it be possible in the future just to get that number a bit more consistently as you used to do in the past?
Ralph Hamers
Okay, for the first question, we turn to Wilfred.
Willem F. Nagel
Yes, on economic developments in the Netherlands, it is indeed. And Ralph has also highlighted that the case that we are seeing some early signs of a coming recovery, but a PMI index improvement doesn't directly translate into GDP.
What we are seeing at this point is more a slowing down of the deterioration than a real improvement. So that's one observation.
It's good news, but it doesn't translate at all into the NPL rates at this point. That's also because, typically, these movements come later in the cycle.
And certainly, some of the bigger asset classes are late cycle anyway. So as we said before, we do note these potential improvements and we do expect them to gradually trickle through into the numbers, but again, not until we're well into 2014.
Omar Fall - Jefferies LLC, Research Division
Understood. I guess, I would have just been surprised not to see some improvement on the SME lending side given that, that is a shorter duration book and much more geared to the immediate economic cycle.
But I understand your caution.
Ralph Hamers
Yes. Well, maybe to specifically comment on that, what we are seeing is that at least in the SME books in the Netherlands, the NPL rates don't go up anymore, at least they didn't in this particular quarter, which may again be just quarterly noise, if you like.
Where we do see an uptick still in NPLs is in the mid-corporate segment that is also part of business lending. And if you combine the two, then we're still seeing an increase in both NPLs and risk costs.
Patrick G. Flynn
On the NIM, the impact of FM was 0. That's why we didn't give it, but we can look to include it going forward.
Operator
The next question is from Francesca Tondi from Morgan Stanley.
Francesca Tondi - Morgan Stanley, Research Division
Following up on a couple of points, looking at the net interest margin, if you could tell us a little bit more. On the one hand, how do you see commercial margin trending, especially in Benelux?
But also, how are you looking on your still large liquidity buffers, you're looking at taking them down, especially if you're looking out to potentially other -- another rate cut or rates into going negative territory? If you could just discuss a little bit around that, it would be very helpful.
And the second question is on asset quality. You've really given us a lot of details, so just a very -- a couple of points quickly.
Do you see potential for further sales, especially Real Estate Finance? I know you've done the U.K.
and U.S., still large portfolio, what about elsewhere in Europe? Do you feel comfortable with the valuation?
And also looking at the AQR, how comfortable you are that the details we have so far, for example on NPL's definition, how close are they to what you have in your NPLs?
Ralph Hamers
Okay, let me take the first question on the commercial margins. Well, basically, in the part of Europe where we are active, there is -- clearly, we have sufficient liquidity buffers and we're ready to lend.
But we don't see a lot of demand on the corporate side, we see corporates moving into markets directly often through bond issues. Where we can support them, we will do so.
But given the fact that there's not a lot of demand and there is sufficient liquidity in the market, you can expect a bit of pressure on margin from that perspective. Having said that, we have always managed our pricing in a very strict way.
So we have our specific hurdles on the basis of which we price. And therefore, for the coming quarters, we expect the total net interest margin to stay around this level.
Francesca Tondi - Morgan Stanley, Research Division
And then you still have a relatively large liquidity buffers that I know, the Treasury level, you've taken somewhat them down. Do you have a further reduction to do, or you are where you were hoping to be?
Patrick G. Flynn
Maybe in terms of impact on interest margins, yes, we have a comfortable liquidity position. Yes, we're meeting the CRD requirements.
Obviously, we look to try and optimize in that space as well. I mean, in terms of interest margin in Benelux, it did improve, notwithstanding the fact that we moved mortgages across to the NN as we were required to do, which obviously is a drag if you take things out.
That was sort of complicated a bit by a further reduction in the interest saving accounts in the Netherlands and Holland of 20 basis points. So in terms of margin, we managed to compensate in the Netherlands from the negative effect of the asset transfer and the weakish loan demand by reducing deposit levels.
And, yes, we'll try and -- we are looking to optimize in terms of our financing costs. We have a very strong net loan deposit ratio.
We've seen good inflow of retail funding, which puts us in a stronger position in terms of the outlook for future long-term debt issuance needs.
Francesca Tondi - Morgan Stanley, Research Division
And then on that, how will you look at the further reduction in interest rates by the ECB, even just taking the ECB net rates into negative territorial rates, what would you think of that?
Patrick G. Flynn
Obviously, we look at this in the round. We look at our position relative to our peers people, we look at our position with respect to our customers and you take a blended and rounded view of how the market is developing.
I think one of the positive points is our deposit rates on average in Holland are still healthy. They're 150 basis points, 1.5%.
So there's plenty of room there. Let's move to the questions on NPL EBA.
Unknown Executive
Yes, I think we're now at question number seven. I have noted 3 things that you wanted to talk about, NPL definition, AQR and valuations and retail finance sales, let me take it in that order.
The NPL definition that's come out from EBA, obviously, we have noted. We struggle a bit with the fact that it doesn't completely gel with the Basel definitions, which doesn't make it easier.
But in any case, this definition is substantially less conservative than our own. I can give you 2 examples.
One is in our situation, we do not only take everything that is more than 90 days overdue, but also everything that has been over 90 days is on the way back to normal or even is normal. We don't take those out of the NPL bucket until they're 6 months performing.
And secondly, the EBA definition in a situation where we lend to group states, that we need to take the whole group into NPL, once we cross 20% of the total exposure being in default, whereas under our own metrics, that is at the first euro of default of anything outstanding to the group. And just to give you an indication of what the differences roughly are, if you take our own NPL definition on the Dutch mortgages, we look at 1.8%.
If you were to take the EBA definition, that would be more like 1.1%. Then you asked about valuations in AQR, there's obviously a number of things going on.
There is a DNB AQR on commercial real estate here in the Netherlands. There's also the ECB AQR coming later in the year and into next year.
And our view is that with regard in particular to commercial Real Estate Finance, which I guess is the background to your question, what we have done over the past few years is, first of all, manage the book down substantially by about EUR 10 billion from EUR 36 billion to about EUR 26 billion at the moment. Secondly, we have increased our risk weights quite substantially over that period from about 20% to currently about 53%.
And against that smaller book, the stock of provisions has also gone up over that period. So on the whole, we feel fairly comfortable with the buffer of capital and provisions that we hold against this book, and we don't expect any major issues there.
And then on Real Estate Finance sales, there's obviously a lot of more activity in the markets in general than there was a year ago. We have taken advantage of that in the U.S.
and in the U.K. to some extent.
There's also bit more activity in the markets closer to home, not yet at price levels that we and our clients find exciting. I would point out that we're not holding large portfolios of distressed real estate as owners here.
Most of our clients are still performing. Most of the assets that we hold are still producing income.
In fact, all of them are. So it's not something that we do without the consent of our clients and usually the initiative of our clients.
But again, where we see opportunities and our clients want to benefit from those, we support them.
Operator
The next question is from Michael van Wegen from Bank of America Merrill Lynch.
Michael van Wegen - BofA Merrill Lynch, Research Division
It's Mike van Wegen, Bank of America Merrill Lynch. Two things.
First of all, on your net interest income, can you indicate for the tertiary unit you saw a big negative impact in Q3. To what extent that recovers when you start essentially use the funding that we've seen strong growth in in Q3?
And to what extent does the liability management give you a benefit going forward as well in your NII by having lower funding costs? So that's question number one.
Question number two is on the European or EurAsia IPO. Now that you've announced that Japan will be part of this entity, I guess you've taken a big hurdle, and the consultation on Solvency 1.5 is also out there.
That, to me, suggests that you by now should probably have a fairly good idea of what this business will look like and where you want to get it to. So when can we expect an update on targets in terms of Solvency leverage ratios and I guess returns?
Patrick G. Flynn
In terms of the -- in the outlook for treasury, a couple of answers to this one. And first is, this is something we probably do owe you an update on for more granular analysis, and we're looking at it in the context of our current planning process.
And we're aiming to give a more fuller analysis of this after we've completed that, so you're going to have to bear with us a bit. I think the full story in this we will -- or the projections of the future at least we will give you next quarter when we complete our MTP [ph] process.
In terms of your specific question, yes, the liability management exercise, particularly the hybrid 8.5%, EUR 2 billion hybrid call is positive, although that's a relatively small part of the overall total. The deterioration quarter-on-quarter is more to do with one-offs effects.
The treasury is where we have our whole -- the cost of the Tier 2 debt that we -- sorry, the long-term debt that we've issued as well. But the deterioration has more to do with one-off effects, lower mark-to-market gains and a lower positive in effectiveness result.
But like I said, I think we will aim to give more color on this once we completed our planning round.
Michael van Wegen - BofA Merrill Lynch, Research Division
And on the EurAsia IPO sort of targets?
Delfin Rueda
Yes, Michael, I think you're absolutely right. We have now clarity about the scope of the entity to be listed.
We have clarity about the earnings potential and the actions that we're taking in order to manage expenses and manage the company going forward. Solvency 1.5 is more clear now.
There is a proposal with -- that has been put forward in order for consultation, but we know what impact that will have. And as already mentioned by Ralph before, we will provide more clarity here with the year-end results or in Q1 next year.
Operator
The next question is from Martin Leitgeb from Goldman Sachs.
Martin Leitgeb - Goldman Sachs Group Inc., Research Division
My two questions are as follows. The first one is, I realized you guys had a quite significant step-up in mortgage production in Retail Germany coming after 2 quarters of relatively slow production.
I was just wondering whether you could provide a bit of color to that, how did you grow -- achieve this growth and what kind of figure or size do we need to think as a run rate going forward? This is particularly in the context that previously had very strong deposit growth in Germany which was not matched by a stronger pickup on the mortgage growth there.
And so just trying to see where this go going forward. And the second question is really just to confirm for the European Commission restructuring.
Does the announcement today of the -- with regards to Japan, does that change anything with regards to the timeline on price leadership band, on acquisition band and on -- with regards to calling hybrids or do the deadlines stay on November 14 and November 15, respectively, remain in place as they are?
Willem F. Nagel
Yes, on the German mortgages, yes, we did see a bit of an uptick this quarter, I think by about EUR 1 billion or so. And at the moment, the demand in Germany is frankly more driving our production than anything else.
The capacity to do more is there. But obviously we want to grow this book in a sensible and a very risk-aware way.
And if you look at our plans longer term for the book, then what is very important to us is that we build a balance sheet that is in more than one respect balanced and that we differentiate also into more asset categories than just mortgages. So we are looking at a more broader base franchise in Germany over the long run.
Therefore, mortgage production will continue to be important, but it's not going to be the only driver of balance sheet growth.
Ralph Hamers
The deal that we have now on basically moving the deadline from 2018 -- 2016 does not change anything on the other aspects, as you mentioned, if it comes to M&A band and price leadership band.
Operator
The next question is from Anton Kryachok from UBS.
Anton Kryachok - UBS Investment Bank, Research Division
Two questions on the Bank balance sheet, please. Firstly, on capital, you had a very nice capital build in this quarter, up 60 basis points.
In that context then, I was wondering whether you have heard from your local regulator on the targeted Basel III fully loaded core Tier 1 ratio that you will be required to have going forward? And if this strong capital generation continues, would you look at early repayment of state aid?
And the second question, please, on the balance sheet size of ING Bank, obviously apart from meeting the demand from your key markets in terms of lending, what else can you do that will start growing the total size of the balance sheet of ING Bank to support the NII?
Patrick G. Flynn
Yes, in terms of the ratio, we've said for some time that our target is 10%. Now the regulator is not going to, I think, publish his views.
I think you can see from what we've done in terms of paying dividends, we paid dividends beginning of the year, we just paid one now. And obviously that requires regulatory approval.
So I think there's an implicit message in there on how the regulator views us. So we stick to our stems as Ralph mentioned in the presentation that we're looking to be at or around 10% Basel III fully loaded.
We meet that today. In terms of balance sheet size and growth, yes, we did give a target for 2015, which would imply a significantly higher balance sheet than we currently have today.
But that's, remember, that was in the context of leading to achieving an ROE of 10% to 13%. We're currently just below 10%.
I think, one thing was certain, that -- certainly in my mind, that A, we would reach it; but B, it would not be the way we originally planned 2 years ago. So we don't have to compensate.
We're currently seeing limited loan demand. There's excess cash in the market at the moment, so we do have some growth, but it's moderate.
And a pickup in the global growth will help, but we're still delivering just under 10% and notwithstanding that tough environment and with loan losses significantly elevated. So we're going to focus on NIM and a very stringent focus on costs, and we will aim to achieve our target ROE.
Anton Kryachok - UBS Investment Bank, Research Division
Sorry, just as a follow up on capital. If the capital generation in the next few quarters surprises positively on the back of RWA contraction, let's say, would you look at accelerating the repayments to the Dutch State, or is it something that you haven't thought about yet?
Patrick G. Flynn
Yes, we have 2 more payments to make. The schedule which we set out, because the cash flow is fixed, we don't get a discount for paying early, so we have to balance acceleration cost more.
And we're looking at -- we obviously are going to get the State repaid as quickly as possible, but we have to balance the accelerated costs with that and we have to balance the potential uncertainties that are coming next year with the AQR, for example, and seeing how the economy evolves. I'd like to look at it after we've repaid the next tranche and see what the world is like.
We have an ambition to exit State aid as fast as is possible, but we will only do that in the context of maintaining strong capital ratios.
Operator
The next question is from Benoit Petrarque from Kepler.
Benoit Petrarque - Kepler Cheuvreux, Research Division
A couple of questions. First of all, on the Benelux Insurance operating earnings, just to come back on the question of the kind of one-offs just to check of improvement year-on-year, as you've mentioned, lower profit-sharing assumptions and lower interest rate rebates, could you quantify that please for the third quarter?
And linked to that, could you also update us on the kind of operating cash flows you've generated from your EurAsia businesses and the split per distributor would be useful obviously. Obviously this is a key question and you're not talking about cash here.
Just wondering if you could clarify that. And then could you talk a bit on Solvency for Nationale-Nederlanden is 183%?
First of all, could you give us the sensitivity to higher or lower interest rates given it has been moving again this quarter? And also, could you update us on Solvency 1.5, what is the kind of likely outcome for the Dutch Life business there?
Just quickly on Japan operating earnings, what will that be for the Closed Block roughly?
Ralph Hamers
Delfin?
Delfin Rueda
Okay, a lot of questions. I'm going to ask [indiscernible] with impact on interest rates and I will try to cover all the remaining.
So the -- starting with the operating cash flows generated by the different business. I'll start with this one because it's the shortest answer.
That -- we'll start providing some information about this once we start reporting with our new segmentation. I think that during the quarter, the main impact on our cap AA [ph] cash flows, I understood that's cash capital, have been mainly the change in the discount rate in -- for our business in NN Life to the move to swap, and that has been the main drag in terms of capital, that compensated some of the generation of capital coming from the different units, Investment Management, Europe and certainly Japan.
If we look at the impact on the Benelux part of the operating results in terms of the profit sharing and rebates, together will be approximately EUR 16 million. If -- looking at the update on Solvency 1.5, as I mentioned before, there is a proposal that has been put forward for consultation.
Still, the intention is to have it implemented as of 1st of January 2014. Just to make clear, the Solvency 1.5 does not change the base of our Solvency capital, the so-called Solvency I.
It just establish another threshold for the Dutch regulator to determine a -- or have more limitation on the possibility of distributing dividends. At this stage and subject to the results, I can basically tell you that the impact of this Solvency 1.5 is not limiting our capacity to distribute dividends.
In relationship to Japan earnings for the VA, I'll try to find an answer for that while I allow my colleague [indiscernible], to reply on the interest sensitive to interest rates.
Unknown Executive
Sure, on the NN Life, we effectively try to match fairly closely on an economic basis. As you know, there's a UFR on the Dutch curve requirements.
This ultimate forward rate, what that basically means is that we're modestly impacted by rising rates. So in a rising rate environment, we lose a little bit of solvency.
In a falling rate environment, we gain a little bit, but it's fairly modest. And on an economic basis, we stay quite reasonably protected for up or down rates.
Patrick G. Flynn
In respect of Japan, the effect of what we're doing in moving to mark-to-market can be summarized in 3 main things. One, currently 75% of the book is mark-to-market in the quarter that is in accordance [ph] with SOP 03.
So you can get counterintuitive results because we do hedge at a full economic capital basis and you get catch-up P&L effects from the SOP 03 reserve's movement. We're going to take that out because we're going to move the full P&L to mark-to-market, so that should make the results more intuitive.
Also there is DAC hung up on that balance sheet that at some point would have to be written off and amortized. We're taking that upfront, so that will be gone.
So that overhang will not be there anymore. Also we will move the reserve adequacy to a very comfortable position so there will be no more questions regarding reserve adequacy.
So those 3 measures, I think, will help stabilize the operating earnings. They will not fully stabilize because you're still exposed to some gamma risk, but it takes that -- 3 of the factors that can be lead volatility in results.
It will also mean that -- and I really want to emphasize this, that our Japan VA business, I think, almost uniquely is managed on an economic capital basis, on a market consistent economic capital basis. It's hedged on the same.
It's capitalized on that basis, and we have EUR 900 million of capital there, which is comfortably in excess of the economic capital requirement. And we will, in addition, then move the accounting to full mark-to-market.
More transparent than that, I don't think you can get.
Operator
[Operator Instructions] The next question is from David Lock from Deutsche Bank.
David Lock - Deutsche Bank AG, Research Division
I'll be well-behaved and just ask two. First one on cost reductions, just circling back on an earlier question, I wonder if you could give a little bit more color on how costs -- future cost reductions could come through?
Ralph, I know in the past you've mentioned that branch has fallen significantly. I just wondered how long we could expect perhaps some of the fixed cost of the branch businesses in Europe to come out?
And the second question is more around capital again. I mean, how do you expect your regulator -- I mean, I know there's been a question previously on how the regulatory level will kind of turn out.
But if we compare where we are today versus where you were when you set that 10% level, it's clear that the European environment is a lot harsher in terms of capital requirements, how do you expect that to roll over the next year, please, if you could give any color?
Ralph Hamers
Okay, I'll take the first one because it's specifically related then to one of the business models that we have, which is the branch model. Clearly, we see that customer trends are to do more and more direct, and more and more themselves.
We're a leader in Internet banking, we're a leader in mobile banking. And therefore, you see that a lot of actual transactions being done, they move to the mobile environment and they move outside of the branch and that is basically what decreases the traffic to branches in general.
Clearly, and that has been the underlying factor for some of the restructuring programs that we have, as a consequence of that, we do decreased the number of branches. But we have to do that in those areas in a very well-planned way because we also still have a lot of customers who like that.
So basically, you do that in a phased approach and you adapt towards the -- basically the adaptation rate of the consumers taking more products and doing more transactions through mobile and Internet. But advice will still be an important role -- will still be important in our model going forward.
So basically, what you can expect is that the plans that are out there right now, we continue to implement them as we speak. Clearly, if there is signals that the adoption of direct channels is even further accelerating, then as a consequence of which, the footprint of branches could decrease, and I'm talking about the Benelux more than anywhere else.
Clearly, we would. On the other side, we also see countries, more emerging countries, where in order to make a -- to complete our business model going forward, we would even consider opening some branches, for example, in Turkey.
So the one that you asked for is we will play it by ear, we will -- we check on customer behavior, and clearly, we move in line with that. On the second one, I'll give the word to Patrick.
Patrick G. Flynn
Yes, in terms of capital, I think -- we think that 10% is a good number, particularly 10% fully loaded. I think we look well relative to tiers in that outlook.
The other thing you need to realize is that we operate a Basel III advanced model. So the ground on which that is based is moving.
And in a downturn environment, a weak economic environment, RWAs are going up. So as we constantly update our models for the current economic data, it generally leads to increasing RWAs requirements.
So we're maintaining a 10% RWA target on the back of a stronger RWA. Our mortgage RWAs have gone up, our Real Estate Finance RWAs have gone up significantly as they should do and as the Basel III models would expect you to do.
So in that context, I think it's -- 10% is still a good number.
David Lock - Deutsche Bank AG, Research Division
So just to be clear, if the model change that you referenced there in terms of Basel III, is that completely separate from the other model environment that you referenced on Page 22 of your quarterly report?
Patrick G. Flynn
Well, I wouldn't call it model change. This is just regular model updates.
We do this all the time. That's what Basel III requires and we regularly update the models for -- around economic data.
And that has led to significant increase in RWA requirements for Real Estate Finance over the years and modest increases for mortgages as well. This is just normal practice.
Basel III is operating as it should.
Operator
The next question is from [indiscernible] from Royal Bank of Canada.
Unknown Analyst
Two questions, please. The first is on net interest income and the absolute level.
Should we consider Q3 as sort of a trough? Or would you believe that the absolute level would continue to come down as you continue to deleverage despite relatively good net interest margins?
And the second is on costs, you mentioned before that best case costs stay flat. Is that post the additional steps you mentioned for which you took the EUR 59 million restructuring charge?
And also, does the restructuring charge mean that your cost savings target of EUR 840 million effectively has gone up?
Patrick G. Flynn
On cost savings, the EUR 840 million target remains. The additional provision of EUR 56 million, approximately half of that give incremental additional savings, about EUR 50 million, so it's not huge.
But the point is we are aiming to do more and this isn't the end of it. Remind me, what was your first question?
Unknown Analyst
It was just the absolute level of net interest income.
Patrick G. Flynn
Yes, we have a strong capital ratio. We are open for business.
We have capacity to lend. We're looking to grow, as Wilfred said, in selected areas and continuing to grow at the healthy margins we currently have, gives us capacity to grow absolute level of interest margin.
Unknown Analyst
So Q3 could be a trough level in absolute terms.
Patrick G. Flynn
If you look at the overall net interest margin Q3 versus Q2, I think they're -- it's the same number effectively.
Operator
The next question comes from Francois Boissin from BNP Paribas.
Francois Boissin - Exane BNP Paribas, Research Division
Actually my question relates to Japan. I just wondered if you could give a bit more detail about how or why a separate sale was not possible, a bit of element from the rationale here would be useful.
And going forward, what is your base case? I mean, do you still plan to sell the business in the coming quarters or do you plan to manage this and run off?
And in particular, I'd like to understand what the risks are to the emergence of capital going forward within the back book? I mean, is this equity risk?
How it is managed and in what scenario would capital emergence be significantly different to what you expect?
Patrick G. Flynn
First of all, I have to say, I'm very pleased that we have included Japan, COLI and VA in the European IPO. I think this is an excellent outcome for shareholders.
Why? Because it brings 2 businesses with a combined capital of over 2 billion post the accounting changes into the IPO.
It brings a COLI business with over EUR 200 million of operating profit, an extremely well-capitalized, as you can see in the deck, into the IPO. And it also brings a VA Block, which is very conservatively managed.
As I mentioned earlier, it's hedged and managed from a cap perspective on a market-consistent basis. I think, again, almost uniquely.
So it's a surplus of capital over the required economic capital today. We hedge all main risks, interest rate, equity and FX.
We also have some vega and gamma hedging, but a moderate amount. The customer behavior has been very stable.
We have updated that 3 years ago and have not needed to make any material changes to that. Significantly, the block -- 80% of the block runs off as accumulation benefit.
We'll run off. There's no extension risk, it simply runs off.
That happens by about 2019, it's gone. The remaining part, which is debt benefit, has a limited risk in terms of customer extension, but we think quite small in terms of the capital impact.
So EUR 900 million capital should emerge over time. The risks primarily are to gamma.
If you have made your shocks, as we saw a bit in Q2, you can get some dislocation. I think that's the major outstanding risk.
The other ones are pretty well hedged.
Francois Boissin - Exane BNP Paribas, Research Division
Okay. And it sounds like it's a nice asset, so any -- why can't you find any buyer for that?
Patrick G. Flynn
I mean, the issue there a bit was we had buyers 2 different parts. We have a COLI business and a VA business in the same legal entity and part of reinsured to another legal entity.
So the complexity of the legal entity structure inhibited the conclusion of a sale.
Operator
The next question is from David Andrich from Morgan Stanley.
David T. Andrich - Morgan Stanley, Research Division
I just earlier didn't have my second question answered, so I just wanted to follow up on it in terms of the Non-life business in the Benelux region -- the Netherlands, I was just wondering if we should think of this result this quarter as kind of a fairly stable result or if we could expect further improvement coming through from price increases and underwriting, particularly on the individual stability side? And just a quick question on the kind of the capital restructuring, what's the -- can you quantify kind of what the potential improvement is in terms of cost of capital coming from that?
Ralph Hamers
Okay, Delfin, Non-life?
Delfin Rueda
Yes, on Non-life, in the third quarter, the operating result was EUR 24 million. That was EUR 18 million better than in the same quarter last year.
And this was mainly due to the improvement in the disability and accident business. Also the property and casualty business compared with the same period of last year has stayed more or less flat.
So this -- the improvement in the results are due to the recovery plan that was already discussed and commented upon in the last quarter on the group income protection. There were many balancing actions taken there.
There was also more favorable claims experience in the illness protection business, better results also for individual disability and that was offset partially by lower results from Personal Accident and Travel. So overall, I think your question is in terms of the -- if the improvements in Non-life are sustainable, and we do believe so.
Of course, maybe for this, the fourth quarter, there's been some strong storms in the Netherlands and that might have an impact, as you know, seasonally on the quarter. But overall, the improvements, particularly in D&A are going through.
David T. Andrich - Morgan Stanley, Research Division
Sorry, just to follow up on that, but the rate increases are still coming through? I think there's probably still an ongoing process there?
Delfin Rueda
Yes, there has been a general repricing in D&A and that has been done. And normally, the majority of our business has a 1 year duration.
We tend to wait for renewals in order to do this price increases and it has already been happening as we move along. So part of the -- a significant part of the recovery in the claims ratio is both in improvements in claims handling, but also in price increases.
Operator
And the final question today is from Jan Willem Knoll from ABN AMRO.
Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
One last question from my side. It seems that your tone on lending margins has changed a bit vis-a-vis previous quarters and to the negative side, I would say.
Can you shed a bit more light on where you expect -- where you see currently most pressure on lending margins and what is the outlook there?
Patrick G. Flynn
I don't think we intended to give a change in tone on lending margins. We maintain pricing discipline on lending.
That's been a constant theme and remains so. I think what we're saying is that with a lot of liquidity in the market that the ability to grow significantly has been constrained.
So it's more about the ability to grow volume whilst maintaining these margins is where the headwind is a bit.
Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
Fair enough. I refer to Slide 14, where you're saying the lending margin was slightly down due to low demand and -- for credit and increased competition, and low demand for credit is the point taken.
The thing is I'm interested in the increased competition. I mean, why do you see increased competition?
In which segments? In which business lines?
That will be helpful.
Patrick G. Flynn
I think this is -- we're trying to read too much into very small changes. Our lending margin is up significantly in the previous year and down slightly in the previous quarter.
The message is we continue to believe or look to sustain healthy margins consistent with generating a 10% return on equity on new business, and the headwind a bit is more in volume.
Jan Willem Knoll - ABN AMRO Bank N.V., Research Division
Okay, fair enough. So lending margins are expected to remain stable going forward?
Patrick G. Flynn
Overall interest margin, we are aiming to keep it stable going forward.
Ralph Hamers
Okay, I think that with that as the last question, we can round off this call. Thank you for the interest that you take in having this session with us and all the questions that you have raised.
Clearly, if there's more questions, our team is available all day and in the coming period as well to further explain. And I think to summarize, today, in the announcements today, the first one, we've made a lot of progress and in such a way with getting the IABF out of the way, as well as getting a clear decision on Japan.
Basically, we know the future restructuring is still to be done, and there's much more clarity there and we have made a lot of progress there, so that's good. And then the second to core message there is that we have strong underlying businesses, both on Bank and the Insurance, both doing very well, underlying performance and both being well-capitalized.
So with that, thanks very much, I wish you a good day.
Operator
Thank you, sir. Thank you, ladies and gentlemen, this does conclude today's presentation.
Thank you for participating.